• A federal appeals court has concluded that the U.S. Treasury Department acted beyond its authority by sanctioning Tornado Cash, a cryptocurrency mixer connected to North Korean hacking activities.
  • In 2022, the OFAC sanctioned Tornado Cash for allegedly laundering over $7 billion in cryptocurrency, including $455 million from North Korean hacking groups.

A  U.S. appeals court has ruled that the Treasury Department overstepped its authority by issuing sanctions against Tornado Cash’s immutable smart contracts, specifying that these contracts lie outside the framework of federal property laws. The Fifth Circuit Court of Appeals reversed a previous decision made by the Treasury’s Office of Foreign Assets Control (OFAC), concluding that autonomous smart contracts, those that function without human intervention, cannot be classified as “property.”

Tornado Cash is a decentralized, open-source software initiative created by a collective of contributors who deployed a set of smart contracts on the Ethereum blockchain in 2019. Tornado Cash’s crypto-mixing smart contracts provide two valuable features: privacy, which anonymizes digital transactions, and immutability, meaning the software code cannot be owned, controlled, or altered even by those who originally created it.

Legal Insights and Implications

According to the court’s ruling, immutable smart contracts consist of coded lines that lack ownership or control, thus falling beyond the jurisdiction of the International Emergency Economic Powers Act (IEEPA). However, the panel ruled that Tornado Cash’s immutable smart contracts cannot be “blocked” under the IEEPA since they do not meet the criteria for services or property as defined by the law.

In August 2022 , the Office of Foreign Assets Control (OFAC) took the step of adding the computer code from Tornado Cash’s 37 smart contracts to its list of specially designated nationals. This decision was primarily driven by concerns regarding the use of Tornado Cash by North Korean state-sponsored hackers, The Lazarus Group , to launder illicit funds worth $455 million, which resulted in a prohibition for U.S. individuals from engaging with the service.

However, in September 2022, OFAC made a limited exception, allowing U.S. users to apply for licenses that would enable them to withdraw their funds from Tornado Cash. Later, in November 2022, OFAC updated its earlier designation, expanding the sanctions to include 53 Ethereum addresses linked to the Tornado Cash platform.

This move sparked legal challenges, with six Tornado Cash users filing lawsuits against the Treasury Department, arguing that the sanctions breach the Administrative Procedure Act.

Bill Hughes, an attorney with blockchain firm Consensys, weighed in on the situation. He praised the court decision, labeling it a “positive outcome” and suggesting it was unlikely to be overturned by the Supreme Court. Hughes cautioned that this ruling does not exempt other aspects of Tornado Cash from scrutiny by OFAC, as the focus was solely on the smart contracts without an administrative key. Paul Grewal, Coinbase’s chief legal officer, heralded the decision as a “historic win for the crypto sector.”

Privacy wins. Today the Fifth Circuit held that @USTreasury ’s sanctions against Tornado Cash smart contracts are unlawful. This is a historic win for crypto and all who cares about defending liberty. @coinbase is proud to have helped lead this important challenge. 1/6

— paulgrewal.eth (@iampaulgrewal) November 26, 2024

In the wake of the announcement, the value of TORN, the token for Tornado Cash, surged more than 430% in the last 24 hours. Currently, TORN is trading around $19, reflecting a 440% increase over the past week, according to data