The U.S. federal appeals court overturned the sanctions imposed by the Treasury Department on Tornado Cash. This popular cryptocurrency mixing service allows users to conduct cryptocurrency transactions anonymously through smart contracts.
This ruling by the Fifth Circuit Court of Appeals marks a significant victory for supporters of decentralized technology and privacy advocates. At the same time, it reignites the debate on how to regulate the use of blockchain tools in criminal activities.
Treasury's sanctions against Tornado Cash overturned
The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash in 2022. According to the agency, the platform is an important tool for criminals, including North Korea's Lazarus Group, to launder money.
However, the court ruled that OFAC exceeded its authority. The court emphasized that under the International Emergency Economic Powers Act (IEEPA), the immutable smart contracts relied upon by Tornado Cash cannot be considered property.
The appeals court's ruling hinges on the nature of Tornado Cash's smart contracts. These are autonomous lines of code designed to operate without human intervention.
These contracts are deployed on the Ethereum blockchain, are immutable, and are accessible to anyone. The court found that such contracts do not meet the legal definition of 'property' because they cannot be owned, controlled, or restricted.
The court stated: "The immutable smart contracts in question do not constitute property because they cannot be owned."
The court further noted that while sanctions may prevent certain individuals from using Tornado Cash, the decentralized nature of the technology ensures that no one, including North Korean hackers, can be completely barred from accessing it. Coinbase's Chief Legal Officer Paul Grewal praised the ruling.
"This is a historic victory for crypto and anyone concerned with defending freedom... These smart contracts must now be removed from the sanctions list, and Americans will be allowed to use this privacy-preserving protocol again. In other words, government overreach doesn't work... No one wants criminals using crypto protocols, but entirely banning open-source technology because a small fraction of users are bad actors is not authorized by Congress. These sanctions expanded the Treasury's powers to an unrecognizable extent, and the Fifth Circuit agreed." Grewal wrote on X (formerly Twitter).
Grewal also emphasized the importance of distinguishing between tools and misuse. Notably, leading cryptocurrency exchange Coinbase is one of the entities suing the government over the sanctions.
Wider implications for cryptocurrency regulation
The ruling exposes the challenges of applying existing legal frameworks to decentralized technologies. Cryptocurrency mixing services like Tornado Cash exist in a legal gray area, prompting U.S. lawmakers to call for a review.
They are neither traditional financial (TradFi) institutions nor entities that can be controlled by a central authority. Critics of the ruling argue that it may encourage bad actors to further exploit blockchain technology.
"If you believe Tornado Cash is used by good people for valuable purposes, then state your case... If privacy protects good people, that’s good, and if it protects bad people, that’s bad. The vast majority of people protected by Tornado Cash are doing bad things," a user joked on X.
Some lawmakers had previously urged the Treasury Department to take stricter measures against cryptocurrency mixers. In 2022, congressional members highlighted concerns about the role of cryptocurrency mixers in money laundering and funding terrorism. Bipartisan efforts aimed to ensure that tools like Tornado Cash, often associated with criminal networks, are subject to regulatory scrutiny.
However, privacy advocates argue that targeting tools rather than participants undermines the principles of decentralization and privacy. Bill Hughes, a lawyer at ConsenSys, appreciated the court's nuanced understanding of the issue but also emphasized a key concern. He warned that regulatory risks still exist.
"This does not mean that the rest of Tornado Cash is not under the jurisdiction of the Treasury/OFAC. The issue lies with the smart contracts that do not manage keys," Hughes wrote.
This means that the court's ruling does not protect Tornado Cash from other legal challenges, especially those involving its founders. As reported by BeInCrypto, they are facing allegations of aiding money laundering. Furthermore, the broader debate on how to regulate decentralized technology remains unresolved.
However, according to the ruling, as of the time of writing, Tornado Cash's native token TORN has risen nearly 400%, trading at $17.63.
This surge reflects investor optimism regarding the protocol's potential recovery and its impact on decentralized finance (DeFi) projects.
