- A U.S. appeals court determined on Tuesday that the Office of Foreign Assets Control (OFAC) overstepped its jurisdiction by imposing sanctions on Tornado Cash, a cryptocurrency mixing service.
- The appellate court overturned the previous district court ruling, asserting that the smart contracts associated with Tornado Cash do not qualify as “property” and, as such, are not subject to sanctions.
- Paul Grewal from Coinbase described the court’s decision as a “historic victory” for the cryptocurrency industry.
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A U.S. Federal Appeals Court has overturned a previous decision, ruling that the Treasury Department’s Office of Foreign Assets Control (OFAC) exceeded its authority in sanctioning the cryptocurrency mixer Tornado Cash. The court found that OFAC’s actions went beyond the boundaries set by Congress, marking a significant legal development in the regulation of blockchain-based services.
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The court stated that Tornado Cash’s immutable smart contracts, which enable privacy for cryptocurrency transactions, do not qualify as “property” owned by a foreign entity under the International Emergency Economic Powers Act (IEEPA). As such, the sanctions imposed by OFAC were deemed invalid, as the smart contracts are autonomous lines of code and not subject to ownership or control.
Despite OFAC’s broad interpretation of “any property” under its purview, the ruling clarified that Tornado Cash’s decentralized smart contracts do not fit into traditional regulatory frameworks. These contracts are not owned, nor do they function as conventional services or agreements, putting them outside OFAC’s jurisdiction.
OFAC had designated Tornado Cash as a sanctioned entity in August 2022, restricting U.S.-based individuals and companies from engaging with it financially. The agency also alleged that Tornado Cash was involved in facilitating illicit transactions linked to North Korea’s nuclear weapons program, adding further controversy to the case.
The announcement of the court’s decision had a dramatic impact on Tornado Cash’s governance token, TORN. The token’s price skyrocketed from $3.60 to nearly $35—an increase of approximately 870%—before stabilizing at $16.70, according to CoinGecko.
Six individuals bring lawsuit against the Treasury Department
The ruling issued on Tuesday follows a lawsuit filed in 2022 by Joseph Van Loon, a user of Tornado Cash, along with five other plaintiffs against the Treasury, Secretary Janet Yellen, the Office of Foreign Assets Control (OFAC), and OFAC Director Andrea Gacki. The plaintiffs contended that the imposition of sanctions constituted an overreach, asserting that Tornado Cash should not be classified as a person or an entity, but rather as a software application.
In August of last year, a district court ruled in favor of the Treasury, concluding that Tornado Cash was more than just software. The judge’s decision factored in the involvement of its founders, developers, and a decentralized autonomous organization (DAO) in governing the platform. On appeal, the plaintiffs reiterated their principal argument that these sanctions overstepped legal boundaries.
The appeals court highlighted that despite OFAC’s sanctions, Tornado Cash remains accessible to anyone with an internet connection, underscoring the platform’s decentralized and open nature.
“A good win,” wrote Bill Hughes, senior counsel at Consensys, on X. “One which the Supreme Court would be unlikely to reverse.”
Paul Grewal, Coinbase’s chief legal officer, also celebrated the decision, calling it “a historic win for crypto and all who care about defending liberty.” Coinbase, which supported the lawsuit against the Treasury, had several employees file suit to challenge and ultimately roll back the sanctions on Tornado Cash.
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