From theblock by Danny Park

Quick Take

A U.S. Federal Appeals court ruled on Tuesday that the Treasury Department’s Office of Foreign Assets Control (OFAC) overstepped its authority in sanctioning cryptocurrency mixer Tornado Cash, reversing a lower court decision.

“We hold that Tornado Cash’s immutable smart contracts (the lines of privacy-enabling software code) are not the 'property' of a foreign national or entity, meaning (1) they cannot be blocked under IEEPA, and (2) OFAC overstepped its congressionally defined authority,” the Fifth Circuit Appeals Court three-judge panel said.

The ruling noted that even with the assessment of OFAC’s broader definition of “any property,” the crypto-mixing service provider remains beyond regulatory reach, as its smart contracts are neither ownable nor traditional contracts or services.

OFAC designated Tornado Cash as a sanctioned entity in August 2022, barring people in the U.S. and firms looking to operate in the U.S. from engaging in financial interactions with it. The agency also linked Tornado Cash to North Korea’s nuclear weapons program. 

Upon the news, the price of Tornado Cash’s governance token, TORN, surged from around $3.6 to a high of nearly $35, an increase of about 870%. It is now trading at $16.7, according to CoinGecko.

Six plaintiffs vs. Treasury

The Tuesday ruling comes after Tornado Cash user Joseph Van Loon and five other plaintiffs sued the Treasury, Secretary Janet Yellen, OFAC and OFAC Director Andrea Gacki in 2022. The six plaintiffs argued that the sanction was an overreach as Tornado Cash is not a person nor an entity but a software.

In August last year, a district court judge sided with the Treasury, determining that Tornado Cash was more than just software as the judge took into account the involvement of its founders, developers and a decentralized autonomous organization in governing the platform. In the appeal, the plaintiffs maintained the same principal argument.

The appeals court ruling pointed out that even with OFAC’s sanctions, Tornado Cash remains accessible to “anyone with an internet connection.”  

“A good win,” Bill Hughes, senior counsel at Consensys, wrote on X. “One which the Supreme Court would be unlikely to reverse.”

“This is a historic win for crypto and all who cares about defending liberty,” Paul Grewal, chief legal officer of Coinbase, said in a post on X. Coinbase helped back the lawsuit against the Treasury, with several employees of the exchange filing suit to roll back the sanctions on Tornado Cash.