Appeals Court Rules Treasury's Tornado Cash Smart Contract Sanctions Unlawful
by Oliver Dale · BlockonomiTLDR
- Appeals court ruled OFAC exceeded its authority in sanctioning Tornado Cash’s smart contracts
- Court determined immutable smart contracts are not “property” under IEEPA
- Decision reverses previous lower court ruling from Texas federal court
- Ruling applies specifically to smart contracts without admin keys, not entire Tornado Cash platform
- TORN token price surged nearly 900% following the court decision
A United States appeals court has ruled that the Treasury Department’s Office of Foreign Assets Control (OFAC) acted beyond its legal authority when it sanctioned the immutable smart contracts of cryptocurrency mixer Tornado Cash, marking a key development in the ongoing debate over cryptocurrency regulation.
The November 26 decision by a three-judge panel of the Fifth Circuit Appeals Court overturned a previous ruling from a Texas federal court.
The appeals court found that Tornado Cash’s immutable smart contracts cannot be classified as “property” under the International Emergency Economic Powers Act (IEEPA), the law that gives the president power to regulate certain financial transactions.
The case originated from OFAC’s August 2022 decision to sanction Tornado Cash, a cryptocurrency mixing service that the Treasury alleged had been used to launder more than $7 billion in cryptocurrency since its launch in 2019. Following the sanctions, six Tornado Cash users, led by Joseph Van Loon and supported by cryptocurrency exchange Coinbase, filed a lawsuit against the Treasury.
The plaintiffs argued that OFAC’s addition of 44 Tornado Cash smart contract addresses to the Specially Designated Nationals list was not in accordance with the law. Crypto advocacy group Coin Center filed a separate lawsuit in October 2022, further challenging the Treasury’s actions.
In their legal opinion, the three judges emphasized that while OFAC has the authority to take action against property, Tornado Cash’s immutable smart contracts do not qualify as property because they cannot be controlled or owned. This distinction formed the core basis of their ruling.
The court’s decision specifically addresses smart contracts without administrative keys, rather than the entire Tornado Cash platform. Bill Hughes, a lawyer at Consensys, clarified this point on social media, noting that other aspects of Tornado Cash may still fall under Treasury jurisdiction.
The ruling represents a partial summary judgment in favor of the platform’s users, requiring that these specific smart contracts be removed from the sanctions list. According to Coinbase’s chief legal officer Paul Grewal, this means U.S. persons will once again be allowed to use this privacy-protecting protocol.
Market reaction to the news was swift and dramatic. The TORN token, associated with Tornado Cash, experienced a surge of up to 866% following the announcement, reaching $34.98, its highest point in two years.
The case has drawn attention from various stakeholders in the cryptocurrency industry, highlighting the complex intersection of traditional financial regulations and emerging blockchain technologies. The Treasury Department had previously defended its actions by arguing that Tornado Cash qualified as an entity that could be designated under OFAC regulations.
The IEEPA, enacted in 1977, serves as the legal framework under which OFAC operates. The law grants the president broad authority to address unusual and extraordinary threats to national security, foreign policy, or the economy of the United States.
The appeals court’s ruling provides clarity on the limits of this authority when applied to autonomous smart contracts. The judges emphasized that the immutable nature of these contracts places them outside the traditional definition of property that can be regulated under existing law.
This decision comes at a time of increased regulatory scrutiny of cryptocurrency services, particularly those offering privacy-enhancing features. The Treasury had initially targeted Tornado Cash as part of broader efforts to combat money laundering through cryptocurrency platforms.
Several members of Congress had previously questioned the Treasury about its approach to Tornado Cash, seeking clarification on the department’s authority and methods in this area. The appeals court ruling now provides some answers to these questions.
The case history includes an earlier ruling by a Texas federal court judge who had sided with the US Treasury, determining that Tornado Cash could be designated under OFAC regulations. This latest appeals court decision effectively reverses that position, at least regarding the platform’s immutable smart contracts.