The argument is that the sanctions authority granted by Congress to Treasury is limited to persons and entities, and the Tornado Cash smart contracts are neither, nor the property of either.
> Interestingly the node operators (the people ACTUALLY EXECUTING TC, even at this very moment) haven't been sanctioned at all
Because the crime is not "executing TC", the crime is (certain) financial transactions. TC code is just the means by which it is executed, and the node operators do not intend to execute a specific financial transaction and do not specifically benefit from it. Just like, for example, if you are going to buy illegal drugs, and you send the payment for it via Venmo and then send the stash location using Gmail, Venmo and Google would not be liable for the drug transaction (even if Venmo charged a transaction fee) because for them it's just common transaction like any other. Same would go for node operators.
> In fact many of the people interacted with TC don't even have possession of the gun
It doesn't matter. What matters is who caused the illegal activity to happen. I mean, if you had a chain that is dedicated to money laundering or another illegal activity, and had no other uses whatsoever - it could actually earn OFAC designation probably by itself, as a whole, and then using it and running the node might become a crime. But I don't think OFAC intends to argue that's the case with Ethereum - it's pretty clearly not true, as most Ethereum users and nodes are perfectly happy to follow the law and never do anything illegal.
So who is the counterparty then? The other random guy(s) who deposited the ETH you end up with?
Using the venmo analogy, it would be the actual venmo corporate computers EXECUTING the tornado cash program.
It seems a little odd to me here to not hold the people executing the transaction program accountable if it's on the sanction list explicitly noting TORNADO CASH is OFAC sanctioned. Remember those nodes running the ethereum virtual machine are validating and computing the transaction, and thus the entire foundation of ethereum would be guilty per your assessment, no?
> thus the entire foundation of ethereum would be guilty per your assessment, no?
No, why would it be? Again, the Ethereum system did not initiate the specific illegal transactions - it was used (without their specific cooperation or knowledge) to perform the transactions, it's very different.
Because the law against murder was broken.
> and the police can confiscate the gun and the bullets
Says who? They can only do this the law provides this mechanism. If there isn't, the gun remains the property of the owner (even if the owner is now a convicted murderer).
> but even then the government could claim to regulate an access to it - just as it could, for example, restrict access to an erupting volcano if it wanted
They could, if Congress has passed a law giving the government this regulatory power.
I get that people might feel "autonomous" is a cop-out, but legally, the argument is narrow. It isn't about people getting a way with crime. The crypto currency community would certainly be opposed to Tornado Cash relayers facing money laundering charges as well, but here they are merely saying that the sanctions authority does not extend to the sanctioning of things. And well, it either does or it doesn't. If Iran secretly plants a cherry tree in Central Park, is OFAC allowed to sanction the cherry tree, and prevent people from eating the cherries? They are arguing no, because OFAC has no authority to sanction trees.
That's the semantic game. If they have authority to limit financial transactions by people, then they have authority to limit financial transactions by people facilitated by things. And things can not (at least not yet, not until general AI exists and recognized as independent legal entity) initiate transactions by itself - somebody caused them to do that, by setting off chain of events that resulted in that transaction. That person can be prosecuted if the transaction is illegal.
> If Iran secretly plants a cherry tree in Central Park, is OFAC allowed to sanction the cherry tree
What you mean by "sanction the cherry tree"? If people use this tree to, say, exchange money (OFAC does not regulate eating, AFAIK) - for example, by hanging sacks with money on its branches - then yes, OFAC would be able to prohibit this way of transferring money to Iran as well as any other way of doing it. Why not?
> They are arguing no, because OFAC has no authority to sanction trees.
It has authority to sanction financial transactions. The means by which they are executed is secondary - it's be stupid for Congress to give them authority to regulate transactions made in one way, but ignore same transactions with same effect made in slightly different way. I don't think anybody would have any luck convincing the courts that was the lawmakers' intent.
Another example, the tool that OFAC has here that we are talking about is their designation power, and the restrictions that follow such a designation are partly set in the statute defined by Congress, not something that OFAC has the power to make up.
> Then yes, OFAC would be able to prohibit this way of transferring money to Iran as well as any other way of doing it. Why not?
Transactions with the target entities ("Iran") are already restricted, whether through a crypto transfer or a tree-branch exchange. This is because OFAC has used its proper powers to designate those targets. The question at hand in this hypothetical is whether OFAC has the power /to designate the tree/ itself additionally, thus making it illegal for you to hang a sack of money there, regardless if you are transacting with Iran or just waiting for your cousin to pick it up.
Does OFAC have the power to say "we are designating the Hawala system"?
Probably not because "Hawala system" is not an entity that can be defined - it's like banning "cryptocurrencies" in general. OFAC wouldn't be able to do that - because it's not a specific definable entity. Designating a specific hawaladar would be possible for them (though likely not very effective).
TL;DR: Nobody thinks that the Tornado Cash smart contracts are themselves persons. The government is clearly operating along the reasoning that a human being had to be (and was, in fact) in the loop as part of deploying the smart contracts. That brings us back to the initial analogy I used: you can't absolve yourself by building a robot that does the crime for you.
But the argument isn't at all about absolving the robot builder. In fact, they explicitly take no view on whether the sanctions against the Tornado Cash entity are justified. They also do not take a view on whether the government would be justified in prosecuting the individuals behind Tornado Cash.
They are saying the government does not have the statutory authority to sanction the robot you built.
(Defending the TCE also continues below that, on a mostly irrelevant and unargued tangent about software IP.)
"So there is potentially an entity called Tornado Cash that is controlled by certain individuals, and the web address and some of the Ethereum addresses in the notice can be thought of as either pseudonyms for that entity or, alternatively, as its property. At this point, we’re not offering an opinion on whether it was appropriate to sanction that entity—we do not know all the facts that have led to this action—but we would agree that there may be an entity behind those donation addresses and that said entity may be legally eligible for listing. "
In short: they're trying to have it both ways, and it's not coming off well. If they had restricted their attention to just the TCA the argument would be more interesting, but ultimately still not compelling: everybody involved understands that there were some humans who decided to "pull the trigger" and deploy the TCA.