In a significant legal development, the United States Court of Appeals for the Fifth Circuit has ruled that the U.S. Treasury’s Office of Foreign Assets Control (OFAC) exceeded its authority by sanctioning Tornado Cash’s immutable smart contracts. This decision, delivered on November 26, 2024, overturns a prior judgment from a lower court.
The appellate court’s three-judge panel determined that while the Treasury has the power to act against property, Tornado Cash’s immutable smart contracts do not qualify as property under the International Emergency Economic Powers Act (IEEPA). The court emphasized that these smart contracts cannot be owned or controlled, and therefore, do not fall within the scope of assets that OFAC is authorized to sanction.
This ruling stems from OFAC’s August 2022 action, where it sanctioned Tornado Cash, alleging the platform had been used to launder over $7 billion in cryptocurrencies since its inception in 2019. In response, six users of Tornado Cash, supported by Coinbase, filed a lawsuit challenging the sanctions, arguing that the inclusion of 44 Tornado Cash smart contract addresses on the Specially Designated Nationals (SDN) list was unlawful.
The recent appellate decision marks a victory for these plaintiffs, as the court recognized that the immutable nature of Tornado Cash’s smart contracts places them beyond OFAC’s sanctioning authority. Bill Hughes, a lawyer at ConsenSys, noted that while this ruling addresses the specific issue of immutable smart contracts, it does not necessarily preclude OFAC from taking action against other aspects of Tornado Cash.
Following the announcement, the price of Tornado Cash’s native token, TORN, experienced a significant surge, reflecting the market’s reaction to the favorable legal outcome.
This case underscores the ongoing legal debates surrounding the regulation of decentralized technologies and the extent of governmental authority over open-source software protocols. The ruling may set a precedent for how similar cases are approached in the future, particularly concerning the classification and regulation of decentralized, immutable smart contracts.
