The US Court of Appeals for the Fifth Circuit has reversed a lower court decision, ruling that the Department of Treasury’s Office of Foreign Assets Control (OFAC) overstepped its statutory authority by sanctioning Tornado Cash, a decentralized crypto-mixing service. 

OFAC had sanctioned Tornado Cash in 2022, citing its alleged use by North Korean cybercriminals to launder nearly $1 billion in stolen cryptocurrency. 

Tornado Cash operates through immutable smart contracts on the Ethereum blockchain, providing anonymity to users by mixing digital assets. OFAC had classified these smart contracts as "property" subject to blocking under the International Emergency Economic Powers Act (IEEPA).

The court ruled that immutable smart contracts—decentralized and unalterable code—do not meet the legal definition of property because they cannot be owned, controlled, or excluded from public use. This distinction undermined OFAC’s justification for including Tornado Cash on its sanctions list.

In the ruling, the court highlighted that Tornado Cash’s smart contracts are autonomous and self-executing, with no entity retaining control over them. The judges noted that while Tornado Cash's services may have been exploited for illicit purposes, the immutable nature of the technology renders it outside the scope of existing statutory definitions under IEEPA.

Paul Grewal, the Chief Legal Officer of Coinbase, commenting about the recent victory, stated: “No one wants criminals to use crypto protocols, but blocking open source technology entirely because a small portion of users are bad actors is not what Congress authorized. These sanctions stretched Treasury’s authority beyond recognition, and the Fifth Circuit agreed.”

The plaintiffs, who were users of Tornado Cash, argued that the sanctions restricted their ability to use the service for legitimate purposes, such as privacy and security. They contended that OFAC’s designation infringed on their rights under the Administrative Procedure Act.

The decision sends the case back to a lower court, with instructions to grant partial summary judgment to the plaintiffs. It underscores the complexities of applying traditional legal frameworks to decentralized technologies and raises questions about how regulators can effectively address the misuse of blockchain tools without overreaching their authority.

This landmark ruling may prompt legislative efforts to update regulatory statutes to address emerging technologies like cryptocurrency mixers.