Unchained - How the Tornado Cash Lawsuit Was Won and Why It Matters - Ep. 743

Starting point is 00:00:00 This decision makes clear that there are limitations on the U.S. sanctions power that OFAC can impose, and those are on open source immutable code. You can imagine code coming in the form of smart contracts like we saw with tornado cash, but there's lots of code outside of crypto that OFAC similarly does not have power to sanction just because amongst its many legitimate users are some bad actors. Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I'm your host, Laura Shin, author of The Cryptopians. I started covering crypto nine years ago, and as a senior editor at Forbes was the first Main Tree Meter Porter to cover cryptocurrency full-time. This is the December 3rd, 2024 episode of Unchained.

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Starting point is 00:01:14 Perfect for GameFi and DFI to build, grow, and scale. Join the community at Pocodot.network slash ecosystem slash community. Today's topic is the recent court ruling of returning the tornado cash sanctions. Here to discuss are Paul Greywell, Coinbase Chief Legal Officer, and Leah Bressick, VP of Legal at Coinbase, who managed the case. Welcome, Paul and Leah. Thank you, Laura. Thanks for having us.

Starting point is 00:01:39 The crypto industry saw an important victory last week when a panel of three judges in federal appeals court struck down the Treasury Department's designation in August 2022 of the Tornado Cash Smart Contracts as sanctioned entities. Paul, can you explain what this means and why it matters? What it means, Laura, is that for the very first time, a federal appellate court ruled that the Department of Treasury's OFAC or Office of Foreign Asset controls violated a law when it designated the Kornado Cash protocol as an SDN or specially a designated national for purposes of international sanctions. It's a ruling that really establishes for the first time that open source software. like this is inappropriate for designation. But beyond that, it's a ruling that establishes that once again, agencies are required to operate within the constraints set by the Congress in passing

Starting point is 00:02:40 laws. And where they overstep their bounds, courts are going to step in and stop them. And we think that's a critical outcome for this case. And Leah, as we mentioned, you managed this case for Coinbase, which was funding the lawsuit on behalf of six users of Tornado Cash, some of whom are also coin-based employees. What was the judge's reasoning? So agencies get their power from Congress, and they have to act within that power. So in this case, Congress authorized OFAC to impose sanctions against certain bad actors and the property in which those bad actors have an interest. What was novel about Tornado Cash is that for the first time, OFAC imposed sanctions on open source immutable code, claiming it was property.

Starting point is 00:03:23 or fell within the definition of property that was controlled by this tornado cash entity that OFAC broadly defined. We disagreed, and the Fifth Circuit agreed with us last week. And the Fifth Circuit made clear that property, as that term is understood at its core, is something that's capable of being owned. An open source immutable code that can't be altered, modified, or controlled simply is not property. And for that reason, OFAC does not have the power to impose sanctions on that kind of immutable code and therefore has to remove these immutable smart contracts from its U.S. sanctions lists and let the U.S. persons once again use this privacy protocol. So let's back up just to make sure that listeners have all the basic facts to kind of like understand this case. Can one of you briefly walk through how Tornado Cash works?

Starting point is 00:04:12 Yes. So Tornado Cash is basically at the heart of Tornado Cash are these immutable smart contracts. And that's this immutable software that was the heart of our case. And the idea is that you're a user and you have a wallet and you send funds into this immutable smart contract and you can withdraw those funds to another wallet. And in doing so, sever the link between you that deposited the funds and you the withdrew. And in doing that, you regain some of your privacy on the blockchain. And so it's considered a privacy protocol because it's a way for people to basically regain some of the privacy.

Starting point is 00:04:46 So if you receive your salary in crypto, people don't know how much you make or you can protect how you spend that money. And so at its core, the thing that powers this protocol are these immutable smart contracts that are essentially just software code. And so also for background, let's go into the Office of Foreign Assess Control decision to sanction tornado cash. Why was it that they were doing that? And then what was also different about that designation? Yeah. So it's important to recognize that Treasury and OFAC play a a critically important role in protecting national security for the United States. And the reason why their focus was on this protocol in the first place was that they believed that there were foreign state

Starting point is 00:05:37 actors, money launders, and terrorist organizations that were taking advantage of some of the technical features of this protocol in order to mask their activities. That's a legitimate concern. What is less legitimate and what the court ultimately held violated the law was to simply designate the software itself under the sanctions programs rather than do what Congress has said OFAC and treasury should always do, which is target the bad actors. And in this particular instance, by failing to target the bad actors, what OFAC effectively did was to tarnish all sorts of innocent users of that same software that had nothing to do. money laundering or terrorism or any other safety or national security concerns in ways that we

Starting point is 00:06:24 thought were troubling to say at the least. In fact, I think the record makes clear that the majority of the users of this privacy tool were people legitimately using it to regain their privacy and security as part of crypto transactions, but OFAC decided to impose the sanctions because some of the users included bad actors. And so as we mentioned earlier, Coinbase was not itself a plaintiff, but it chose to get involved by funding this case. Why was that? We thought that in this case, having these six plaintiffs bring this challenge was actually the best vehicle for this case because these six plaintiffs gave you the true cross-section of the different types of users that were using this privacy protocol for legitimate reasons. So you had Tyler, who was a Coinbase employee, who used it to donate to Ukraine without fear that there would be Russian retaliation. against his wallet addresses.

Starting point is 00:07:15 And then you had other people that were doing it again because they feared for their physical security or privacy. And so I thought in formulating the case, the court really understood this legitimate use of this privacy protocol. And you could see that because in the decision, they actually went through some of these examples and talking about how there were these majority of legitimate use cases in addition to the examples of bad actors that OFEC had done.

