Emily Walker
On November 26, the Fifth Circuit Court of Appeals determined that the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) overstepped its boundaries by imposing sanctions on the immutable smart contracts of crypto mixer Tornado Cash. The court ruled that these self-operating contracts, which do not require human management, cannot be considered “property” under federal law, thereby removing them from the International Emergency Economic Powers Act (IEEPA) jurisdiction.
Major Victory for Crypto
This ruling reversed OFAC’s prior inclusion of Tornado Cash’s smart contracts on the sanctions list, which significantly impacted privacy practices and decentralization within the cryptocurrency sector. Judges highlighted that immutable smart contracts are mere lines of code without ownership or control, thus they cannot be treated as property subject to sanctions.
Tornado Cash functions as an open-source, decentralized protocol that allows users to enhance the anonymity of their Ethereum blockchain transactions. By merging transactions and creating a disguise for the flow of funds, it secures user privacy.
In August 2022, OFAC sanctioned Tornado Cash for allegedly facilitating the laundering of over $7 billion in cryptocurrency since its launch in 2019, including funds related to North Korean cybercriminals. This marked a groundbreaking moment as it was the first instance where the US government targeted a decentralized technology rather than individual entities.
The Fifth Circuit’s ruling focused on how “property” is defined under the IEEPA. The court reasoned that immutable smart contracts—automated code executing independently on a blockchain—cannot be owned or controlled by people or organizations. This distinction is critical since the IEEPA grants the Treasury the power to regulate foreign property interests, not autonomous code devoid of ownership.
The court noted, “Immutable smart contracts are self-executing pieces of code that operate independently. They do not embody the characteristics traditionally associated with property under federal law.”
Responses from the Crypto Community
Paul Grewal, whose company Coinbase supported the legal challenge against the Treasury, celebrated the ruling as a historic victory for the crypto ecosystem. On X (formerly Twitter), he commented: “Privacy triumphant. Today, the Fifth Circuit declared US Treasury’s sanctions on Tornado Cash smart contracts as unlawful. It’s a landmark achievement for crypto and those who value freedom. Coinbase is proud to have spearheaded this vital legal fight.”
Grewal stressed that the court recognized that banning open-source technology because of a minority of bad actors was outside Congress’s intent. He remarked that the sanctions “overreached Treasury’s authority” and this ruling rectifies that disparity.
Jake Chervinsky, Chief Legal Officer at Variant Fund, called the judgment a “remarkable win for crypto.” He pointed out that the court affirmed that immutable smart contract protocols are not “property” under sanctions as they cannot be owned, thus nullifying OFAC’s 2022 classification of Tornado Cash. This victory is a boost for decentralization.
Matt Corva, an attorney from ConsenSys, stressed the importance of the decision as a check against excessive governmental control. He emphasized: “The Fifth Circuit Court of Appeals ruling in favor of those challenging the prior imposition of sanctions on Tornado Cash smart contracts is monumental. A significant win against administrative overreach without proper legislative backing.”
Corva also highlighted the severe implications for those affected by such governmental actions: “The burden on those impacted in correcting such issues is enormous. This outcome became possible due to Coin Center, Paul Grewal from Coinbase, and numerous contributors involved in similar cases nationwide.”
Hayden Adams, CEO of Uniswap Labs, expressed his shock at the ruling, stating, “Wow. Immutable smart contracts just prevailed against the treasury department in court. [ … ] It’s astonishing how well crypto is performing in federal courts.”
Currently, the Treasury Department has not indicated whether it will appeal the Fifth Circuit’s ruling, which could perhaps be reviewed by the Supreme Court if challenged further.
As of this moment, the Tornado Cash token (TORN) is valued at $18.08, showing a 415% increase within the last 24 hours.