US Appeals Court Rules OFAC Overstepped in Tornado Cash Case

TLDR

• A US Appeals Court has overturned a ruling against Tornado Cash.
• They’ve ruled smart contracts are not property.
• Other aspects of the protocol could still be in play.

If you’ve been following the Tornado Cash saga, a new twist has emerged that could have major implications for crypto users. 

The U.S. Fifth Circuit Court of Appeals has ruled that the Treasury Department’s inclusion of Tornado Cash’s immutable smart contracts on its sanctions list was unlawful. Here’s what this means for you.

What You Need to Know About the Case

First, let’s break down how Tornado Cash works. Users add funds to a shared pool from one address. Then they remove those funds using a different one, creating a no man’s land of transactional history. It creates a truly anonymous environment, making it an ideal scenario for criminals wanting to launder money. At least, that was the argument…

Tornado Cash, a popular crypto mixer, was sanctioned by the U.S. Department of the Treasury in August 2022. At the time, the Office of Foreign Assets Control (OFAC) claimed the platform was used to launder over $7 billion in crypto since its launch in 2019. 

To enforce this claim, 44 smart contract addresses associated with Tornado Cash were added to the Specially Designated Nationals (SDN) list, effectively prohibiting U.S. citizens from interacting with them.

The ruling immediately sparked debate. While the Treasury described Tornado Cash as an “entity that may be designated per OFAC regulations,” others pointed out that its immutable smart contracts could neither be owned nor controlled by anyone.

This distinction was at the center of the recent court case.

The Appeals Court Verdict

On Nov. 26, a three-judge panel from the Fifth Circuit Court of Appeals overturned a lower court’s decision, stating that OFAC exceeded its authority in sanctioning Tornado Cash’s smart contracts. 

The court explained that these immutable smart contracts don’t qualify as “property” under the International Emergency Economic Powers Act (IEEPA), a federal law that allows the president to regulate and restrict certain transactions.

The judge’s ruling was crystal clear:

“We hold that Tornado Cash’s immutable smart contracts (the lines of privacy-enabling software code) are not the ‘property’ of a foreign national or entity, meaning (1) they cannot be blocked under IEEPA, and (2) OFAC overstepped its congressionally defined authority.”

Also, a heads-up, guys. The above link goes to the official information about the case and it’s pretty lengthy. While we read it all, we don’t expect you to do it unless you have 2-3 hours with nothing else to do.

Immutable smart contracts operate autonomously on blockchain networks. Unlike traditional accounts or entities, no admin key or individual can alter or control them. This is why the appeals court found that labeling these as “property” did not align with the parameters set by IEEPA.

Does This Mean Tornado Cash Is in the Clear?

Before you start thinking Tornado Cash has won a total victory, it’s important to note that this judgment doesn’t clear the platform as a whole. 

Bill Hughes, a lawyer at Consensys, explained that this ruling focuses specifically on the immutable smart contracts without admin keys. Other portions of Tornado Cash could still face scrutiny from the Treasury.

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

Put simply, this ruling doesn’t mean Tornado Cash or similar protocols are immune from further legal action. Nevertheless, it does set an important precedent regarding how autonomous smart contracts are treated under U.S. law.

What Happens Next?

One immediate consequence of the ruling is that the sanctioned smart contracts must be removed from the SDN list. According to Coinbase’s chief legal officer Paul Grewal, U.S. citizens can again legally use Tornado Cash’s privacy-preserving protocol.

“These smart contracts must now be removed from the sanctions list and U.S. persons will once again be allowed to use this privacy-protecting protocol,” Grewal posted on X.

While this decision holds significance for crypto users, it’s worth noting that the legal framework around decentralized platforms remains murky. As governments and regulators grapple with how to address decentralized technologies, Tornado Cash may continue to face challenges, especially if it has been implicated in illegal activities.

What This Means for You as a Crypto User

If you’re new to crypto, this case highlights the growing tension between decentralized technology and traditional regulatory frameworks. 

The decision doesn’t mean that all privacy-oriented tools are inherently safe or lawful to use. Instead, it underscores the need for clear legal standards that balance privacy rights with regulatory responsibilities.

The Fifth Circuit’s ruling is undoubtedly a victory for advocates of decentralization and privacy in crypto. However, it’s not the final chapter. Challenges surrounding the legalities of decentralized finance and privacy-focused protocols will continue to play out in courts and regulatory agencies.

For now, Tornado Cash users can celebrate this decision as an important affirmation of the principle that code, when truly autonomous, shouldn’t be treated like traditional property. However, the ruling also reminds users to remain cautious and informed as governments develop new frameworks to regulate crypto.