Episode Summary
Executive Summary: The episode centers on Coinbase’s legal victory in the Fifth Circuit overturning OFAC’s Tornado Cash sanctions as applied to immutable smart contracts. Guests Paul Grewal and Leah Bresic explain the court’s property analysis, the role of privacy in crypto, what happens next procedurally, and how the ruling may affect other Tornado Cash and crypto cases, broader sanctions policy, and open-source software development.
Main Topics: Fifth Circuit overturns Tornado Cash sanctions (Priority: 5/5): The panel held OFAC exceeded its authority by sanctioning immutable open-source smart contracts, which the guests argue are not 'property' that can be owned or controlled under the statute. How Tornado Cash works and why privacy matters (Priority: 5/5): The guests explain that Tornado Cash’s immutable pools allow users to deposit and withdraw funds through a mixer, severing the link between wallets and improving transaction privacy. Coinbase’s role in funding and shaping the lawsuit (Priority: 4/5): Coinbase funded the case on behalf of six plaintiffs because it viewed the designation as government overreach that harmed ordinary users and established important limits on sanctions power. Procedural next steps and possible appeals (Priority: 4/5): The government has time to seek en banc review or Supreme Court review, with the mandate expected around January 21; until then the sanctions remain in effect. Impact on other Tornado Cash and crypto cases (Priority: 4/5): The discussion covers Coin Center’s parallel Eleventh Circuit case and the criminal case against Roman Storm, both of which could be influenced by the Fifth Circuit’s reasoning. Broader implications for agency power and open-source code (Priority: 5/5): The guests frame the ruling as more than a crypto case: it limits OFAC’s ability to sanction open-source immutable code and reinforces that agencies must stay within congressional authorization.
Key Arguments: OFAC can target bad actors, but not neutral open-source immutable code merely because bad actors also use it. Immutable smart contracts are not 'property' because they cannot be owned, altered, or controlled like ordinary contracts or assets. The lawsuit succeeded because the plaintiffs represented a real cross-section of legitimate Tornado Cash users harmed by the designation. The district court erred by treating smart contracts as ordinary contracts; the Fifth Circuit corrected that legal characterization. Loper Bright matters because courts now give agencies less deference when interpreting the scope of their own authority. The ruling could chill future overbroad sanctions and encourage regulators to focus on individuals and illicit cash-out points instead of tools used by law-abiding users. Even if OFAC keeps some mutable relayer contracts sanctioned, the core immutable pools must be removed from the sanctions list. The same logic should influence parallel litigation and may weaken parts of the Roman Storm criminal case tied to sanctions. Congress could theoretically amend the law, but the guests argue a pro-crypto political environment makes broad new sanctions authority less likely.
Data Points: Fifth Circuit panel size: 3 judges - A unanimous appellate panel struck down OFAC’s designation of Tornado Cash smart contracts. Number of plaintiffs: 6 - Coinbase funded the lawsuit brought by six Tornado Cash users. Appeal deadline: 45 days - The government has 45 days to decide whether to seek further review. Expected mandate date: About January 21, 2025 - The guests said the Fifth Circuit mandate would likely issue around January 21 and return the case to the district court. U.S. cryptocurrency users: 52 million - Used to argue that crypto voters and users matter politically and may influence legislation. Tornado Cash hack estimate cited: $3.6 billion - Referenced as an estimate of crypto stolen by North Korean hackers as of May 2024. Coinbase CEO goal: A billion or more people - Coinbase described its mission as bringing a billion or more people into the crypto economy. Coinbase employee plaintiff example: Donated to Ukraine - One plaintiff used Tornado Cash to donate without exposing wallet addresses to retaliation.
Pivotal Quotes: "open source software like this is inappropriate for designation." — Paul Grewal: Explaining why the Fifth Circuit’s ruling matters and what it establishes about OFAC’s power. "An open source immutable code that can't be altered, modified, or controlled simply is not property." — Leah Bresic: Summarizing the court’s core reasoning for rejecting OFAC’s sanctions theory. "we refuse to accept this invitation to rewrite the statute so that OFAC can do something that Congress has not authorized it to do yet." — Laura Shin quoting the Fifth Circuit: Discussing the opinion’s statement that courts will not expand statutory authority for agencies.
Implications: The ruling strengthens privacy-preserving crypto tools, limits broad sanctions on neutral software, and may shape parallel litigation and future congressional debate over how far U.S. agencies can go against open-source code.