Starting point is 00:07:38 So we thought that was the best vehicle to bring a challenge like this. It plainly made an impression. And, you know, Coinbase has not only never hidden its support for these plaintiffs and for this case, we're quite proud of it, and we trumpeted it wherever we've had the opportunity. But we thought that it can often be distracting to focus on corporations and amorphous organizations or entities and ignore that these types of sanctions, when they ultimately reflect government overreach, can hit real people in real ways. We've got the stories of the individuals here or a critical element of the case that needed to be presented. And how did the case even come together? Like, how were the plaintiffs chosen? Did they decide to file, you know, even before Coinbase knew about it? And then you decided to fund after you knew about it? Or how did all that happen? The sanctions dropped. And about a month later, we filed this complaint with the six plaintiffs. And so what happened during that month period is that we Coinbase aligned that we wanted to bring this challenge.

Starting point is 00:08:41 And then we were able to identify these six plaintiffs. And our goal, like I mentioned, was to identify a real cross-section of people who were using this privacy protocol for legitimate reasons and also a diversity of like where they were located. So some of the plaintiffs are from Michigan, Tennessee, Texas, California, Maine. So the plaintiffs actually worked with us. They knew that we were looking for plaintiffs as part of this challenge. And so we kind of combined to align on the arguments, align on where we're going to file and ultimately bring this challenge together. And I will say a huge shout out to the plaintiffs who were just tremendous as part of this case. They are the real heroes here, for sure.

Starting point is 00:09:18 Why did that matter about their geographic distribution? We just thought, again, it was to the cross-section. So one of them being located in Texas is how we were able to file in Texas. But also, it's just helpful, again, to give the court a sense of what the broad harm was with the sanctions that basically made it so that all U.S. persons couldn't use this privacy protocol. I thought it was helpful to have different stories, different locations, different locations, different experiences, that, again, it's all about a cross-section to really prove that privacy protocols have real utility in the crypto ecosystem. And just to bring your audience, Laura, a bit more into the mindset of the court, first and

Starting point is 00:09:54 foremost, judges, I think, are often viewed as automaton who simply take laws as drafted and apply them to records as crafted. And that is, of course, their primary responsibility. But at the end of the day, judges are people, too. They want to understand. the implications of the case before them. And they also want to understand, you know, the motivations of people bringing these types of challenges. The other insight I wanted to share was in terms of the alignment, the internal alignment that Leah referenced. As soon as several of us at Coinbase learned of this designation, there was an almost immediate reaction, frankly, one of surprise and then ultimately shock and disdain, because

Starting point is 00:10:41 It became very clear to us almost immediately after we reviewed the designation that OFAC had overstepped its bounds. What was particularly gratifying to me, and I think to so many of us, including Leah and others on a legal team, was that our leadership at the company, Brian Armstrong, our board, Emily Choi, there was almost immediate support for the idea that if we could find the right plaintiffs and bring the right type of challenge, the Coinbase absolutely positively would lend its resources to do just that. And that's something, again, I'm grateful for, but also just take a lot of pride in in terms of our approach to this case. Yeah, I'll just echo Paul, which is it's, you can't imagine that all companies would be willing to bring a challenge like this, right, saying that OFAC had overstepped its boundaries.

Starting point is 00:11:30 So I think it was, it's definitely, I'm very grateful for the company to letting us bring a challenge like this that really was an important landmark to show that there are limitations on the US sanction power. And just dive a little bit more into that. Like, why was it a big step for Coinbase to do this? Like, probably the most obvious one is it's expensive. But, like, you know, they weren't actually involved. So can you just explain, like, what it is that, yeah, was different about them funding it?

Starting point is 00:11:58 Well, these types of cases, unfortunately, can be terribly expensive. But they can also be distracting in terms of taking time, not just time, but also attention. away from all the other important responsibilities that we have in running the company day to day. What was different about this case, what made it so important for us to step in was, first and foremost, the idea that ordinary Americans could be swept up in government overreach in ways that were critically important. And at the same time, the nature of the overreach here went beyond just OFAT, the Department of Treasury, sanctions regimes. The issues really that were, that we're or immediately parenthood has implicated all sorts of other government overreach that very much

Starting point is 00:12:43 impacts Coinbase and crypto more generally. And so we thought this was an important opportunity not only to do the right thing and to stand side by side with people who were at serious risk as a result of the over designation, but also to establish important principles that we think are going to have significant implications in other cases that Coinbase and the Cryptic community are currently involved in. So as we mentioned earlier, this ruling came from an appeals court to explain what happened when, you know, it was at an earlier stage. Like, obviously, you lost that case. You know, what was the reasoning behind that? Yeah, no, cases rarely go in linear fashion, and this is no

Starting point is 00:13:23 exception to that. So we filed in the Western District of Texas, and we actually were transferred from our original location in Waco to Austin. And then there was an Austin District Court judge that disagreed with us. And his, His disagreement was mostly that he found that they had defined an entity that could be sanctioned. He disagreed that immutable smart contracts were not property. And so he found that the sanctions could stand. And then obviously we appealed to the Fifth Circuit and we got our favorable opinion last week. I will say that I think Paul and I very much at the outset, the company was very invested in taking this the full way,

Starting point is 00:13:56 meaning that we knew that this kind of a case might be one where we might have some trouble in the first venue. And then we would appeal and see if we could be successful in the second venue. we felt very strongly about the strength of our legal arguments. So in that sense, I feel like Paul even tweeted after our district court lost that, like, our plan was immediately to appeal because that was always our plan was just to continue to try to get the decision we thought was right, which was that OFAC had overstepped the authority that Congress gave it. And at the district court level, what was their argument that the tornado cash contracts

