US Court Reverses Sanctions Against Tornado Cash

A federal appeals court in the US ruled that the Treasury Department’s Office of Foreign Assets Control [OFAC] overstepped its authority in sanctioning crypto mixer Tornado Cash.

Background

• The Fifth Circuit Appeals Court three-judge panel say that Tornado Cash’s immutable smart contracts are not the 'property' of a foreign national or entity
• This means they cannot be blocked under the International Emergency Economic Powers Act [IEEPA]
• They also ruled that the OFAC overstepped its congressionally defined authority
• The OFAC branded Tornado Cash as a sanctioned entity in Q3 2022
• At the time, Tornado was characterized as a "notorious" crypto-mixing service
• The agency also went on to restrict users from the US to engage with the mixer
• Alongside, it also went on to link Tornado Cash to North Korea’s nuclear weapons program

Why should you pay attention?

• The ruling underlined that Tornado remains beyond regulatory reach
• This is because its smart contracts are neither ownable nor are traditional contracts or services
• The smart contracts will now be removed from the sanctions list
• US users will once again be allowed to use this privacy-shielding protocol
• In other words, the government’s overreach will not stand
• Tornado Cash’s governance token, TORN, was trading around the $3.5 threshold on Tuesday
• However, on the heels of the ruling, it went on to touch $34.98

Who said what?

• Coinbase and others had sued the government on the grounds of overreach
• The exchange’s Chief Legal Officer Paula Grewal said,

“Privacy wins. This is a historic win for crypto and all who care about defending liberty. Coinbase is proud to have helped lead this important challenge”

• He added,

“In particular, the Court ruled that while Treasury has the power to take action against “property,” the open-source, immutable smart contracts at the core of Tornado Cash *can’t* be owned by anyone and so are not “property” subject to sanctions”

• The judges emphasized,

"We readily recognize the real-world downsides of certain uncontrollable technology falling outside of OFAC’s sanctioning authority. But we must uphold the statutory bargain struck (or mis-struck) by Congress, not tinker with it"

Zooming out

• No stalwart advocates the criminal and malicious usage of crypto protocols
• Blocking open source technology entirely because a small portion of users are bad actors ain’t a done deal
• The sanctions imposed had stretched the Treasury’s authority beyond recognition
• The Fifth Circuit, in retrospect, agreed