The extravaganza of extraordinary sanctions judgments continues. Last time, I considered the Federal Court’s unusually bold interpretation of Australian sanctions laws in the case involving a company partly owned by two sanctioned Russian oligarchs. Then, two weeks ago, the US Court of Appeals for the Fifth Circuit struck down US sanctions against Tornado Cash, a decentralised cryptocurrency mixer alleged to have laundered copious amounts of funds for North Korea.
The Fifth Circuit’s judgment was unanimous and delivered by Judge Don R. Willett, who according to Wikipedia and his own X/Twitter profile is a ‘former rodeo bull rider’. (While not a pastime that I approve of, this is admittedly more exciting than British or Australian judges, who all list gardening and opera as their hobbies.) Perhaps fittingly for a former entertainer, Judge Willett is an engaging writer, with a certain dramatic flair. ‘Enter Tornado Cash’, begins the section of the judgment dealing with the mixer’s operations. One could imagine Tornado Cash being the name of a rodeo bull.
For all the breeziness of its prose, I found the Fifth Circuit’s judgment surprisingly difficult to make sense of. The issues involved are complex, and in a previous post I tamely refused to commit to any view as to whether the Office of Foreign Assets Control (OFAC) could lawfully sanction Tornado Cash. Now, the Fifth Circuit told us what the answer is — or did it?
Background
The background to Tornado Cash litigation will be familiar to those following developments in the domain of crime and crypto. (Or, if you do not yet know your Bitcoin from OneCoin, all you need to know can be found in Andy Greenberg’s excellent history of forensic tracing of cryptocurrency, Tracers in the Dark).
All transactions in major cryptocurrencies, such as Bitcoin and Ethereum, are entered on a publicly available ledger called the blockchain. The blockchain only records cryptocurrency addresses (e.g. 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa — the first-ever Bitcoin address), rather than counterparties’ real-life identities, but clever detective work can connect the two. Then, all of one’s cryptocurrency transactions could be exposed to scrutiny. Mixers prevent this by interposing other addresses between the payor and the recipient.
Tornado Cash is not only a mixer, but also a decentralised one. That is, it operates on the basis of smart contracts that automatically carry out transactions once certain conditions are met. Some of these smart contracts are immutable: once set up, they cannot be altered or removed.
Tornado Cash is not decentralised in all of its aspects. Its creators, Roman Storm and Roman Semenov, provided front-end user interface that made it easier for the public to use Tornado Cash’s smart contracts. In their criminal prosecution, US government alleges that Storm and Semenov profited from its operations and sought venture capital funding in exchange for a share in the proceeds. They can also alter mutable smart contracts.
In sanctioning Tornado Cash, the OFAC designated specific Ethereum addresses it uses. Those are the addresses through which one interacts with Tornado Cash’s smart contracts. Two sets of plaintiffs, including the Coinbase-backed group involved in the litigation before the Fifth Circuit, challenged these sanctions. Both lost at trial, but brought appeals before the Fifth Circuit and Eleventh Circuit, the first of which has now succeeded.
Fifth Circuit’s Reasoning
In one sense, the judgment is very simple. Under the International Emergency Economic Powers Act 1977 (IEEPA), President is empowered to block, regulate or otherwise restrict dealings in ‘any property in which any foreign country or a national thereof has any interest’. The Fifth Circuit reached the conclusion that Tornado Cash’s immutable smart contracts were not property and, therefore, the OFAC was acting ultra vires.
Not being expert in US property law (or, frankly, any property law), I have no quarrel at all with the court’s finding in this respect. But here is the problem. The OFAC’s action essentially consisted of two components: (a) sanctioning Tornado Cash as an entity; and (b) designating specific Ethereum addresses that Tornado Cash was using. Even if the latter was unlawful because smart contracts are not property, this is no obvious reason for the sanctions against Tornado Cash as a whole to fall.
An essential part of plaintiffs’ case was that Tornado Cash was not an ‘entity’ capable of being sanctioned at all, but a ‘decentralized, open-source privacy protocol’. The Firth Circuit explicitly refused to decide the point and stated that it was unnecessary to do so since no sanctionable property was involved in any event.
But if Tornado Cash is a sanctionable entity, it may well have interests in other property beyond the smart contracts, for example the servers it uses or the funds it generates. Sanctions mean that, if such property is ever found in the US, no operations with it are permitted under the law. They also mean that no US person is allowed to make assets available to Tornado Cash or receive assets from Tornado Cash. In short, the question of whether Tornado Cash can be sanctioned must be distinct from that of whether specific smart contract addresses can be designated.
What Happens Next
So far, therefore, the Fifth Circuit’s judgment looks like sweeping in its effects yet poorly reasoned. But there is a plot twist. Several days ago, American journalist Laura Shin, the host of an excellent podcast called Unchained, published an interview with Paul Grewal and Leah Bressack, CoinBase’s two most senior lawyers who are running the Tornado Cash case.
According to Grewal and Bressack, the Fifth Circuit did not rule that sanctions against Tornado Cash as a whole were unlawful: only that a certain subset of smart contracts it uses, namely immutable smart contracts, cannot be listed. The judgment therefore does not require the OFAC to remove Tornado Cash from the SDN list, or even to delist all of the sanctioned smart contract addresses. To be clear, this is what Grewal and Bressack argue the OFAC should do, but it is evident from the interview that they do not think the judgment necessitates this.
Now, I have no doubt whatsoever that Grewal and Bressack are right. And what they say must be obvious to someone who has access to the parties’ most recent pleadings and motions. But no one reading the judgment alone, on its own terms, could possibly divine this conclusion. Furthermore, the original complaint; the plaintiffs’ motion for summary judgment; and the trial court judgment all deal with Tornado Cash sanctions in broad terms.
What must have happened is that, somewhere along the way, the plaintiffs reframed their case, and relief sought, more narrowly on the particular issue of immutable smart contract addresses being listed. The upshot is: yes, they won, but in a limited fashion. This also explains the court’s reasoning. It appears that the Fifth Circuit, despite the parties’ original pleadings, the court was ultimately not asked to address whether Tornado Cash was a sanctionable entity.
Therefore, the popular understanding that the Fifth Circuit struck down sanctions against Tornado Cash is plain wrong. Not because the media misrepresent what the court said, but because its judgment is so incredibly, mind-bogglingly obscure. For all its Legalese-infused folksiness (‘for starters, the noscitur a sociis canon instructs…’), it really makes no effort at all to help the public understand its implications.
In terms of next what the next steps are, again I would encourage everyone to listen to the Unchained episode. The OFAC has until 21 January to appeal should it wish to do so, either to the full panel of the Fifth Circuit or to the Supreme Court. Neither court is obliged to consider the appeal, but has the discretion to do so. Once the judgment becomes final, the trial court will issue the respective order and the OFAC will be required to comply, potentially by keeping the sanctions against Tornado Cash but removing the offending smart contract addresses.
This in itself would raise some interesting questions. For example, would mixing cryptocurrency via those newly un-sanctioned addresses indirectly enrich the still-sanctioned Tornado Cash as an entity and therefore fall foul of the prohibition on making assets indirectly available to a sanctioned entity? Such arguments would take us into issues similar to those addressed in the Australian case of ABC v QAL, but with a crypto-twist.
In the meantime, the other challenge to Tornado Cash sanctions is still going ahead in the Eleventh Circuit, it being an open question whether that court will adopt the Fifth Circuit’s reasoning. Likewise, the prosecution against Tornado Cash’s founders remains afoot. So, I think it is fair to say — more to follow in this saga.
Economic Crime Law 