Starting point is 00:14:26 were actually property? So it's the funny thing about smart contracts being named contracts, is that they, found here, the district court really found that that contracts, that smart contracts were essentially contracts and that contracts are capable of being owned. And you saw in the Fifth Circuit's opinion that they disagreed, because the idea is a contract requires two people or more on both sides, right? And with a smart contract, it's basically me, the user, engaging with software. So there's no two people involved. And so I think that's where the district court kind of fell into this as a contract and contracts can be property and are subject to being owned just like normal contracts can be owned. And the Fifth Circuit

Starting point is 00:15:07 disagreed and said immutable smart contracts are a different kind of animal. And contract is kind of a misnomer. It's really immutable code, right? And I think that's where the courts disagreed. Yeah. And where I think the Fifth Circuit also corrected the error below was in calling out explicitly a critical Supreme Court decision, Loper Bright, which overturned deference that is traditionally given to agencies under Chevron. I think many of us in crypto have been talking about Chevron deference now for some time and Loper Bright's effect on it. What the Fifth Circuit said was, in light of Loper Bright, this agency was entitled to zero deference on what the law actually required. So it then proceeded to interpret the law provided by Congress on its own merits,

Starting point is 00:15:53 which is critically important. And so now that we have this ruling from the appeals court, what happens next? So the government gets a certain number. of days to decide if they want to appeal. So they could go to the full Fifth Circuit, what we call an en banc, and ask them to revisit the decision or appeal to the Supreme Court. And we'll have to see what the government decides to do there. And regardless, what we would expect is that this decision in the Fifth Circuit would become final in January and get sent back to the district court with that order to OFAC to remove the smart contracts from the U.S. sanctions list. The other thing, Laura, that I hope will happen is that this agency, but all the law,

Starting point is 00:16:32 also other agencies will take to heart what the court was telling them about how to exercise their authority provided by Congress. I'm perhaps naively optimistic that many agencies will pause and reflect on what is a remarkable decision by the circuit court to basically overturn a decision by an agency that traditionally received incredible deference and frankly respect given its important responsibilities. And so I'm hopeful that there will be a course correction here that goes beyond just the four corners of the judgment that's ultimately entered in this case. And it's a really good point that we talk about this as a crypto victory, but this is actually a really important decision outside of crypto, meaning that this decision makes clear that there

Starting point is 00:17:17 are limitations on the U.S. sanctions power that OFAC can impose, and those are on open source immutable code. You can imagine code coming in the form of smart contracts like we saw a tornado cash. But there's lots of code outside of crypto that OFAC similarly does not have power to sanction just because amongst its many legitimate users are some bad actors. Yeah. Just going back to, you know, what you were saying about how the initial judge had ruled that the contracts for contracts. The district court made a funny statement about that in the, and their ruling, which I'm just trying to find. But they basically, yeah, basically said like smart contracts are misnamed, too. They're not really contracts. But one thing I also wanted to ask when you earlier said that the government

Starting point is 00:18:01 has a deadline to decide whether or not they're going to appeal. What is that deadline? So they have 45 days. So we would expect what we call the mandate. So the final decision of the Fifth Circuit would land about January 21 and go back to the district court. So they have basically that time period for the government to decide what they want to do next. Okay. And that's kind of an interesting date because it's the day after the inauguration. It is odd that it falls that way this Yes. Okay. Well, do you have kind of like if you put your finger to the wind, would you guess that they're going to appeal or not appeal? I really hope they will reflect, as I mentioned earlier, and step back and ask themselves, would have further appeal to the Supreme Court in the absence of any circuit split at this point or contrary authority really being the interest of the American public? And to reflect upon, again, as this opinion makes clear, their actions, impact.

Starting point is 00:18:56 real Americans trying to do real things in ways that we would all not only, I think, recognize as legitimate, but celebrate donations to charities, work, supporting families. So I hope that the Department of Justice and Department of Treasury reflect upon this before they make a final decision, but obviously, ultimately, that will be their decision to make. They have to seek a number of approvals inside the Department of Justice to be able to appeal to the Supreme Court, too. So that'll be in a transition period like this. That'll also be a little bit interesting. Okay. So they basically get to decide where they want to appeal, whether the en banc or the Supreme Court, like if they were to try to appeal, which do you think they would prefer?

Starting point is 00:19:40 I think that we may have a different opinion on this. I don't know. We've never discussed this. I think that their odds are exceedingly slim regardless of which route they take. But this circuit, like most circuit courts, grants very few en banc appeals. It's fully within the discretion of the court. And of course, the Supreme Court is now quite famous for being very stingy and granting certiori petitions on its own. So I do think the odds are going to be very, very slim regardless of which one they choose. But again, that's a choice for them to make. I agree with Paul. I think the Fifth Circuit opinion is very strong and it's a unanimous opinion of this panel. So I think it would be, in that sense, that would be a reason not to bring it to the

Starting point is 00:20:23 full Fifth Circuit en banc, because it's so. such a strong opinion. And in terms of the Supreme Court, this is a Supreme Court that's definitely been looking a lot at agency overreach, right? And that's obviously the Loper Bright decision that came out. So that's also an interesting vehicle to bring this kind of a case to where there's a novel application of sanctions that really strains the meaning of property, which is the authority Congress gave O'FAC. Yeah, honestly, just from the way that you're describing this, it sort of feels like if they want to test the waters, they could try, you know, with either one. But it's not really in their hands. Like, they could attempt to appeal. But ultimately, if the judges decide not to hear the

Starting point is 00:21:03 case, then it's over. So, yeah, judges get to make those calls. And I think for all the reasons, Leah suggests, I would be shocked if either the full fifth circuit or the Supreme Court thought this was a case worthy of scarce judicial resources given, given its posture. All right. So at this point, it sounds like, because obviously we're in this situation where a bunch of users have funds that are trapped in tornado cash. Is it that people have to wait to see, you know, if they can obtain their funds again until January 21st? So technically the decision is not final until that mandate comes down from the Fifth Circuit. So until that January 21 period, they won't go to the district court. And until the district court orders OFAC to remove those. smart contracts from the U.S. sanctions list, they're still on the sanctions list and the sanctions still apply. Okay. So then after they get removed, is it literally just anybody can start using $4.2.2. Cash again, and it's all cool? So once the smart contracts are removed from the

