The United States Court of Appeals for the Fifth Circuit has reversed sanctions imposed on Tornado Cash by the Office of Foreign Assets Control (OFAC). The decision represents a win for privacy advocates in the crypto space while raising questions about the limits of government regulatory authority.

The case stemmed from OFAC’s 2022 designation of Tornado Cash, an open-source crypto-mixing protocol, as a tool for money laundering. The designation alleged that the protocol had been used by malicious actors, including North Korea’s Lazarus Group, to launder proceeds from cybercrime. OFAC had categorized Tornado Cash’s immutable smart contracts as “property,” effectively blocking their use under sanctions laws.

Plaintiffs, including Tornado Cash users, challenged OFAC’s authority, arguing that the protocol’s immutable smart contracts could not be classified as “property” under the International Emergency Economic Powers Act (IEEPA). The court agreed, ruling that immutable smart contracts—self-executing code that cannot be altered or controlled by any party—do not meet the legal definition of property.

In its decision, the court emphasized that Tornado Cash’s immutable smart contracts operate autonomously and cannot be owned or controlled by any individual or entity, including their creators. As such, they fall outside OFAC’s regulatory purview under IEEPA.

“This decision highlights the challenges of applying traditional legal frameworks to emerging technologies like blockchain and cryptocurrency,” the court stated.

The ruling does not negate concerns about the misuse of crypto-mixing technologies for illicit purposes. However, it underscores the need for legislative action to address the regulatory gaps in managing decentralized technologies.

Tornado Cash’s supporters argue that the protocol is a tool for financial privacy, enabling users to protect their transaction data from surveillance and exploitation. Critics, however, contend that its anonymization features make it a haven for bad actors.

The court’s reversal remands the case to the lower court with instructions to grant partial summary judgment in favor of the plaintiffs.