- The Fifth Circuit Court of Appeals has overturned sanctions imposed by the Treasury’s OFAC on Tornado Cash
- The court ruled that immutable crypto contracts are not “property” under the International Emergency Economic Powers Act (IEEPA)
- The decision underscores limits on government authority over decentralized blockchain technology
In a stunning victory for freedom of speech advocates, the Fifth Circuit Court of Appeals has overturned sanctions imposed on Tornado Cash in August 2022. The Fifth Circuit yesterday ruled that immutable blockchain contracts cannot be classified as “property,” exceeding the statutory authority granted under the IEEPA. This action nullifies the sanctions applied by the U.S. Treasury’s Office of Foreign Assets Control (OFAC) and allows US citizens to use the protocol without fear of prosecution.
Privacy vs Criminal Acts
Tornado Cash, a decentralized crypto-mixing service, gained notoriety for enabling users to anonymize blockchain transactions, which attracted some of the world’s most prolific hackers. In 2022, OFAC sanctioned Tornado Cash for allegedly aiding money laundering, including transactions linked to North Korean cybercrime groups. The move blocked all interactions with its smart contracts, triggering a lawsuit from users who argued the sanctions were unlawful.
Since the ruling, a collection of blockchain entities, including Coinbase, has fought the decision, contending that Tornado Cash’s immutable contracts are autonomous, unalterable, and unowned. As such, they argued, these contracts fall outside the scope of OFAC’s authority. The lower court initially sided with OFAC, but the Fifth Circuit reversed that decision in a ruling published yesterday.
Smart Contracts Aren’t Property
Writing for the majority, Circuit Judge Don Willett stated, “Immutable smart contracts are not property because they are not capable of being owned,” noting the decentralised nature of Tornado Cash:
More than one thousand volunteers participated in a “trusted setup ceremony” to “irrevocably remov[e] the option for anyone to update, remove, or otherwise control those lines of code.” And as a result, no one can “exclude” anyone from using the Tornado Cash pool smart contracts. In fact, because these immutable smart contracts are unchangeable and unremovable, they remain available for anyone to use and “the targeted North Korean wrongdoers are not actually blocked from retrieving their assets,” even under the sanctions regime.
Judge Willett’s summary was succinct, citing the International Emergency Economic Powers Act (IEEPA), which OFAC used as the basis for its ban:
The plain meaning of “property” in the Act does not support the Department’s designation of Tornado Cash.
Judge Willett also noted that while the court recognized the risks posed by technologies like Tornado Cash, the government’s authority is bound by statutory limits, saying, “Legislating is Congress’s job—and Congress’s alone.”
Victors Celebrate
Coinbase’s legal head, Paul Grewal, celebrated the win, following the company’s involvement in the battle:
These smart contracts must now be removed from the sanctions list and US persons will once again be allowed to use this privacy-protecting protocol. Put another way, the government’s overreach will not stand. 2/6
— paulgrewal.eth (@iampaulgrewal) November 26, 2024
Others also added their pleasant surprise at the result:
holy shit
immutable smart contracts just beat the treasury department in court
“we hold that Tornado Cash’s immutable smart contracts (the lines of privacy-enabling software code) are not the “property” of a foreign national or entity, meaning (1) they cannot be blocked under… https://t.co/KROajcEGhq pic.twitter.com/qYpMa6vpe3
— Hayden Adams 🦄 (@haydenzadams) November 27, 2024
This decision sets a critical precedent in defining the legal limits of sanctions and government oversight over decentralized systems. While applauded by tech advocates for protecting innovation, the ruling raises concerns about the regulatory gap in addressing crypto-enabled crime. There is every chance now that, following Judge Willett’s comments, Congress to will look to update the IEEPA to better address blockchain-era complexities.