Starting point is 00:22:08 sanctions list, that means that U.S. persons can once again interact with those immutable pool contracts, and a lot of the trapped funds are in those immutable smart contracts that are those pools. Yeah, another way to think about it, Laura, is that if all of the the procedures Leah laid out come to pass as we fully expect they will, the world will essentially, this world anyway, will be reset to the day just before these sanctions were issued in the first place. Oh, wow. That's so interesting. And I do believe that there are specific addresses that are believed to be associated with North Korean hackers, that those are still sanctioned. So then, because Tornado Cash will mix all the different transactions that are in any

Starting point is 00:22:51 one, I don't even know what I call it, but, you know, when they're trying to, you know, put it through this privacy mixer. So basically, like, even if you were, even if your funds were in the same batch, it wouldn't matter because it's recognized that, like, you didn't know that you were interacting with funds that were from a North Green hacker. Is that how that works? Exactly. So what they did with the sanctions is they basically added the tornado cash website, then a bunch of mutable contracts, and then these core immutable contracts that are the pools, that are the heart and soul of the tornado cash protocol, the way that we mix the funds, right? So our whole case and the remedy that the Fifth Circuit just gave us last week was to remove the immutable

Starting point is 00:23:36 smart contracts. So technically, OFAC could keep those mutable ones that are the optional features that have been offered on top of tornado cash, but the core features that are the mixing service at these different, you know, at these different money amounts, those would now be accessible and any U.S. person could still use them. And you're right, that means bad actors might use them, but that also means all the legitimate actors could also use them still. The other thing, though, to bear in mind is that if a bad actor is otherwise designated or on the SDN list, they don't get a free pass as a result of this decision, far from it. And I think that's one of the core points that the court was trying to make in writing the

Starting point is 00:24:16 decision in the way that it wrote it. OPEC does have pools available to it to go after bad actors. What they can't do is stretch the definition of property to sweep in all sorts of innocent actors simply because it's more convenient or less burdensome. That's a really good point. Sanctions is one of many tools the U.S. government has to target bad actors. And in many ways, it's actually the bluntest tool. Because in this case, you basically sanction the smart contracts and you make it so no U.S. person can use them because a few bad actors use them. There are much more targeted or narrowly focused ways to actually punish bad actors. And I think the court's saying, like, those are still possible. You can still sanction the Lazarus group and all the

Starting point is 00:24:57 North Korea actors. You just can't do this kind of a broad sanction on code, which then ends up having these like huge negative implications for U.S. persons. Yeah, there's one other entity that can be involved here, or like a category of entity that can be involved here, which is the relays. Can you explain how that works and how the, you know, judges ruled on their participation? Yes. So the relayers are basically an optional, additional privacy layer people can do. So in other words, you still have to pay gas fees when you use one of these mixers. And there's a concern that if you, the user, are paying the gas fees on the other side when you're withdrawing your funds, then people can figure out it's still you, even as you use the mixer. And so these relayers offer yet another way to kind of add additional

Starting point is 00:25:45 anonymity as you withdraw your funds. But they're optional. So you can still use the immutable smart contracts to mix funds without any relayers, or you can choose to use relayers that basically will help you pay the gas fees so that you don't have that added connection on the back end in terms of linking you to the withdrawal following the mixing. So in this case, what the court was saying is these relayer contracts are mutable contracts. So those were not the things that we were actually challenging. We were challenging the addition of immutable smart contracts to the sanctions list. So there has not been a decision on whether OFAC has power or doesn't have power to basically sanction mutable contracts like these relayer registries. So those

Starting point is 00:26:28 could remain sanctioned. So should users of tornado cash and these relayers be concerned about using the relays, or do you feel like this decision, you know, makes it okay for them to use the relays as well? So I think we'll have to see what OFAC does. So the order from the court will be for OFAC to remove the immutable smart contracts, which are basically those pools that are the core of the 20-0-cash privacy protocol, the order will not say that OFAC needs to remove any mutable contracts. And these relayers and the relayer registry, so the thing that lists all the relays, are an immutable contract. So we'll have to see if OFAC, in removing the immutable smart contracts, decides just to remove the whole designation, or whether they choose to keep the relayer

Starting point is 00:27:13 registries, mutable smart contracts still on the U.S. sanctions list, in which case then that would be, that would make it so that U.S. persons cannot use that particular optional feature. Oh, and if that were to happen, then what you is, well, first of all, I'm a little bit confused even why the judges didn't make it clear of what should happen. So I think it's, it's, it's, the, the Fifth Circuit at least, was very focused on the one issue in front of them. And the issue in front of them was just these immutable smart contracts. And the reason why they even brought up these relayer mutable contracts is that the district court had kind of conflated the two in their lower court decision that ruled against us. So the circuit court brought them up mostly to clarify that

Starting point is 00:27:57 everything that they're talking about is the immutable code. And it's the immutable code that OFAC has no power to sanction and that it has to remove from the sanctions list, right? So I think that's a little bit where the confusion comes from. But it is possible that OFAC, receives this mandate from the Fifth Circuit and says, to Paul's point, you know, we're going to take down the whole designation, as opposed to we're only going to take down the specific items that the Fifth Circuit forced us to take down, which would be these immutable pool contracts. And, Laura, the reason why I'm hopeful on these points is that first and foremost, the professionals at O'FAC and within Treasury really are, I think, public servants looking at what is in the

Starting point is 00:28:41 public interest and always focus on what is the right thing to do under the law. Now, sometimes they get it wrong, grievously wrong, and as we've shown in this case, we're not afraid to challenge them when that happens. But I am optimistic that in reviewing this decision holistically, OFAC will reconsider its entire approach to designating these different pieces of this tornado cash protocol and open source project and focus on what, makes sense for users of this service or protocol. And how can we target the bad actors without sweeping in lots of innocent ones? You know, one last bit that I want to find out here is, you know, would Coinbase be okay if it turns out that the relays are still sanctioned? Or is

Starting point is 00:29:32 there anything additional for you to do? Or we're going to wait to see what OPEC chooses to do. So what Coinbase is always focused on is making sure that the agencies which oversee these different crypto protocols and this industry as a whole follow the law as written by Congress. And so in choosing to either keep or not keep any designation that it may have in place, OFAC violates the law. Coinbase is going to address that in exactly the same manner as we've chosen to address it here.

