The Fifth Circuit Court of Appeals in the U.S. issued a ruling reversing the sanctions imposed by the Office of Foreign Assets Control (OFAC) against Tornado Cash.
On November 26, the Fifth Circuit Court of Appeals ruled that OFAC exceeded its authority by imposing sanctions on 44 immutable smart contract addresses of Tornado Cash in August 2022. This ruling reversed a previous decision by a lower court in Texas, which sided with the U.S. Treasury.
The lawsuit stems from allegations that Tornado Cash has been used to launder over $7 billion in cryptocurrency since its launch in 2019. OFAC added the smart contracts of this platform to the Specially Designated Nationals and Blocked Persons List (SDN), considering it a necessary measure to prevent illegal activities. However, a group of six Tornado Cash users, led by Joseph Van Loon and supported by Coinbase, sued the Treasury Department, arguing that this action violated the law.
The panel of three judges argued that immutable smart contracts are merely pieces of open-source code that cannot be owned or controlled by any individual or organization. Therefore, they cannot be blocked under the International Emergency Economic Powers Act (IEEPA) of 1977, which only applies to assets controlled by foreign entities or individuals.
Bill Hughes, a lawyer at Consensys, stated that this ruling is a clear affirmation that OFAC has exceeded the authority granted by Congress. However, he also emphasized that not all activities of Tornado Cash are exempt from the control of the Treasury Department or OFAC, as the issue focuses only on the smart contracts without management keys.
Paul Grewal, Coinbase's Chief Legal Officer, shared on X that the smart contracts of Tornado Cash should be removed from the sanctions list and that U.S. citizens should be allowed to use this platform legally.
This ruling opens a new direction for managing decentralized finance (DeFi) protocols, while also setting clearer limits on government power to intervene in blockchain technology. This is seen as a significant victory for the cryptocurrency community, especially for those advocating for privacy in the decentralized finance sector.
