Treasury Wrong on Tornado Cash Sanctions

A federal appeals court has reportedly ruled that the U.S. Treasury Department overstepped its authority when sanctioning immutable smart contracts associated with Tornado Cash, and hence, could be considered wrong. The court emphasized that these smart contracts are not property owned by a foreign person or entity, a key criterion for sanctions enforcement.

Bill Hughes, Lawyer at ConsenSys wrote, “A good win.  One which the Supreme Court would be unlikely to reverse.  Another case where Loper Bright helped because the court wasn’t required to defer to a permissible reading by the agency. ”

How Treasury Overstepped its Authority when Sanctioning Tornado Cash

According to Hughes X post, in its decision, the court highlighted that the immutable smart contracts in question are not subject to ownership or control. These contracts were created through a collaborative “trusted setup ceremony” involving over 1,000 participants, ensuring that the code is unchangeable and accessible to anyone. The court noted that no entity can exclude others from using the Tornado Cash smart contracts, and despite the Treasury’s sanctions, they remain operational. Consequently, even sanctioned individuals, such as alleged North Korean actors, can still access their assets through these smart contracts.

The ruling further addressed the Office of Foreign Assets Control’s (OFAC) long-standing interpretation that contracts and services can be classified as property. The court rejected this in the context of smart contracts, asserting that immutable code does not constitute a service as no human effort is involved in its operation. Instead, the court described the smart contracts as tools rather than services.

Additionally, the court ruled that since these smart contracts are not ownable, they do not fall under OFAC’s regulatory definition of property. Therefore, blocking them under federal law is impermissible, and OFAC cannot enforce sanctions against them.

However, the court clarified that the ruling applies specifically to immutable smart contracts without administrative controls. Other components of Tornado Cash remain subject to potential Treasury and OFAC actions.

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