Starting point is 00:30:04 That's really our focus is. Is the agency complying with the restrictions imposed upon it by Congress when it authorized these activities? We'll see what happens in this particular case once OFAC has made this decision. And I think it's important, and I think this was in the Fifth Circuit's opinion, too, is that a number of people use the immutable smart contracts without any relays. So relays are really an optional service. And so in that sense, like it's just something to remember, depending on what OFAC ends up deciding, is that many, many people use this immutable smart.

Starting point is 00:30:36 smart contracts to protect their privacy without using any relayers. Okay, yeah. I mean, it sounds like it gives you just an added layer of privacy, but if it were the case that it became sort of a practice to regularly use tornado cash, then maybe it wouldn't matter so much or something. In a moment, we'll talk about some other lawsuits involving tornado cash, but first, a quick word for the sponsors who make this show possible. Big news for DeFi traders.

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Starting point is 00:32:47 At this point, we also had the fact that there's actually multiple cases involving tornado cash there in the courts, including one by Coin Center, which is suing OFAC in the 11th circuit, saying, you know, similar to actually what you were saying in your case, which is that the agency did not have the authority to put tornado cash on the sanctions list. So since that is still going through the court, like what bearing does this particular ruling have on that case? Yeah. Well, the 11th Circuit will ultimately make its own determination based on the record that was

Starting point is 00:33:19 presented to it by Coin Center and OPEC in that case. We do think, however, that this Fifth Circuit ruling will and should have a significant influence on how they think about those very similar issues. for obvious reasons. It's the same law. It's the same broad question. So while the 11th Circuit has the discretion to issue a different ruling, we think that the wiser course here is to simply take the analysis, the logic of the Fifth Circuit opinion and apply it in that case with the same outcome. And so, Paul, if the 11th Circuit decides to kind of just ignore the Fifth Circuit decision, and if they decide to rule differently, then what happens?

Starting point is 00:34:03 Any number of things could happen in that particular case. Again, I don't think that this 11th Circuit will simply ignore the decision of the Fifth Circuit. Whether it chooses to follow it is a separate question. But I do think this is a critically important and monumental opinion that will influence how it approaches the questions before it. If at the end of the day, the 11th Circuit disagrees, that would create a circuit split. there could be the potential first for review by the full 11th Circuit, just as in our case, the full this circuit in theory could review the decision of the panel. But ultimately, if there were a split, that might create an opportunity for further review

Starting point is 00:34:43 by the Supreme Court. But it's important to also bear in mind, Laura, that simply because there are circuit splits doesn't mean that the Supreme Court automatically takes up the case. In fact, the vast majority of circuit splits that are presented to the Supreme Court for review are declined. And so we're quite confident that this decision in the Fifth Circuit will hold, and we're hopeful that it's sound reasoning and extensive analysis will influence the 11th Circuit in a very similar way. This is so interesting. I just have to play through all the sort of like chess game scenarios. So let's say that they decide to rule differently, and then the Supreme Court

Starting point is 00:35:22 decides not to address the circuit split. Then what happens? On that particularly, instance, you would have different law in different circuits. And again, this is not unusual. It feels a bit odd to non-lawyers and certainly those who are less familiar with how circuit court jurisdiction works. But yes, you would effectively have in the three states of the 11th Circuit, Georgia, Florida, and Mississippi, one standard. And in the states comprising the Fifth Circuit, which include Louisiana and Texas, a different standard. It's not ideal. And it's also one reason why all other things being equal,

Starting point is 00:36:06 when circuit courts are presented with a persuasive decision by a fellow circuit court, they tend to take it seriously because no group of judges wants to create this type of double standard or different set of requirements depending on where someone happens to define themselves. Okay. And then in the other scenario where they, take into account this decision that just occurred, would they do that like right now or like how quickly could they say, okay? And at that point, is it that they're saying like, we're not even

Starting point is 00:36:39 going to let this case move forward because we agree with that ruling or, you know, like, what was the timeline and yeah, what would happen? The circuit court could simply take the Fifth Circuit ruling and apply it in issuing its own decision. It could invite further briefing by the party. in that case in light of this Fifth Circuit decision. But it ultimately has the responsibility for ruling on the case before it. And so I'm quite confident that you're going to see a decision come from the 11th Circuit, and I'm equally confident that it will follow the reasoning of the Fifth Circuit because the Fifth Circuit's reasoning was so extensive and so thoughtful and so careful

Starting point is 00:37:17 in its overall approach. And so then if they make the same ruling, then is the whole timeline of everything that we discussed earlier, is that still, that's the main timeline? It's still the main timeline and the question then for the government would be whether they seek to appeal to the Supreme Court, given that two circuits have disagreed with the government's position. And that would be a much harder case to get the Supreme Court to take because you don't even then have a circuit split that the Supreme Court would have to decide. Okay. Okay. And just the last thing is for the Coin Center lawsuit, they're making the same argument that the plaintiffs in your case made.

