US Court Lifts Sanctions on Tornado Cash Smart Contracts

• The Fifth Circuit ruled that U.S. law does not consider the immutable smart contracts of Tornado Cash as property.
• OFAC’s sanctions on these contracts exceeded its legal authority, per the court.

The U.S. Fifth Circuit Court of Appeals has ruled that the Treasury Department’s Office of Foreign Assets Control (OFAC) overstepped its authority in sanctioning immutable smart contracts of Tornado Cash. The court found these contracts, as self-executing open-source software, cannot be classified as property under the International Emergency Economic Powers Act (IEEPA).

This ruling reverses a lower court decision and brings clarity to blockchain developers and privacy advocates. The court emphasized that immutable smart contracts, which operate autonomously without human intervention, do not fit the legal definition of property. They lack ownership, and no entity can control or modify them after deployment. Over 1,000 participants permanently locked Tornado Cash’s code during a “trusted setup ceremony,” making these contracts unchangeable.

Because these smart contracts remain accessible to anyone, including sanctioned entities, the sanctions imposed by OFAC failed to block their operation. The ruling stated that amending laws to address gaps or unintended consequences is Congress’s responsibility, not the judiciary’s. The court rejected OFAC’s argument, noting that self-executing code is a tool, not a service, as it does not require human effort to function.

Sanctions Lifted but Scrutiny Remains

In August 2022, the Treasury Department sanctioned Tornado Cash for allegedly laundering over $7 billion, including funds tied to North Korea’s Lazarus Group. Despite these sanctions, Tornado Cash continued to operate without interruption. Blockchain data revealed that nearly $2 billion was deposited into the protocol in the first half of 2024. This highlights the resilience and ongoing usage of decentralized systems, even under regulatory pressure.

Coinbase, a significant supporter of the plaintiffs, welcomed the decision. Paul Grewal, Coinbase’s Chief Legal Officer, stated that blocking open-source technology due to misuse by a minority undermines innovation. He argued that OFAC’s sanctions went beyond its legal mandate.

While this decision lifts sanctions on immutable smart contracts, other Tornado Cash components may still be scrutinised. The court instructed a lower court to reexamine the case, applying the new legal interpretation. Legal experts believe this decision could influence future cases involving decentralized protocols.

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