A US federal appeals court has overturned sanctions imposed by the Treasury Department on Tornado Cash. The popular crypto mixing service allows users to anonymize cryptocurrency transactions through smart contracts.
The ruling, handed down by the Fifth Circuit Court of Appeals, represents a significant victory for advocates of decentralized technology and privacy, while also reigniting debates about how to regulate the use of blockchain tools in criminal activities.
Tornado Cash sanctions lifted
The US Treasury's Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash in 2022. According to the agency, the platform was a key tool for illicit actors, including North Korea's Lazarus Group, to launder stolen funds.
However, the court ruled that OFAC exceeded its authority. It stressed that the immutable smart contracts that underpin Tornado Cash cannot be considered property under the International Emergency Economic Powers Act (IEEPA).
The appellate court’s decision was based on the nature of Tornado Cash’s smart contracts. These are autonomous lines of code designed to function without human intervention.
These contracts, deployed on the Ethereum blockchain, are unalterable and accessible to anyone. Thus, the court concluded that the contracts do not meet the legal definition of “property” because they cannot be owned, controlled or restricted.
The immutable smart contracts in question are not property because they cannot be owned, the court wrote.
The court also noted that while sanctions may block certain individuals from using Tornado Cash, the decentralized nature of the technology ensures that no one, including North Korean hackers, can be entirely prevented from accessing it.
Paul Grewal, Coinbase's chief legal officer, welcomed the decision.
This is a historic victory for crypto and everyone who cares about defending freedom… These smart contracts should now be removed from the sanctions list and US citizens will once again be able to use this privacy-protecting protocol. In other words, government overreach will not prevail… No one wants criminals to use crypto protocols, but blocking open-source technology entirely because a small portion of users are bad actors is not what Congress authorized. These sanctions have stretched Treasury’s authority beyond recognition, Grewal stated in X .
Grewal also stressed the importance of distinguishing between tools and their misuse. It’s worth noting that Coinbase, a major cryptocurrency exchange, was among the entities that sued the U.S. government over the sanctions.
Broader implications for crypto regulation
The decision particularly highlights the challenges of applying existing legal frameworks to decentralized technologies. Crypto mixing services like Tornado Cash occupy a legal gray area, prompting calls for scrutiny by U.S. lawmakers.
They are neither traditional financial institutions (TradFi) nor entities subject to control by a central authority. Critics of the decision argue that it could encourage bad actors to further exploit blockchain technology.
If you think Tornado Cash was used by good people for valid purposes, then make your case… If privacy protects good people, it’s good, if it protects bad people, it’s bad. The vast majority of people Tornado Cash protected are doing bad things, quipped one user on X.
Some lawmakers have already pushed the Treasury to take stronger action against crypto mixers. In 2022, members of Congress highlighted concerns about their role in facilitating money laundering and terrorist financing. A bipartisan effort aimed to ensure that tools like Tornado Cash, which are often associated with criminal networks, face regulatory scrutiny.
However, privacy advocates argue that targeting tools rather than actors undermines the principles of decentralization and privacy. Bill Hughes, a lawyer for ConsenSys, applauded the court’s detailed understanding of the issue, but made a crucial point. He warned that regulatory risks remain.
This does NOT mean that the rest of Tornado Cash is out of reach of Treasury/OFAC either. The issue was about smart contracts without an admin key, Hughes wrote.
This means that the court’s decision does not shield Tornado Cash from further legal challenges, especially those related to its founders. As BeInCrypto reported, they face accusations of facilitating money laundering. Furthermore, the broader debate over how to regulate decentralized technologies remains unresolved.
Following the decision, however, Tornado Cash’s native token, TORN, surged nearly 400% to trade at $17.63 at the time of writing.
TORN Price Performance. Source: BeInCrypto
This increase reflects investor optimism about the protocol’s potential resurgence and its implications for decentralized finance (DeFi) projects.
The article TORN skyrockets nearly 400% after Tornado Cash sanctions lifted appeared first on BeInCrypto Brasil.