Court ruling frees Tornado Cash from Treasury sanctions

In a significant development for the cryptocurrency sector, a U.S. appeals court based in New Orleans delivered a ruling that favored Tornado Cash, a cryptocurrency mixer service. On November 26, 2024, the Fifth Circuit Court of Appeals announced that the Office of Foreign Assets Control (OFAC) of the Treasury Department had exceeded its authority when it sanctioned Tornado Cash. This judicial decision reversed an earlier ruling by a lower court and granted a partial summary judgment that benefits users of the mixing service. The court's ruling centered on the nature of Tornado Cash’s immutable smart contracts, determining that they do not classify as property under the International Emergency Economic Powers Act (IEEPA). This act permits the government to exercise significant control over economic transactions and assets during emergencies, but the court concluded that smart contracts, being codes that lack ownership or control, do not fit this definition. The opinion published by Circuit Judge Don Willett emphasized that these smart contracts were not the property of any foreign national or entity, thus invalidating the basis for the sanctions. The ruling was met with enthusiasm from notable figures within the cryptocurrency industry, including Brian Armstrong, CEO of Coinbase, and Hayden Adams, the founder of Uniswap Labs. They expressed that the decision marks a pivotal moment for the future of cryptocurrency and open-source code. Following the announcement, the price of Tornado Cash’s associated token surged dramatically by 430%, reflecting the market's positive response to the ruling. Previously, Tornado Cash had been blacklisted in 2022, making it illegal for U.S. citizens and businesses to utilize the service. Critics of the Treasury's sanctions pointed out that penalizing an entire software protocol was both unconstitutional and out of the Treasury's jurisdiction, reiterating the idea that software should not be subject to such sanctions. This ruling not only alleviates the legal burden on Tornado Cash users but also sets a precedent concerning the treatment of decentralized software and tokens in the U.S. The implications of this ruling extend beyond just Tornado Cash; it raises fundamental questions about the extent of government power over decentralized finance and open-source technologies. The judgment's recognition of smart contracts as distinct from traditional property law is likely to inspire similar challenges to regulatory actions in the future. As the crypto market continues to evolve, this legal precedent could foster a more favorable regulatory environment for emerging technologies, potentially influencing other jurisdictions to rethink their positions on digital currencies and corresponding legal frameworks.