Starting point is 00:37:57 Yeah, they are focused on that same property argument that we are in terms of immutable smart contracts, not being property. And they've done an excellent job in their advocacy. And so I think they also are to be complimented for, so reciprocally pursuing this issue and so effectively arguing the merits of their case. Okay, so it's not like there's any legal differences in the arguments that would need to be addressed. It's actually just pretty much the same questions. So one thing that I noticed is that in this particular ruling, the judges made an interesting statement early in the decision.

Starting point is 00:38:35 So what they did was they presented this argument by the plaintiffs, which they summarized as, quote, that tornado cash is open to our self-executing software is not sanctionable under the act, as opposed to the rogue persons and entities who abuse it. But then they said, OFAC's concerns with illicit foreign actors laundering these funds are undeniably legitimate. Perhaps Congress will update AEPA, which is the International Emergency Economic Powers Act,

Starting point is 00:39:01 enacted under the Carter administration, to target modern technologies like crypto-mixing software. So I brought that and I thought, wait, are they encouraging Congress to update AIPA so that OFAC can put smart contracts, on the sanctions list? Or, I mean, it could also be just that they're stating a fact, which is that it is possible this could happen.

Starting point is 00:39:21 How are you reading that? Yeah, Laura, I think it's more of an acknowledgement of Congress's authority, of course, to revisit these types of issues, particularly when the law in question was enacted, not just a year or two ago, but in this case, several decades ago. But I don't think it was in any way a strong suggestion or an invitation to do so. And even if it were, Congress is under no obligation to follow the dicta of a circuit court in passing any legislation. Congress has the prerogative. And I think in this case, whatever Congress ultimately decides to do, the more important lesson from this decision is that it should proceed

Starting point is 00:40:03 wisely and carefully and target the bad actors, not the neutral tools that they may rely upon to conduct their bad acts. I thought the end of the opinion was really, was really helpful because the Fifth Circuit there said, we refused to accept this invitation to rewrite the statute so that OFAC can do something that Congress has not authorized it to do yet. But then I think to that same end, they said it's up to Congress, whether they want to revise the statute, right? Our job as courts is to say, what does the law let OFAC do today?

Starting point is 00:40:35 And it does not let them today sanctioned open source, you know, immutable software. And I thought, so I think they're kind of drawing the balance, which is the court's job is never to amend the statute. The court's job is to interpret the law, and it's Congress that gets to decide whether they want to amend what they authorize O'Fact to do. So then we're actually circling back to the main story in crypto this year, which is the election. And I saw that Jake Chervinsky kind of hinted at this. He said, the problem with the Fifth Circuit for a nudal cash ruling is it doesn't say, quote, Treasury shouldn't be able to sanction crypto. It just says they can't under current law. And then he had a double.

Starting point is 00:41:12 interpretation from you guys. He said it then basically invites Congress to pass legislation enabling crypto sanctions. And then he wrote, stay frosty and lame duck. So because we are in this position politically where one party has power and it's the party that for the last few years has definitely been much more anti-crypto than the Republican Party, but we're facing this kind of like clean sweep that's about to occur in January for the Republicans to have both chambers of Congress and the presidency, do you see this risk that Jake is talking about, or do you feel like that's probably not going to happen? I think Jake is right to call out the risk, but I also think it's equally important to call out that come January, we're going to be presented with the most

Starting point is 00:41:59 pro-crypto Congress in history. Hundreds of pro-crypto legislators will take the oath of office in both the House and the Senate. We're going to have the most pro-crypto presidential administration in history by a mile. So in that environment, the idea that any new laws would pass that would widely swipe at crypto without carefully and narrowly tailoring their effects to really focus on, again, what the circuit court focused on in this decision, which was the bad actors and not those who are innocent, I think gives me a cause for hope and optimism that the right balance will be struck regardless of whether Congress chooses to act.

Starting point is 00:42:40 I would think Congress would look very hard at this kind of a massive expansion of the U.S. sanctions power, because to give OFAC the ability to basically sanction open source software when the vast majority of users are legitimate and there are bad users amongst it, that's a big, big expansion of a very, very strong tool. And I would think a lot of different parties are going to have views on that because that impact is actually, it's impact for crypto, but it's impact far outside crypto too. So I would think that would be something that any Congress would want to look really hard at and look at all the other tools the U.S. government has because sanctions is not the only tool you have to target bad activity. Yeah, and the other thing I hope that this new pro-crypto Congress will continue to heed or bear in mind is 52 million Americans now own or have owned a cryptocurrency of one type or another. And the voice of the crypto voter in the November elections could not have been stronger. And so we do think that that political impact will also weigh on any action that Congress may take and hopefully restrain any impulse to overreach in the way that we saw addressed in this decision by the Fifth Circuit.

Starting point is 00:43:53 And would you say that because of the elections and how, as we mentioned, the Republicans are really poised to take power both in Congress and in the presidency, do you think that that would affect the government's decision on whether or not to appeal? Like, would they factor that in? Well, as Leah pointed out, in order for any further appeal to be taken, a number of approvals have to be performed within the Department of Justice in particular. And ultimately, the Department of Justice will reflect the priorities of the Attorney General, who, of course, is appointed by the president, even if she or he operates independent of the president once in office. So I do think that the politics here will matter. as much as the policy. And fortunately for crypto, I think the politics and the policy are both

Starting point is 00:44:45 trending in our direction. Okay. So another court case that could be affected by this ruling is the criminal case in the Southern District of New York against Roman Storm, one of the developers of Tornado Cash. What would you say this ruling means for his case? So I'm not familiar with all the facts and evidence in that particular criminal case. Obviously, that's something that only the attorneys would know. But that case includes conspiracy charges involving money laundering and sanctions. So given that the Fifth Circuit opinion is so clear on the fact that there is no authority for OFAC to impose sanctions on open source immutable software code, which is at the core of the tornado cash, I would imagine all the parties in that criminal case will be looking very closely at this new decision, especially as it relates to the sanction charges that have been brought against those defendants. So I would imagine that if they follow the argument in this particular case, then basically that would cause them to, I guess, discard the charges on, what was it not on the development?

