Tornado Cash smart contracts cleared of OFAC sanctions in latest ruling

A US appeals court ruled that the Treasury overstepped its authority by sanctioning Tornado Cash’s immutable smart contracts, declaring them outside the scope of federal property laws.

On November 26, the Fifth Circuit Court of Appeals overturned a previous ruling by the U.S. Treasury Department’s Office of Foreign Assets Control that held that smart contracts operating autonomously without human intervention could not be classified as “property.”

According to the decision, immutable smart contracts are lines of code that are not subject to ownership or control and are outside the scope of the International Emergency Economic Powers Act.

For those who don’t know, IEEPA is a federal law that gives the President the authority to regulate and sanction international economic transactions.

However, the panel noted that Tornado Cash’s immutable smart contracts “cannot be blocked” under IEEPA because they do not qualify as services or property.

The jury referred to the “trusted installation ceremony,” a contract update that took place in May 2020, in which more than 1,000 participants contributed cryptographic data to finalize the cryptographic parameters of Tornado Cash’s smart contracts.

By eliminating the possibility of updates or administrative checks, the process ensured that all smart contracts were immutable. Governance was then transferred to the Tornado Cash community via the TORN token, an ERC-20 token launched in 2021 to vote on protocol changes.

As a result, these smart contracts operate autonomously without human intervention, which makes them different from assets that can be classified as property or services. The IEEPA allows regulation of property or services affiliated with foreign entities, but the autonomous nature of smart contracts meant that they did not fit these definitions.

The decision rejected Treasury’s interpretation of the law and concluded that “it is Congress’s job to legislate.”

Paul Grewal, Coinbase’s chief legal officer, supported the decision, saying, “Total blocking of open source technology because of misuse by some users is not something Congress authorized.”

Coinbase, which financially supported the lawsuit against the Treasury Department’s decision, has been a vocal advocate for protecting open source development in the crypto industry.

According to ConsenSys attorney Bill Hughes, the court’s decision mandates the removal of these specific contracts from the sanctions list. However, he clarified that other parts of Tornado Cash or related protocols may still face sanctions.

“It’s a good win. “The Supreme Court is unlikely to reverse this,” he added.

Cryptocurrency mixer Tornado Cash, approved by the US Treasury in August 2022, was accused of facilitating illicit transactions worth over $7 billion.

Following the sanctions, six users, including two Coinbase employees, challenged OFAC’s decision to include 44 Tornado Cash smart contract addresses on the Specially Designated Nationals (SDN) list, arguing that the Treasury misapplied its authority under IEEPA.

The Texas district court initially upheld Treasury’s actions and ruled that Tornado Cash could be considered an “asset” under OFAC regulations. Plaintiffs appealed, resulting in the Fifth Circuit’s recent decision.