How the Tornado Cash Lawsuit Was Won and Why It Matters - Ep. 743
Dec 3, 2024
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Paul Grewal, Chief Legal Officer at Coinbase, and Leah Bressack, VP of Legal at Coinbase, dive deep into the landmark lawsuit against Tornado Cash. They discuss how the federal appeals court struck down U.S. Treasury sanctions, arguing that immutable code isn't property and shouldn't be restricted. The conversation covers the potential future of privacy tools in crypto, the court's reasoning, and what this legal precedent means for developers and open-source software. Their insights shed light on the evolving landscape of cryptocurrency regulation.
The federal appeals court ruled that OFAC cannot sanction open-source code like Tornado Cash, challenging U.S. sanctions authority.
Coinbase's involvement in the lawsuit highlighted the importance of legal protection for legitimate users of cryptocurrency privacy tools.
The ruling emphasizes the need for regulatory frameworks that effectively balance national security with the privacy rights of lawful users.
Deep dives
Court Ruling on Tornado Cash Sanctions
A recent federal appeals court ruling marked a significant victory for the crypto industry by overturning the U.S. Treasury's designation of Tornado Cash smart contracts as sanctioned entities. The court determined that the Office of Foreign Assets Control (OFAC) lacked the legal authority to impose such sanctions on open source immutable code. This ruling establishes a precedent that open source software cannot be broadly categorized as property under U.S. sanctions law, thereby protecting legitimate users from repercussions related to the actions of bad actors. The decision reinforces the principle that government agencies must operate within the limitations set by Congress.
The Implications of Open Source Software
The Fifth Circuit's ruling clarified that immutable software, such as Tornado Cash smart contracts, does not meet the definition of property capable of being owned, as required for sanctions. This distinction is crucial for developers and users in the crypto space, as it mitigates the risk of government overreach interfering with innovations that utilize similar technologies. The court emphasized that legislation should target bad actors rather than neutral tools that may facilitate illicit activities. This decision could enable further development and use of such privacy protocols without fear of sanctions disrupting their functionality.
Coinbase's Role and Advocacy
Coinbase played a pivotal role in the court case by funding legal support for six plaintiffs who utilized Tornado Cash for legitimate reasons. The collaboration aimed to showcase the diverse and lawful use cases of this privacy protocol, emphasizing the negative impact that sanctions could have had on innocent users. This involvement reflects Coinbase's commitment to advocating for regulatory frameworks that align with the interests of the crypto community, rather than permit overreach by government agencies. As shown in this case, Coinbase is willing to support future challenges against similar government actions that infringe on the rights of individuals.
Future Legal Landscape and Potential Appeals
Following the Fifth Circuit's ruling, the government faces options regarding whether to appeal the decision, which could influence similar cases in other circuits, such as the pending Coin Center lawsuit. An appeal to the Supreme Court would be complicated by the strength of the Fifth Circuit's unanimous opinion, raising questions about the likelihood of success. If multiple circuits issue conflicting rulings on the legality of sanctions concerning Tornado Cash, the Supreme Court could be prompted to intervene. This situation highlights the ongoing evolution of legal interpretations surrounding digital currencies and the importance of maintaining a balanced approach that safeguards both security and privacy.
Balancing National Security and Privacy
The discussions around the Tornado Cash sanctions underscore the delicate balance between national security concerns and the privacy rights of legitimate cryptocurrency users. While there is a consensus on the need to combat bad actors utilizing crypto for illicit purposes, the mechanisms for doing so must avoid overreaching into the rights of law-abiding citizens. Experts suggest that focusing on targeting specific bad actors while considering the broader implications of sanctions is essential for effective regulation. This case serves as a critical reminder of the importance of developing frameworks that protect user privacy without undermining efforts to curb financial crime.
Last week, the crypto world celebrated a major legal victory when a federal appeals court struck down OFAC’s sanctions on Tornado Cash’s immutable smart contracts in a Coinbase-funded lawsuit. While this decision is a significant win for crypto, its implications go far beyond the industry—it challenges the very limits of U.S. sanctions authority on open-source code.
In this episode, Coinbase’s Chief Legal Officer Paul Grewal and VP of Legal Leah Bressack discuss the case, the reasoning behind the court’s decision, and its broader implications, especially given that other cases are still in court. They address whether they think the government will appeal, how this ruling impacts other privacy tools and the other lawsuits, and why the case is a critical precedent for the intersection of code, law, and innovation.
Plus, what does this mean for Tornado Cash developer Roman Storm?
Show highlights:
Why the decision was so significant, according to Paul
What reasons the judge used in the ruling
The basics of Tornado Cash and why OFAC sanctioned it in 2022
Why Coinbase decided to get involved in the case
Why a District Court had previously agreed with OFAC
Whether the government will appeal and what the implications of the case are outside of crypto
When users could start using the protocol
Whether users will be safe to use relayers, which add privacy
Why Paul believes that the 11th Circuit, where the Coin Center Tornado Cash lawsuit was filed, will not ignore this ruling from the 5th Circuit
Whether the judges were encouraging Congress to update IEEPA to make it possible for OFAC to sanction smart contracts
Whether there’s a risk that under new legislation OFAC could sanction smart contracts
How the case of Tornado Cash developer Roman Storm could be impacted by this decision
Paul’s and Leah’s take on Balaji’s proposal to build privacy-preserving zero knowledge smart contracts on ZEthereum
Whether the judges’ opinion will have an impact on existing privacy projects
What types of sanctions and regulations the government can impose to prevent money laundering
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