The U.S. Fifth Circuit Court of Appeals has ruled that the Office of Foreign Assets Control (OFAC) overstepped its authority when imposing sanctions on the cryptocurrency mixer Tornado Cash. The ruling was reported by The Block.

The appellate court overturned a previous district court decision.

Key Ruling Details

“Immutable smart contracts of Tornado Cash (lines of code enabling privacy) do not constitute ‘property’ of any foreign national or entity. As such, they cannot be blocked under the International Emergency Economic Powers Act (IEEPA), and OFAC exceeded its authority as defined by Congress,” stated the panel of judges.

The decision clarified that even under an expanded definition of “property” by OFAC, the mixer’s smart contracts fall outside the scope of regulatory enforcement. These contracts are neither property nor traditional services or agreements.

Market Impact

Following the news, the price of Tornado Cash’s utility token, TORN, skyrocketed by approximately 870%, surging from $3.60 to a peak of $35. As of writing, CoinGecko reports it trading at $16.54.

Background of the Case

The ruling stems from a lawsuit filed in September 2022 by six Ethereum and Tornado Cash users against the U.S. Department of the Treasury. The plaintiffs argued that the sanctions were excessive, as Tornado Cash is not a person or entity but rather open-source software.

However, in August 2023, a district court sided with OFAC, asserting that the Decentralized Autonomous Organization (DAO) managing the mixer was a legal entity akin to a corporation. The court reasoned that the DAO benefitted financially from the mixer’s smart contracts, making it accountable.

In the latest ruling, the appellate court noted that Tornado Cash remains accessible to anyone with internet access, regardless of the sanctions.

Industry Reactions

Bill Hughes, Senior Counsel at ConsenSys, called the decision “a significant victory that the Supreme Court is unlikely to overturn.”
Paul Grewal, Chief Legal Officer at Coinbase, which supported the lawsuit against the Treasury, hailed the ruling as a historic moment for cryptocurrency and the protection of freedom.

Historical Context

OFAC imposed sanctions on Tornado Cash in August 2022, barring U.S. individuals and entities from engaging in financial transactions with the service. The agency linked the mixer to North Korea’s nuclear weapons program.

Last week, a court extended the pretrial detention of Tornado Cash developer Alexey Pertsev. In May, a Dutch court found him guilty of laundering $1.2 billion through the mixer and sentenced him to 64 months in prison. In July, his request for bail pending appeal was denied.

Charges of money laundering and sanctions violations have also been filed in the U.S. against Tornado Cash co-founders Roman Storm and Roman Semenov.