The core legal logic behind this ruling may be the key entry point for us to understand the future relationship between technology and law.

Written by: Liu Honglin, Iris

Major Progress in the Tornado Cash Case!

The U.S. Fifth Circuit Court of Appeals recently ruled that the immutable smart contracts of Tornado Cash do not meet the definition of "property" in traditional law, and thus the sanctions imposed by the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) were deemed overreaching. However, this ruling regarding the mixer Tornado Cash may be good news for the vast majority of Web3 developers. Nevertheless, the ruling in the Tornado Cash case does not mean that technology developers can completely distance themselves from responsibility.

As a legal practitioner in the Web3 field, attorney Mankun believes it is necessary to dig deeper for insights from these two events: Does technological neutrality truly equate to complete immunity? What principles are worth referencing when the judiciary defines the boundaries of responsibility between technological tools and user behavior? The core legal logic behind this ruling may be the key entry point for us to understand the future relationship between technology and law.

Core Controversy of the Tornado Cash Case: Does it Constitute Property?

The core controversy of the Tornado Cash case lies in whether smart contracts can be recognized as "property" in a legal sense, which directly determines whether OFAC's sanctions against it have legal basis. Here, one might ask how the recognition of smart contracts as property relates to whether the U.S. can impose sanctions on them.

According to the International Emergency Economic Powers Act (IEEPA), the U.S. Treasury can only impose freezing or control measures if the subject is recognized as "property." In this case, OFAC's sanction logic is that Tornado Cash, as a mixing tool, is considered a core means for wrongdoers to conceal the source of funds, and is even closely related to money laundering activities. According to OFAC data, in 2021, the North Korean hacker group Lazarus Group transferred over 65% of its illegal funds through Tornado Cash. Therefore, although smart contracts are technological tools, their actual use leads them to be viewed as property, thus becoming the target of sanctions.

However, the U.S. Fifth Circuit Court of Appeals held a different position. The court pointed out that the use of smart contracts does not determine their legal attributes, and they cannot be classified as "property" simply because of illegal use by users. The underlying technology of Tornado Cash, the smart contract, is a piece of self-executing, decentralized code that cannot be owned, controlled, or used exclusively, and therefore does not meet the traditional legal definition of "property." Based on this, the court ruled that OFAC's sanctions exceeded its statutory authority.

This controversy has sparked widespread discussion on technological neutrality. Supporters of this view argue that technology itself is not guilty; its original intention is to provide legitimate functions, such as mixers aimed at protecting user privacy, rather than supporting criminal activities. However, opponents argue that the consequences of technology being misused should not be entirely borne by society, and the role and responsibility of developers cannot be ignored. This issue is further reflected in the U.S. Department of Justice's charges against Tornado Cash co-founders Roman Storm and Roman Semenov. The Department of Justice believes that these developers, knowing that the tool could be misused, still promoted its use, which constitutes indirect participation in money laundering crimes.

This also raises a deeper question: When the original design intention of technology diverges from its actual use, how should the law intervene? Especially in decentralized systems, how should the uncontrollability of technology be balanced with potential social risks? How should the boundaries of developer responsibility be defined?

These questions are not limited to the U.S. judicial field. Globally, different countries and regions are facing similar challenges, while China's judicial practice demonstrates a distinctly different legal logic and regulatory attitude.

Chinese Regulatory Perspective: Legal Intervention Based on Actual Use

Unlike the U.S., which emphasizes the legal responsibility of developers, Chinese judiciary tends to analyze whether technological tools pose a threat to public interest or social order based on their use and social impact when dealing with issues of technological neutrality.

The Qvod case is undoubtedly a typical representative. The Qvod player itself is an efficient technological tool, but its technical characteristics were widely used by users to disseminate infringing content. The court found that Qvod Company, knowing that its product could be misused, not only failed to take effective technical restrictions but also encouraged users to use the technology more through optimized design. Ultimately, the court viewed the developers' "tolerance" of the technology's use as indirect participation, ruling that it constituted assistance in infringement. This case indicates that the Chinese judiciary's recognition of technological neutrality is conditional, and the foreseeability of potential misuse by developers during the development and promotion process, as well as the measures taken, are important bases for determining their legal responsibility.

