The Breakdown - A Huge Victory for Privacy in the Tornado Cash Suit

Episode Date: November 28, 2024

Privacy rights in the United States got a major boost as a Federal Appeals Court ruled that OFAC exceeded its authority in sanctioning Tornado Cash. The crypto industry rejoices. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Wednesday, November 27th, and today we are talking about a big development in the tornado cash case. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly.org slash breakdown pod. All right, friends. Well, frankly, I had been prepared for a very, very light newsday, given that we are heading into Thanksgiving and everything is kind of quieting down. But we got some seriously big news yesterday.

The Tornado Cash sanctions have been overturned in court. The Fifth Circuit Federal Appeals Court has ruled that the Treasury's Office of Foreign Assets Control or OFAC exceeded their authority in applying sanctions to Tornado Cash. The panel of judges overruled a prior ruling out of a Texas federal court. Just to level set for a moment because there's numerous lawsuits involving Tornado Cash, this case is dealing exclusively with the legality of sanctions. It has absolutely nothing to do with the criminal charges brought against Tornado Cash founders and might not have a meaningful impact on those cases.

However, in this case, the court found that, quote, Tornado Cash's immutable smart contracts, the lines of privacy-enabling software code, are not the quote-unquote property of a foreign national or entity, meaning, one, they cannot be blocked under IEPA, and two, OFAC overstepped its congressionally defined authority. IEPA, or the International Emergency Economic Powers Act, was enacted in 1977 to establish the sanctions regime. It allows OFAC to use sanctions to prohibit U.S. citizens from engaging in financial transactions involving certain entities or involving their property. The court also made a fairly stark reference to OFAC taking it upon themselves to extend their jurisdiction far beyond their legislative authority. The judges said, OFAC's concerns with illicit foreign actors laundering funds are undeniably legitimate.

Perhaps Congress will update IEPA enacted during the Carter administration to target modern technologies like crypto-mixing software. In other words, the court extended the prevailing legal theme of tamping down overreach from the administrative state, insisting that laws need to be clearly written by Congress and not implied by government bureaucrats. This ruling has immediate and massive implications for privacy and crypto. Paul Grewell, the chief legal officer of Coinbase explained, tweeting, privacy wins. Today, the Fifth Circuit held that the Treasury sanctions against Tornado cash smart contracts are unlawful. This is a historic win for crypto and all who care about defending liberty. Coinbase is proud to have helped lead this important challenge. These smart contracts

must now be removed from the sanctions list, and U.S. persons will once again be allowed to use this privacy-protecting protocol. Put another way, the government's overreach will not stand. No one wants criminals to use crypto protocols, but blocking open-source technology entirely because a small portion of users or bad actors is not what Congress authorized. These sanctions stretched Treasury's authority beyond recognition and the Fifth Circuit agreed. In particular, the court ruled that while Treasury has the power to take action against property, the open-source immutable smart contracts at the core of Tornado Cash can't be owned by anyone, and so are not property subject to sanctions. Among other things, this is a massive validation of the legal theory put forward by CoinCenter in the wake

of the sanctions. They argued that by relinquishing control over the smart contracts, they could no longer be recognized as property of any identifiable tornado cash organization. Therefore, the fully autonomous smart contracts didn't fit within the sanctions power granted to OFAC. Jerry Brito, the outgoing executive director of Coin Center, wrote, this is a huge victory. The court agreed with what we've been arguing from day one. Immutable smart contracts are not property subject to sanctions. Still, consensus lawyer Bill Hughes warned that although this is a massive win for crypto privacy, it only applies to a fairly narrow set of infrastructure. Following a long explainer of the ruling, he concluded, in some, they cannot be blocked under federal law. They certainly can't be blocked

as an exercise of OFAC's discretion. This does not mean that the rest of tornado cash is out of bounds for Treasury and OFAC 2. The issue was about smart contracts with no admin key. In other words, crypto mixers where founders still have some level of control over the smart contracts, are probably still fair game for sanctions. Matt Corva, another member of the legal team of consensus, presented the big picture takeaway from the entire episode, tweeting, there is low cost to the government in trying new strategies, even if the goals are noble. There is huge cost to those impacted in trying to make that right. The outcome wouldn't have been possible without CoinCenter, Coinbase, Paul Grewell,

and the many mines and wallets who contributed to this and similar challenges around the country in other cases. Speaking of paying a huge cost, Tornado cash founder Roman Storm sent out another request for funding to defend his criminal case, tweeting, My fight is not over yet and I still lack resources. That case is set to begin in April. In terms of impact, this ruling provides a roadmap for building privacy protecting crypto tools while avoiding sanctions risk. It's a big vindication of the idea that decentralization is important,

and fully immutable smart contracts are categorically different to those retaining developer control. This could all go away with the passage of legislation, but developers have a brief window to deploy public goods to the blockchain. Robin Whitney, a crypto marketing and growth expert, wrote, this is a really big W. Contracts employed by tornado cash are not property and not owned. they operate without humans, have code that's unchangeable and unremovable. Now, privacy can cook. More broadly, this ruling enhances the feeling that a period of government overreach is coming to an end. It reinforced two important principles for the era of law the U.S. seems to be heading into. First, quote, the foremost task of legal interpretation is dividing what the law

is, not what the judge interpreter wishes it to be, and legislating is Congress's job and Congresses alone. It appears the industry can look forward to a period where regulations are more clear and known in advance, rather than sprung on companies and and a Wells notice. And even for those not intimately involved in crypto law, the vibe shift is palpable. Investor Meltem to Mirrors wrote, reading the tornado cash ruling, the vibe shift is so real. A golden age is upon us. Today's episode is brought to you by Bitkey, the hardware wallet built for Bitcoin. Made by the team behind Square and Cash App, BitKee makes securely managing your Bitcoin absurdly simple. BitKee is integrated with partners like Cash App, Coinbase, Robinhood, and Blockchain.com,

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That's $51 off the normal price. Get yours today online at Amazon, Best Buy, or Bitkey. That's B-I-T-K-E-Y.World. Next up, of course, we have to do our daily check-in on the price. At least for now, it looks like those Thanksgiving conversations will at least be a little muted without us hitting $100,000. For some, the recent price weakness, which would have been ridiculous to say two weeks ago, of course, is giving some unpleasant flashbacks to 3,000.

