A federal appeals court has concluded that the U.S. Treasury Department exceeded its authority in sanctioning Tornado Cash, a cryptocurrency mixer linked to North Korean hacking operations. In 2022, OFAC sanctioned Tornado Cash for allegedly laundering more than $7 billion in cryptocurrencies, including $455 million from a North Korean hacker group.
A U.S. appeals court has ruled that the Treasury Department overstepped its authority by imposing sanctions on Tornado Cash's immutable smart contracts and stating that these contracts fall outside of federal property law. The Fifth Circuit Court of Appeals reversed an earlier decision by the Treasury Department's Office of Foreign Assets Control (OFAC), concluding that autonomous smart contracts that function without human intervention cannot be classified as “property.”
Tornado Cash is a decentralized open-source software initiative created by a collection of contributors who deployed a set of smart contracts on the Ethereum blockchain in 2019. Tornado Cash's cryptographically mixed smart contracts provide privacy, anonymizing digital transactions, and immutability means that software code cannot be owned, controlled, or modified, even by the person who originally created it. means.
Legal insights and their implications
According to the court's ruling, immutable smart contracts are outside the jurisdiction of the International Emergency Economic Powers Act (IEEPA) because they consist of coded circuits over which there is no ownership or control. However, the Commission ruled that Tornado Cash's immutable smart contracts cannot be “blocked” under IEEPA because they do not meet the criteria for services or assets as defined by the law.
In August 2022, the Office of Foreign Assets Control (OFAC) took action to add the computer code of 37 Tornado Cash smart contracts to the list of Specially Designated Nationals. This decision primarily stemmed from concerns that the Lazarus Group, a North Korean government-backed hacker, would use Tornado Cash to launder $455 million worth of illegal funds, resulting in individuals in the United States You are prohibited from participating in this service.
However, in September 2022, OFAC made a limited exception and allowed users in the United States to apply for a license to withdraw funds from Tornado Cash. Then, in November 2022, OFAC updated its previous designation and expanded sanctions to include 53 Ethereum addresses linked to the Tornado Cash platform.
The move raised legal issues, with six Tornado Cash users filing a lawsuit against the Treasury Department, claiming the sanctions violated the Administrative Procedure Act.
Bill Hughes, a lawyer at blockchain company ConsenSys, weighed in on the situation. He praised the court's decision, calling it a “positive outcome” and suggesting it was unlikely to be overturned by the Supreme Court. Hughes cautioned that the ruling does not exempt other aspects of Tornado Cash from OFAC oversight, as it focuses solely on smart contracts without administrative keys. Paul Grewal, Coinbase's chief legal officer, hailed the decision as a “historic win for the crypto sector.”
Privacy wins. Today, the Fifth Circuit ruled: @USTreasurySanctions against Tornado Cash smart contracts are illegal. This is a historic victory for everyone who cares about cryptocurrencies and defending freedom. @coinbase We are proud to be able to help lead this important challenge. 1/6
— paulgrewal.eth (@iampaulgrewal) November 26, 2024
Following this announcement, the value of Tornado Cash's token, TORN, soared more than 430% in the past 24 hours. According to the data, TORN is currently trading at around $19, reflecting a 440% increase over the past week.