Starting point is 00:45:48 But then the money laundering, as far as I understand, they would have to show that he like actively engaged in trying to help launder money, which is kind of a totally different thing. so then potentially it would it would mean that actually both of the, you know, areas of his case are potentially on much-shakier ground, basically, or the government's view of his case on both instances on much-shakier ground. I would not be surprised if the attorneys in those cases submit supplemental briefing, right, and there might be an additional motions practice to the court to see whether any parts of the original indictment need to be modified.

Starting point is 00:46:26 I would also not be surprised to learn at some point in the future that all of the attorneys involved in that separate case spent much of their Thanksgiving weekend pouring over the details of this Fifth Circuit. I don't understand any implications for them. Yeah, yeah, but that one doesn't go to trial until April. And do you see any scenario in which this ruling or, you know, if it were strengthened by a similar ruling from the 11th Circuit that that eventually wouldn't go to trial? or do you think no matter what it probably will? I think that'll depend on the Department of Justice because for it to not go to trial, either the court would have to rule against, you know, dismiss the indictment or the government would have to remove the indictment.

Starting point is 00:47:09 Okay. So for the Roman Storm case, I heard something really interesting on Bankless. They interviewed Roman and his lawyer, Carrie Curtis, a waymaker. And she was saying that the case touches on our Fourth Amendment right, which protects citizens from unreasonable searches and seizures by the government. She said that in that case. The government is saying that because a cold wallet exists in somebody's house, they can seize or search for it

Starting point is 00:47:34 and then decide later whether or not it's connected to any case or crime. I didn't know if you weren't aware of that or if there were any other issues with that case that you thought that crypto community might be interested in. Well, search warrants can be predicated on any number of grounds. It's possible, for example, that in the example that was discussed, the assets in cold storage are viewed as the instrumentalities or fruits of a crime. But ordinarily, when a search warrant is granted by a U.S. magistrate judge, the target of the search warrant is viewed as evidence of a crime. And in order for that to be established, the government is required to identify what crime they believe was committed.

Starting point is 00:48:18 So, again, the details matter here. but I do think it's important that we all pay very careful attention to these various rulings because they very well could have implications for other cases and other circumstances with significant effect. All right. So something else that I was curious about is, I don't know if you saw after the ruling, Bologis Sreeny Vossin made a proposal for a pseudonymous developer to quote, go Zatoshi, that's with a Z, and build Zetherium, also with a Z, which he said,

Starting point is 00:48:51 would mean that this developer should use impeccable OPSEC and, quote, take it upon themselves to add private transactions along with the zero knowledge stack to Ethereum as a set of optional smart contracts. And he called this, you know, whole setup as Ethereum. And he said it would be the newly legal tornado cash plus APIs for all the zero knowledge innovation over the last few years. Essentially, it would be a way to ship much of Justin Drake's impressive five years EK roadmap in three months, except via smart contracts rather than at the base layer. Do you feel like, like this ruling could be extrapolated to enable something like this to happen without risk of, you know, the government targeting it.

Starting point is 00:49:31 Well, I never bet against biology and his creativity. I will say that regardless of whether or not the approach he lays out would ultimately pass muster, I think a lot of lawyers and non-lawyers are going to be studying this opinion for years and even perhaps decades to come, given the potential impact it will have on all sorts of open source projects and development efforts globally that up until this point, up until this decision were in peril as a result of the OFAC sanctions that were issued. And that's actually a really good point because another big win from this case is that we had heard that the sanctions had actually been chilling developers from basically building

Starting point is 00:50:12 code and developing more privacy protocols or other critical innovation for crypto because they were concerned that they would build code, deploy it, and then bad actors who they had no control over would misuse it and they would be held accountable. And I think this opinion actually gives them much comfort that I think they haven't had in a long time. So in that sense, that's another win from this decision last week. Yeah, and I think, Leah, that was, you're exactly right. And that was reflected in the outpouring of not just support and exuberance, but even emotion online when this decision issued. This one was personal for a lot of people. And I think, you know, the developers that Leah references are probably those who felt the most vindicated

Starting point is 00:50:50 by the decision of the Fifth Circuit. Yeah, I think something that's interesting is that the traditional financial system gives people more privacy in a lot of ways than defy. I mean, I don't know. There's sort of apples and oranges. There's obviously the KYC that you have to do with TradFi, but then, you know, all of that stuff is not public, and the institution you're working with has a privacy policy, etc, etc. Obviously, with the public blockchain, people can figure things out. They have a lot.

Starting point is 00:51:28 You know, people will notice, oh, Vatolic yellowed into his first meme coin, or they'll, you know, say, oh, like, so-and-so burned one million of whatever they received, or, you know, they tracked down, you know, Zach XBT does this. He tracks down people. You know, I did it. with the Dow hacker. So anyway, it's just sort of apples and oranges. But yeah, would you say that, you know, probably lawyers advising the many, many privacy projects that are in crypto are, you know, saying that they're developer, that these developers working on these projects can, like, breathe more easily?

Starting point is 00:52:06 Or do you feel like they're kind of waiting to see a little bit more what happens next? Well, I think that there's no. question that as a result of this opinion, developers should breathe more easily, given the potential implications of the sanctions and all the impacts that we were talking about earlier. All that said, I must say that I personally don't take a lot of comfort from the privacy-protective features of the Bank Secrecy Act or K-Y-C programs that are imposed by many. financial regulators, if for no other reason that they have led to the aggregation and collection of all sorts of different personal information and huge volumes with very little oversight.

