Court Rules OFAC Exceeds Its Authority to Sanction Tornado Cash Smart Contracts.
In August 2022, the U.S. Office of Foreign Assets Control (OFAC) imposed sanctions on crypto-mixing service Tornado Cash for laundering more than $7 billion in digital currencies since its inception in 2019. OFAC said Tornado Cash played a key role in facilitating illegal activities such as money laundering by the North Korean hacker group Lazarus. However, on November 26, 2024, a Fifth Circuit Court of Appeals decision reversed the sanctions and declared that OFAC exceeded its authority by targeting immutable smart contracts associated with Tornado Cash.
The court's decision emphasized that smart contracts, which are automatically executed lines of code, are not considered “property” under the International Emergency Economic Powers Act (IEEPA). Because these smart contracts are decentralized and cannot be modified or controlled by any person or entity, the court ruled that they are outside OFAC's jurisdiction.
The ruling effectively lifts sanctions imposed on Tornado Cash's smart contracts, but does not prevent OFAC from pursuing individuals and organizations that use these protocols for illegal activities.
The ruling represents an important victory for the cryptocurrency sector, particularly for proponents of decentralized finance (DeFi) and open source software. This clarifies the legal distinction between authorization of individuals or organizations and authorization of autonomous software protocols.
As Coinbase Chief Legal Officer Paul Grewal pointed out, the court's decision means individuals in the United States will once again have access to privacy-enhancing protocols like Tornado Cash.
The court's ruling lifts sanctions against Tornado Cash's smart contracts, but still allows governments to take action against bad actors who abuse such decentralized systems.
This decision recognizes the importance of both privacy and innovation in the cryptocurrency space and highlights the need for a balanced approach to regulating decentralized technologies.
Tornado Cash is a decentralized, open-source cryptocurrency mixing service designed to enhance privacy by obfuscating transaction history on the Ethereum blockchain. Launched in 2019, Tornado Cash allows users to deposit cryptocurrencies, mix them with other currencies, and withdraw them to a new address, making it more difficult to trace the original source of funds. This privacy-enhancing feature attracts both legitimate users seeking financial privacy and illegal actors looking to launder money. Despite its potential privacy protections, Tornado Cash was arrested by the US Office of Foreign Assets Control (OFAC) in 2022 for its role in facilitating money laundering involving North Korean hacker group Lazarus. He was subject to sanctions. Tornado Cash operates through smart contracts, automatically executed lines of code, and has become the focus of debates over privacy in decentralized finance (DeFi) and blockchain technology.
