U.S. Appeals Court Reverses Tornado Cash Sanctions

A U.S. federal appeals court ruled that the U.S. Treasury Department’s sanctions against Tornado Cash, an on-chain privacy tool, are unlawful.

A Nov. 26 ruling from the U.S. Court of Appeals for the Fifth Circuit found that the Office of Foreign Assets Control exceeded its statutory authority by sanctioning Tornado Cash.

“We hold that Tornado Cash’s immutable smart contracts… are not the ‘property’ of a foreign national or entity, meaning they cannot be blocked under the [International Emergency Economic Powers Act], and OFAC overstepped its congressionally defined authority,” the court said. “We reverse and remand to the district court with instructions to grant… partial motion for summary judgment based on the Administrative Procedure Act.”

The ruling noted that the sanctions did not claim that Tornado Cash is owned, controlled by, or a product of North Korea and incorrectly classified Tornado Cash’s smart contracts as “property” — making the sanctions incongruent with the IEEPA or the North Korea Sanctions and Policy Enhancement Act.

“The immutable smart contracts at issue in this appeal are not property because they are not capable of being owned,” the court said. “As a result, no one can ‘exclude’ anyone from using the Tornado Cash pool smart contracts… We decline the Department’s invitation to judicial lawmaking — revising Congress’s handiwork under the guise of interpreting it. Legislating is Congress’s job — and Congress’s alone.”

However, the court acknowledged that OFAC’s concerns regarding the use of Tornado Cash by illicit foreign actors to launder funds are legitimate, and suggested that Congress could update the IEEPA to encompass “modern technologies like crypto-mixing software” at a later date.

The price of Tornado Cash’s TORN token has soared in response to the news, with TORN up nearly 400% over the past 24 hours after initially rallying 869% within two hours of the verdict, according to The Defiant’s crypto price feeds.

Sanctioned

OFAC took the unprecedented move of adding computer code in the form of Tornado Cash’s 37 smart contracts to its list of specially designated nationals in August 2022.

The Treasury Department cited the use of Tornado Cash by North Korean state-sponsored hackers to launder stolen assets as justification. The move prevented U.S. persons from interacting with Tornado Cash.

A minor exception was made in September 2022, when OFAC allowed U.S. persons to apply for licenses permitting them to withdraw assets from Tornado Cash.

In November 2022, OFAC replaced its August designation with new sanctions including 53 Ethereum addresses associated with the Tornado Cash software.

The Treasury Department has faced lawsuits from six Tornado Cash users alleging the sanctions violated the Administrative Procedure Act.

Legal experts weigh in

Bill Hughes, a lawyer for the blockchain software company Consensys, commended the court for its ruling, describing it as a “good win” that the Supreme Court would be “unlikely to reverse.”

Hughes said a U.S. district court will now consider the case while applying the Fifth Circuit's finding that Tornado Cash’s smart contracts do not comprise property and thus can’t be sanctioned.

“This does NOT mean that the rest of Tornado Cash is out of bounds for Treasury/OFAC,” Hughes added. “The issue was about smart contracts with no admin key.”

Paul Grewal, the chief legal officer of Coinbase, described the verdict as a “historic win for crypto.”

“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,” Grewal said. “No one wants criminals to use crypto protocols, but blocking open-source technology entirely because a small portion of users are bad actors is not what Congress authorized.”