Thanksgiving 2020. Back then, Bitcoin price had doubled since April and was approaching the psychological barrier of $20,000 for the first time that cycle. As Bitcoiners logged into the Turkey Day Zoom calls of that cursed Thanksgiving, the price plummeted. Bitcoin fell 17% across 24 hours to hit $16,000 in an event that became known as the Thanksgiving Day massacre. A similar collapse, this Thanksgiving would see the price drop below $80,000. So far in this cycle, though, we haven't seen many of the rapid 20 to 30% drawdowns that plague Bitcoin bull markets. There were a few few slower ones during the summer, but nothing to truly shake conviction. And yet, with Bitcoin failing to break out above 100K, many are starting to call for exactly that kind of correction.

Charlie Scher, a crypto analyst at BTC market said, The current price action is best understood as part of its historic pattern of sharp gains followed by healthy corrections. Such pullbacks demonstrate a cyclical pattern that allows the market to consolidate gains and reduce leverage before advancing further. The dip to $92,000 aligns with this trend, suggesting it could be a last flush before Bitcoin finally crosses 100K. However, a deeper correction, between 20% and 30% could take Bitcoin closer to $80,000, a level still consistent with prior bull market behavior. To the extent that there would be a silver lining to another Turkey Day rinse out, it's this. Back in 2020, after diving by 17%,

Bitcoin tripled over the next five months. The people who bought that dip and held for the long term are now up almost 500%. As Gemini's Cameron Winkel boss tweeted, Bitcoin doesn't go down, it just goes on sale sometimes. Speaking of up a ton, Dan Morehead, the founder of Pantera, is celebrating a milestone. After 11 long years, his original Bitcoin fund has hit 1000X. The fund was established in 2013 and was the first of its kind. Returns are now at 131,165% net of fees and expenses. In a blog post lauding the achievement, Moorhead took a trip down memory lane digging up his original investment pitch. In July of 2013, Moorhead told potential investors, the forecast Bitcoin washout happened. Very quickly. Bitcoin's are now trading at $65 per BTC,

exactly half the price they were trading at our first meeting on May 28th. I think we should buy aggressively now. The price is going way up. It's going to squeeze up like a watermelon seed. Morehead left this offer on the table but told his investors he would be purchasing 30,000 Bitcoin's that weekend. In this week's blog post, Moorhead wrote, that first investment memo still reads well. In 2013 to 2015, we bought 2% of the world's Bitcoins. Even after 11 years, Bitcoin is is still squeezing up like a watermelon seed. Honestly, I just can't help thinking that we have many more years of very compelling returns. In another flashback, he shared an investment not from one month after the fund made its first buy, writing, I was discussing Bitcoin with an investor yesterday,

and he replied somewhat dismissively, it's just like buying gold. No, it's like buying gold in 1000 BC. 99% of the financial wealth has yet to address Bitcoin. When they do, Bitcoin is either going to be worth zero or up orders of magnitude. Moore had noted that, by his estimation, only 5% of global wealth now has taken on a Bitcoin allocation, leaving a lot of room to grow. He wrote, that's still exactly how I feel. We're still early. 95% of financial wealth has not addressed blockchain. They're just beginning this massive transformation now. When they do, Bitcoin might be at something like $740,000 per BTC. As one of the longest-standing institutional allocators in the space, Moorhead's view is extremely instructive. He's one of the only people that can incredibly

show what a 10-year time horizon looks like in Bitcoin. Sharing a little more, he wrote, I can imagine an investor thinking, Bitcoin has doubled this year. Well, I guess I missed it and giving up. That's the wrong mindset. On average, it almost doubles every year. The compound growth rate since we launched the fund 11 years ago is 88%. Putting it in perspective, Morehead pointed out that $740,000 per Bitcoin is only a $15 trillion market cap. Not an inconceivable number he wrote relative to $500 trillion in financial assets. His post also highlights how much of a struggle it was to get the fund off the ground. He relays his experience after the 87% crash in December 2013 and the three years of nothing until 2016. Moorhead did 170 investor meetings that year to raise a grand total of a million

dollars, adding, the management fees on that were 17,241, 100 bucks a meeting. Still, Morhead is betting that the trend is still intact. He wrote, I think it will take a few years longer, but I do think there's a decent chance of doing so. That's been my mentality. I wouldn't bet my life on it. I'm not 100% sure blockchain assets will go up. But when you multiply the, chance it goes up times the order of magnitude or more the industry is potentially going to go up, the result ends up being way better than the other assets one could invest in. The expected value of the trade is the most compelling I have seen in almost 40 years of doing this. Over a decade of buying Bitcoin in size and then 1,000x later, Bitcoin is still the most compelling trade

Moorhead has seen in his career. And with that, we will wrap our slightly shorter just in advance of Thanksgiving episode of the breakdown. Hope you are headed to a wonderful celebration. Or if you outside of the United States, looking forward to a day where your U.S. colleagues and peers don't bother you at all hours of the day with our crazy questions and entrepreneurial schemes. In any case, appreciate you all listening as always, and until next time, be safe and take care of each other. Peace.