The United States Fifth Circuit Court of Appeals found the Treasury Department’s sanctions to be unlawful in relation to the immutable smart contract of Tornado Cash, one of the biggest crypto mixers to offer a privacy-focused product and a victory for its users.

On Nov. 26, a three-judge panel determined that the designation of immutable smart contracts used by the platform, which both CentralBank and its users claim, was overreach under the International Emergency Economic Powers Act (IEEPA). This ends in a reversal of the lower court ruling and in amark of partial summary judgment for Tornado Cash users.

Tornado Cash Sanctions Highlight Complexities of Blockchain Regulation

In their legal opinion, the panel pointed out that though the Treasury has the power to sanction property, Tornado Cash’s immutable smart contracts are not included in that definition. The judges also said these lines of privacy-enabled software code are not the property of a foreign national or entity. “They cannot be blocked under IEEPA, and OFAC exceeded its congressionally defined authority in doing so,” this means.

Immutable smart contracts are simply, by nature, that they operate autonomously on blockchain networks and can’t be controlled or owned by any individual or entity. However, the ruling implies considerable implications on how federal law applies to blockchain technology.

In the judgement on X, the lawyer for ConsenSys, Bill Hughes, summarized, ‘They cannot be blocked under federal law.’ “As OFAC’s discretionary authority does not apply to these smart contracts.” However, Hughes said the victory in the case doesn’t completely let Tornado Cash off the legal hook. He explained:

“This does NOT mean that the rest of Tornado Cash is out of bounds for Treasury/OFAC too. The issue was about smart contracts with no admin key.” 

In August 2022, the US Treasury sanctioned Tornado Cash, which they said had laundered over $7 billion in crypto since the 2019 founding of the mixer. The funds included those tied to high profile hacks attributed to groups like the North Korean Lazarus Group.

Coinbase and Crypto Advocates Celebrate Tornado Cash Legal Victory

The Specially Designated Nationals (SDN) list targeted 44 Tornado Cash smart contract addresses globally. This drew immediate push back from the crypto community. The lawsuit, which was rolled out by six Tornado Cash users and supported by Coinbase, claimed that agencies acted in violation of the law. A similar suit was filed by crypto advocacy group Coin Center in October 2022.

Nevertheless, a Texas federal court found initially that Tornado Cash was ‘an entity’ under OFAC regulations. The appeal was prompted by the decision, and culminated in the Nov. 26 judgment. The news came following a gigantaur rally for the Tornado Cash token (TORN), surging more than 866% to hit a two year high of $34.98. The spike is dramatic, which reflects renewed optimism about the platform’s future.

Paul Grewal, chief legal officer for Coinbase, also welcomed the decision and wrote in a Nov. 26 post on X that “These smart contracts need to come off the sanctions list, and Americans will be able to use this privacy protecting protocol once more.”

The ruling is a very big win for crypto privacy advocates, but it is no resolution to the underlying debate about whether blockchain will or should be regulated as a national security issue. Legal precedent for now, the decision enforces the autonomy of immutable smart contracts, and perhaps reshapes how authorities respond to decentralized technologies.

Conclusion

Tornado Cash users score a big win as appeals court ruling puts immutable smart contracts on path to following U.S. law. Challenges remain, but the decision emphasizes the autonomy of the decentralized technologies and the limits to regulatory authority in the crypto landscape under evolution.

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