The Tornado Cash case

A new milestone in the Tornado Cash (hereinafter TC) saga. An American decision was recently handed down and reforms the legality of the sanction imposed by OFAC. Let us take advantage of this decision to review the case.

Tornado Cash, what is it?

TC is a software protocol deployed on Ethereum. TC acts as a token “mixer.” It allows masking the origin and destination of crypto-asset transfers by collecting, pooling, and mixing the crypto-assets deposited by many users into the protocol. It therefore allows masking the link between 2 wallets (while retaining proof of the link between the 2 wallets).

Tornado Cash uses zk-SNARK technology. Thanks to this technology, users can prove they possess information without having to reveal it. Here, a proof was generated to justify, after the fact, the link between the 2 wallets.

Often perceived as a tool used by criminals to launder their funds, TC is first and foremost a security and privacy protocol. While some criminals think they need to use TC, much more ordinary use cases exist. As I already wrote here, in a world where more people use crypto, a solution like TC is essential for preserving one’s privacy and the security of one’s crypto. Let me explain:

If you have some crypto and want to use it for your daily purchases, it is possible to store a large portion of your crypto via a very secure solution while for everyday payments, a hot wallet, funded from your larger wallet, is sufficient.

However, due to the traceability intrinsic to the technology, the recipients of all your payments could trace back the chain of transactions to identify your “main wallet.” Same thing with your friends. If you had to reimburse your companions for part of a meal and you reimburse in crypto, your friends could easily trace back through the transactions to arrive at your “main wallet.” By breaking the link between your main wallet and your everyday wallet, you preserve some of your privacy.

Just as in the banking system, where total transparency of individual balances is deemed unacceptable, crypto needs tools to preserve an equivalent level of confidentiality. Why should it be different for crypto?

Due to the nature of a blockchain’s infrastructure (decentralized and transparent), TC is an essential solution for preserving one’s privacy on the internet. Want to learn more about TC? Read this (in English)

OFAC’s censorship

This tool was therefore used by hundreds of people pseudonymously and in a decentralized manner as the technology intends. Nevertheless, some criminals saw fit to use this platform for less noble purposes.

In August 2022, OFAC (Office of Foreign Assets Control) therefore considered this platform as prohibited and purely and simply censored the tool.

The decision from OFAC stated that:

As a result, all property and interests in Tornado Cash that are in the United States or in the possession or control of U.S. persons are blocked and must be reported to OFAC. In addition, any entity that is owned, directly or indirectly, 50% or more by one or more blocked persons is also blocked.

All transactions by U.S. nationals or within (or transiting) the United States that involve any property or interests in property of designated or blocked persons are prohibited, unless authorized by a general or specific license issued by OFAC, or exempt.

These prohibitions include any contribution or provision of funds, goods, or services by, to, or for the benefit of any blocked person and the receipt of any contribution or provision of funds, goods, or services from any such person.

OFAC encountered a fundamental reality of blockchain: its decentralization prevents the outright deletion of a deployed protocol.

It was therefore only the user interface that had been set up that was censored.

This decision was immediately criticized by the crypto community and even by the open-source community. On the legal principles involved, the decision had already been heavily criticized when it was made (see notably the analysis by CoinCenter).

The conviction of the lead developer in the Netherlands

After the censorship of the protocol, it was the conviction of Alexey Pertsev by a Dutch court that “reignited” the case in May 2024.

On the surface, the decision was expected. The stakes of this decision are moreover major because it aims to validate a developer’s liability for the use made by a third party of their program. In summary, if I develop an application and you commit crimes and offenses using that application, I can be convicted for having developed that application. Somewhat excessive and problematic with regard to our fundamental freedoms.

However, the Court’s reasoning is revealing. One can indeed read in the decision that:

The court held that it is Tornado Cash that breaks the link between a deposit and a withdrawal. By breaking this link between a deposit and a withdrawal, Tornado Cash conceals or hides the origin of the withdrawn cryptocurrency, the identity of the real owner, and where the cryptocurrency is transferred to.

As Tornado Cash allows completely anonymous deposits and withdrawals, it also conceals or disguises the person who has the power to dispose of the cryptocurrency or, in other words, who is in possession of the cryptocurrency.

When these acts are performed with respect to ether derived from a crime, it is in fact Tornado Cash that gives effect to the act of concealment or money laundering.

Therefore, according to the Court, Tornado Cash cannot be considered as a mere tool for the user. The fact that Tornado Cash, in carrying out these concealment or laundering acts, did not at any time have the power to dispose of the cryptocurrencies derived from the crime does not change this. Indeed, the performance of these laundering acts does not require the existence of a power of disposal over the laundered assets.

This decision is obviously shocking insofar as it holds the developer responsible for the use made by users. To draw an analogy, it is as if the car manufacturer were held responsible in the event of a road accident caused by a drunk driver…

Unfortunately, our democracies are not free from all criticism and we are never far from an “inconsistency” and/or “anomaly.”

5th Circuit decision (USA)

In its decision of November 26, 2024, a U.S. court of appeals reformed the initial decision on the legality of OFAC’s sanction.

In summary, the Court held that OFAC exceeded its statutory authority when it sanctioned Tornado Cash for allegedly facilitating money laundering for malicious actors.

While acknowledging that malicious actors can take advantage of Tornado Cash for malicious cyber activities, the decision found that the “immutable smart contracts” at issue do not constitute “property” within the meaning of the law used by OFAC because they cannot be owned and because no one can prevent others from using them. (source)

This is a significant development that contrasts with the Dutch decision. In its ruling, the Court examined how a smart contract works. There is a genuine desire to understand the technical workings of the protocol.

Another interesting element in the decision is the overview and explanations of crypto-assets and blockchain. On this point, we can only be pleased to see a professional judge demonstrate such a degree of understanding. This confirms, once again, that these technologies continue to find their place in our society.

This decision was hailed by defenders of crypto and online privacy as a victory for decentralized technologies and the protection of individual rights.

Conclusion

These decisions (USA & the Netherlands) show a thorough understanding of a protocol like TC, which is not the simplest. Those who think “judges don’t understand anything about it” should read these judgments to properly grasp the competence of judges on the matter.

To delve deeper into the subject, I can also refer you to the analysis and reflection by Alexandre Stachtchenko (The Excesses of Financial Surveillance Threaten Our Democracies)

In this regard, I wish to conclude with a quote from Lyn Alden, cited by Alexandre Stachtchenko, which sums up the situation well: Bitcoin is money only when it allows prosecuting people in court. The rest of the time, it is a speculative tool to which this qualification is denied.

To go further: cryptomonnaie.be — The Belgian cryptocurrency blog | Newsletter CryptoBelgique — Stay informed of news and updates