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In a landmark decision, a U.S. federal appeals court has ruled that the Treasury Department’s sanctions against Tornado Cash, a popular crypto mixer, were unlawful. The court found that the sanctions overreached by targeting open-source software, which does not meet the legal criteria for enforcement under current laws.
The ruling addresses the Treasury Department’s claim that Tornado Cash’s smart contracts could be blocked under the International Emergency Economic Powers Act (IEEPA). However, the court determined that these immutable smart contracts do not qualify as “property” under the law.
“The immutable smart contracts in question are not property because they cannot be owned,” the court stated, emphasizing that even under the regulatory definition used by the Office of Foreign Assets Control (OFAC), the property must be ownable. This decision places Tornado Cash’s smart contracts outside OFAC’s jurisdiction.
Treasury’s Controversial Blacklisting
The Treasury and OFAC blacklisted Tornado Cash in 2022, citing concerns about its role in facilitating the laundering of billions of dollars stolen in cyberattacks, including those tied to North Korea’s Lazarus Group. Despite the sanctions, Tornado Cash has remained operational, as its decentralized nature allows individuals, including sanctioned entities, to continue using the platform.
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The court pointed out that targeting the software itself is misguided, suggesting that enforcement efforts should focus on bad actors who exploit the technology for illegal activities rather than penalizing the open-source code.
“Until Congress updates IEEPA to address modern technologies like crypto mixers, Tornado Cash’s immutable smart contracts cannot be classified as property subject to sanctions,” the court declared.
Legal Challenges and Repercussions
The ruling stems from a lawsuit filed in 2022 by six plaintiffs, including Joseph Van Loon, against Treasury Secretary Janet Yellen, OFAC, and OFAC Director Andrea Gacki. The plaintiffs argued that the sanctions froze their legitimately used funds, infringing on their rights and exceeding the Treasury’s statutory authority.
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Initially dismissed by a federal court in Texas, the case gained traction after the plaintiffs, supported by Coinbase, appealed the decision. The Fifth Circuit Court of Appeals reversed the lower court’s ruling, marking a significant legal victory for the crypto industry.
A Major Win for Privacy and Tornado Cash
This decision is being hailed as a milestone for the cryptocurrency sector, emphasizing the importance of protecting open-source software from unwarranted sanctions.
Paul Grewal, Chief Legal Officer at Coinbase, celebrated the ruling, calling it a victory for privacy and freedom. “Privacy wins. The Fifth Circuit has held that Treasury’s sanctions on Tornado Cash smart contracts are unlawful. This is a historic win for crypto and liberty,” Grewal shared on X.
Coinbase CEO Brian Armstrong echoed this sentiment, accusing the Treasury of overstepping its authority. “This decision underscores the need to differentiate between technology and its misuse. Legitimate applications of open-source software must not be punished,” Armstrong stated.
Bill Hughes, senior counsel at Consensys, agreed, describing the decision as “a significant win unlikely to be reversed by the Supreme Court.” However, Hughes noted that this victory does not render the entire protocol immune from regulatory scrutiny, clarifying that the case focused on smart contracts without admin keys.
Alexey Pertsev Yet to be Released
Alexey Pertsev, a Russian national and one of the primary developers behind Tornado Cash, a cryptocurrency mixing service, was arrested in Amsterdam on August 10, 2022. Dutch authorities detained Pertsev on suspicions of “involvement in concealing criminal financial flows and facilitating money laundering through the mixing of cryptocurrencies.”
On May 14, 2024, a Dutch court found Pertsev guilty of money laundering, sentencing him to five years and four months in prison. The court determined that Tornado Cash had been utilized to launder approximately $1.2 billion in illicit funds, including proceeds from cybercrimes linked to North Korea’s Lazarus Group. Despite arguments that Tornado Cash was merely a privacy tool beyond the developers’ control, the court concluded that Pertsev and his team had effective control over the platform, particularly through its web interface, and failed to implement adequate measures to prevent its misuse.
Pertsev’s conviction has sparked significant debate within the cryptocurrency community, especially concerning the responsibilities of open-source developers and the balance between privacy and regulatory compliance. Advocates argue that penalizing developers for the actions of users could set a concerning precedent, potentially hindering innovation in privacy-focused technologies.
We believe that the Federal Court ruling should change the current outlook of Pertsev’s potential jail time and, hopefully, set him free in the near future.
Torn Token Surge
TORN, the native token of Tornado Cash, experienced a dramatic surge on Tuesday, briefly reaching nearly $35 after a groundbreaking ruling by the U.S. Fifth Circuit Court. The court determined that immutable smart contracts cannot be classified as “property” under current legal frameworks.
By the time of publishing this, TORN had retreated from its peak, trading at $18.06, a staggering 390% gain within the day, based on CMC data.
This pivotal legal decision dealt a significant setback to the U.S. Treasury Department’s sanctions authority and sparked a broader rally among privacy-centric cryptocurrencies. Railgun (RAIL) rose 36.6% to $0.98, Zcash (ZEC) gained 26.5% to $56.92, Beam (BEAM) increased 19.8% to $0.069, and DASH climbed 11.4% to $35.79, according to CoinGecko statistics.
Implications for the Future of Crypto Regulation
The Tornado Cash ruling sends a strong message to regulators about the limits of their authority over decentralized and open-source technologies. It reinforces the notion that individuals misusing technology should be targeted instead of stifling innovation through sweeping sanctions.
As the crypto industry continues to grow, the case highlights the need for updated legal frameworks that balance enforcement against bad actors while preserving the legitimate use of privacy tools like Tornado Cash.
