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Key Takeaways

A federal court ruled that OFAC’s sanctions on Tornado Cash’s smart contracts exceeded its power.
The court found that Tornado Cash’s smart contracts cannot be classified as property of a foreign national or entity.

A US federal appeals court has determined that the Treasury Department’s sanctions on crypto mixer Tornado Cash were excessive as they unjustly targeted open-source software, which lacks legal justification under current law.

According to the court ruling, while the US Treasury and its OFAC department have the authority to block “any property in which any foreign country or a national thereof has any interest,” Tornado Cash’s smart contracts do not fulfill the criteria for being classified as property under the International Emergency Economic Powers Act (IEEPA) and related legal interpretations.

“The immutable smart contracts at issue in this appeal are not property because they are not capable of being owned,” the ruling noted.

“Because even OFAC’s regulatory definition requires that property be ownable, the immutable smart contracts are beyond the scope of OFAC’s blocking power,” it wrote.

The US Treasury and its OFAC department have blacklisted Tornado Cash since 2022 due to concerns over its use in laundering billions of dollars stolen in cyberattacks, particularly those linked to North Korea’s Lazarus Group.

However, even with sanctions in place, the crypto mixer remains operational and accessible, the ruling said. This means that sanctioned individuals can still utilize the platform despite the Treasury’s attempts to block their access.

The court suggested that the focus should be on targeting the specific individuals or entities using the software for illegal activities, rather than the technology itself.

“Perhaps Congress will update IEEPA, enacted during the Carter Administration, to target modern technologies like crypto-mixing software. Until then, we hold that Tornado Cash’s immutable smart contracts (the lines of privacy-enabling software code) are not the “property” of a foreign national or entity, meaning they cannot be blocked under IEEPA, and OFAC overstepped its congressionally defined authority,” the court determined.

The ruling originated from a lawsuit initiated by Joseph Van Loon and five other plaintiffs against Treasury Secretary Janet Yellen, OFAC, and OFAC Director Andrea Gacki in 2022.

The plaintiffs, who used the platform for legitimate purposes but found their funds frozen post-sanction, asserted that the Treasury’s action infringed upon their rights and exceeded the department’s statutory authority.

The lawsuit, supported by Coinbase, was initially dismissed by a federal court in Texas in August 2023. The plaintiffs subsequently appealed the decision, and the recent ruling by the Fifth Circuit Court of Appeals successfully overturned the lower court’s judgment.

Privacy wins

The ruling is seen as a huge win for the crypto industry, as it reinforces the idea that open-source software should not be penalized for the actions of a few bad actors.

Coinbase’s chief legal officer Paul Grewal said the legal victory is an important milestone for the industry, as it demonstrates that courts are willing to protect the rights of crypto users.

“Privacy wins. Today the Fifth Circuit held that the US Treasury’s 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,” Grewal wrote on X.

Brian Armstrong, CEO of Coinbase, claimed that the Treasury had “exceeded its authority” when it sanctioned open-source software, ignoring the technology’s legitimate applications.

“A good win,” said Bill Hughes, senior counsel and director of global regulatory matters at Consensys. “One which the Supreme Court would be unlikely to reverse.”

However, Hughes clarified that the legal victory does not mean that all aspects of the protocol are now immune to regulatory scrutiny. “The issue was about smart contracts with no admin key,” he said.