Starting point is 00:53:01 And so while I do think that there are some features that are included in programs and policies that should give people some comfort, the fact of the matter is that we collect way too much data in this country, when you consider how much actual effect it has on the safety and security of the country. And I think, again, part of the reaction to the tornado cash decision was, I think, an outcry for some sensible balance to return to our system, whether you're talking about traditional finance, defy, or any other part of our modern economy. Yeah.

Starting point is 00:53:42 I mean, the more I learn about ZK technology, I realize that this technology would enable, you know, any institutions that wanted to interact or transact with us or that we wanted to use to transact to check that, you know, we're a legitimate act or, you know, whatever, whatever it is without us having to reveal this information without creating honeypots for hackers. You know, it does seem like it's a really important tool. So I'm going to ask you a challenging question. I'm sure that most of the crypto community and just general people would say that the problem that led to the government's decision to try to sanction tornado cash is a legitimate problem and it does need to be resolved, which is the fact that North Korean hackers are using defy to launder over what. So the most recent estimate I could find was from May and it said that there was about $3.6 billion worth of crypto that they had been able to hack and much of that has gone to fund its nuclear program. And I wondered what some ideas were that you thought could address this issue without infringing on the rights of law-abiding citizens to privacy.

Starting point is 00:54:51 Well, there's no question that there are many bad actors operating globally and that they use all sorts of neutral tools and systems in order to perform their activities. I think, you know, my advice to regulators and policymakers on this topic is to focus on the bad actors. and to be mindful of the effects of sanctions programs on innocent people. It doesn't mean that we don't need sanctions programs. In fact, Coinbase has invested many, many millions of dollars in building world class and state-of-the-art sanctions programs that we believe would stand up against anyone's anywhere in the world.

Starting point is 00:55:31 But the urge to overreach, the urge to over-designate, we think, is a natural but an unfortunate consequence of all of, of our concerns collectively about some pretty bad actions that are taking place globally. But all of this needs to be measured in response and at least be mindful of the consequences on real people when things go awry. And even after this decision, OEC has the power to sanction bad actors, right? So if bad actors are helping the Lazarus group or other hackers do their money laundering, those are people that, you know, if Ovec can build the packages and has the evidence,

Starting point is 00:56:09 that they could sanction consistent with the authority that Congress gave them. them. I also think one thing we don't talk about often is that focusing the government's attention on the cash out points is another big way to go ahead and combat the money laundering risk from Lut. So the privacy protocol was just about, you know, mixing their funds. But how they support the regime is often by converting that cryptocurrency into, you know, fiat currency that they can then use to support North Korea. So I think that's another place that the government can really focus its attention that doesn't have to do with privacy protocols at all. And so just to understand, like, on a nuts and bolts level, what this looks like is they would

Starting point is 00:56:46 sanction any addresses that are associated with hacks, but then let's say that they're going to use a decentralized exchange to swap from one coin to another coin, then would it be like the D5 front end would block them or like just talk through kind of logistically how that would work. So the biggest cash out points that groups like the Lazaroth group would do to convert. their crypto into something that they can use for the North Korea regime would actually be the Fiat cash out points, right? So I would imagine it could be, you know, overseas exchanges or other places that, you know, have KYC obligations based or might not have KYC obligations based on where they're located. But that would be an area that I know the government has already mentioned that they're

Starting point is 00:57:29 focused on. And it's really a critical point at which money is converted from crypto into something that can support the regime. So that definitely could be a way that they could focus. And the second thing is, Think of all the people in the line that might help the North Koreans and what they're doing, whether it's hackers or people who work for North Korea. Those are the types of bad actors that O'FAC has historically built those evidence packages on and then move to sanction. And that's consistent with Congress's authority to sanction bad actors. Okay.

Starting point is 00:57:59 So as you mentioned at the beginning, you know, Coinbase supported this case that they weren't directly involved in. I, you know, wondered if Coinbase ever saw itself supporting a case. like this again, and if so, whether or not the company has come up with certain principles or thresholds for deciding whether or not it should get involved in these legal industries, legal issues that affect the industry more widely. Yeah, you know, what our CEO, Brian Armstrong has always spoken about is our mission as a company and whether or not supporting a particular case or lending resources to a particular challenge is consistent with that mission. Our goal is to bring a billion or more people into

Starting point is 00:58:40 the crypto economy. And so if there are future lawsuits that will help make that possible and that challenge a government overreach or violations of law set by Congress, we'd be very interested in lending our support to that. But I think it's also important to bear in mind that while we're very proud of our role in this particular case, one of the things I'm most proud of more generally is that crypto as a community has responded here. It's not just about Coinbase is not just about any one set of plaintiffs. You've really seen an entire industry and community stand up and rise up together in the face of this government overreach. And I think that's something that all of us should be tremendously proud of. All right. Well, this has been a great

Starting point is 00:59:25 conversation. Where can people learn more about each of you and your work? Well, I'm available and often posting on X and on LinkedIn. Of course, you can always learn more about Coinbase at coinbase.com. And I would welcome anyone to read any of the briefs that we did in this case because obviously you have the decision, you have the oral argument, you have our opening brief and our reply brief. And I think those really do a good job of refining the arguments. And I think teeing up with the Fifth Circuit ultimately decided last week. Great. Well, it's been a pleasure having you both on Unchained. Thank you, Laura.

Starting point is 00:59:56 Thank you so much. Thanks so much for joining us today to learn more about Paul, Leah, Coinbase, and the lawsuit about Tornado Cash. Check out the show notes for this episode. Unchained is produced by me, Laura Shin, with help from Matt Piltered, Wanda Ranovich, Megan Gapas, Pamma Jimdar, and Marco Craiga. Thanks for listening.

Unchained - How the Tornado Cash Lawsuit Was Won and Why It Matters - Ep. 743

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