In the fintech sector, this regulatory approach is also applicable. For example, in a 2019 case involving a Bitcoin mining site in Hunan, the court ruled that although the mining site did not directly violate the law, its high energy consumption caused actual harm to public resources, thus violating local energy management regulations. This case reflects that China's legal framework not only focuses on whether the technology itself is legal but also emphasizes the potential impact of its actual application on the overall interests of society.

Furthermore, Chinese judiciary not only focuses on the criminal use of technology but also tends to explore whether technology developers have sufficient foresight regarding risks. For instance, in the 2019 Token Better illegal fundraising case, the platform facilitated illegal fundraising by developing virtual currency trading functions. Although the case primarily targeted the platform's operators, it was also mentioned during judicial proceedings that the technical team failed to take technical shielding or restriction measures, knowing that their tool could be misused for illegal fundraising. This tolerance was seen as condoning illegal behavior, indirectly increasing the platform's legal responsibility.

Additionally, the focus of China's blockchain regulation is on how developers can ensure compliance through technological means. For example, in a local government's blockchain poverty alleviation project, although the project aimed to improve the transparency of fund distribution through blockchain, vulnerabilities in its smart contract design led to some funds being maliciously altered and transferred by criminals. Judicial investigations pointed out that the development team failed to adequately consider the risks of technical vulnerabilities, and the design did not meet reasonable safety standards, thus being required to assist in accountability and bear some remedial obligations.

However, the Chinese judiciary's handling of technological tools is not a complete denial. In fact, for certain privacy protection technologies, the courts also fully recognize their legality and reasonableness. For example, in a legal dispute involving a certain encrypted chat software in 2020, the court ruled that the end-to-end encryption service provided by the developers was not illegal, and the developers could not control how users used this technology, thus not bearing responsibility for misuse. This ruling not only maintains space for technological innovation but also delineates clear boundaries of responsibility for developers to some extent.

So, returning to the core question, when the use of encryption technology shifts from privacy protection to money laundering, fraud, and other criminal activities, how should the "duty of care" and legal responsibility of developers be defined?

In the Chinese judicial environment, this duty of care is more related to the developers' behavior during the promotion phase. If developers encourage illegal use of technology through marketing and design, the courts typically tend to include them in the scope of liability. For example, in the "PlusToken" digital currency Ponzi scheme case, developers designed and promoted a Ponzi platform using blockchain and smart contract technology, leading to many users being defrauded. The court ultimately ruled that developers bore direct responsibility for their technology being used for illegal activities and pursued their legal liability accordingly. This also means that technology developers in the Chinese environment must face potential legal challenges more cautiously.

Ultimately, the Chinese judiciary adopts a more pragmatic perspective when dealing with the boundaries between technology and law. This perspective neither completely denies the neutrality of technology nor solely relies on the original intention of technology to define its legality, but rather comprehensively considers the social impact of technology and the consequences of its use. For encryption technology, this judicial attitude serves as both a warning of potential risks and a reference path for the industry to develop legally and compliantly. In an era of rapid technological development, the adaptability of law is becoming a common challenge faced by judicial systems worldwide, and Chinese judicial practice may provide different solutions to this challenge.

Attorney Mankun's Summary: Balancing Technological Innovation and Legal Responsibility

The Tornado Cash case provides a new direction for global judicial practice. Although the U.S. court ruled that immutable smart contracts do not constitute "property," this result temporarily offers developers a certain degree of legal protection, but the debate over technological neutrality is far from over. In contrast, Chinese judiciary emphasizes developers' social responsibility more when addressing similar issues, requiring them to maintain sufficient foresight regarding potential risks during the design and promotion process and actively take compliance measures. This pragmatic regulatory attitude may impose certain constraints on industry innovation, but it also provides beneficial references and lessons for global technological legal practice.

At the intersection of technology and law, balancing innovation and responsibility is the only way forward. In the future, attorney Mankun looks forward to working with the industry to promote the improvement of the technological compliance framework, helping Web3 move towards a healthier and more sustainable development path.

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