Tornado Cash Sanctions Deemed Unlawful by Appeals Court in Major Crypto Win

• A U.S. Appeals court has sided with Tornado Cash users against the U.S. Treasury Department.
• The ruling has been hailed as a big win for crypto, privacy, and open-source technology. 
• Experts have weighed in on whether the recent ruling has any implications for the project’s developers, who are facing criminal charges.

When the U.S. Department of Treasury’s Office of Foreign Asset Control (OFAC) sanctioned the notorious crypto mixer Tornado Cash in August 2022, outlawing the protocol’s use in the U.S. and by U.S.-facing entities, several crypto and privacy advocates were quick to cry foul .

Several legal proceedings later, these advocates have now gotten a court to agree with them in a ruling hailed as a massive victory for crypto, privacy, and open-source technology.

Immutable Smart Contracts Are Not Property

A U.S. Appeals court has sided with Tornado Cash users against the U.S. Treasury Department. In a Tuesday, November 26 ruling , the court held that the Treasury exceeded its congressionally allowed authority when it sanctioned Tornado Cash, reversing an August 2023 district court decision .

In the recent ruling, the court stressed that Tornado Cash’s immutable smart contracts did not fall into the definition of property or service owned by a foreign entity as the open-source code could not be owned, controlled, or changed, even by its creators.

"OFAC's concerns with illicit foreign actors laundering funds are undeniably legitimate. Perhaps Congress will update IEEPA, enacted during the Carter Administration, to target modern technologies like crypto-mixing software. Until then, 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 ruling read.

The court also noted that despite the Treasury Department’s designation of Tornado Cash, the software continued running, potentially placing liability risks on U.S. crypto users.

"Simply put, regardless of OFAC's designation of Tornado Cash, the immutable smart contracts continue operating. And furthermore, because the software continues to operate regardless of the sanctions, and the blockchain technology 'allows peer-to-peer transfers... without requiring the recipient to consent to transfer,' some users may become liable whenever someone transfers them digital assets via Tornado Cash, even without their knowledge," the ruling read.

Unsurprisingly, the victory in the case pursued by six Tornado Cash users backed by Coinbase has sparked significant celebration across the crypto space.

A Big Win for Crypto

Several crypto community members have hailed the recent ruling as a significant victory for the industry.

"Privacy wins. Today the Fifth Circuit held that the Treasury’s sanctions against Tornado Cash smart contracts are unlawful. This is a historic win for crypto and all who cares about defending liberty," Coinbase CLO Paul Grewal enthused .

Similarly, Consensys Senior Counsel Bill Hughes described the ruling as “a good win” for the industry.

The views come as the ruling offers legal recognition of the immutability of smart contracts. At the same time, it also provides significant clarity for open-source developers. As such, the ruling has been tipped to boost crypto innovation.

Following the ruling, a key question has been what it means for Tornado Cash developers Alexey Pertsev, Roman Storm, and Roman Semenov. In May 2024, a Dutch court sentenced Pertsev to 64 months in prison for money laundering for his role in creating the crypto privacy protocol. Storm and Semenov face similar charges in the U.S. , though Semenov’s whereabouts remain unknown.

An Entirely Different Matter?

Responding to questions about how the ruling impacts the Storm and Semenov case, Consensys Senior Counsel Bill Hughes argued it was an entirely different issue.

"completely different deal altogether. This doesn't say that Tornado Cash wasn't a service generally, but that the immutable smart contracts that were part of the software suite that the platform included were not. DOJ says Roman was running a service that violated sanctions, illegally transmitted money, and facilitated money laundering. This doesn't change those allegations," he stressed, likely referring to the project's front end.

Alexey Pertsev is working to appeal his conviction in the Netherlands. In January 2024, Storm launched a fundraiser to cover legal fees.

On the Flipside 

• The recent ruling does not end the case but refers it back to the district court for reevaluation.
• The ruling does not appear to have much implication on the separate charges faced by the project’s developers.

Why This Matters

The Tornado Cash ruling represents a significant milestone in the push to ensure protections for smart contract code.

Read this for more on Tornado Cash:
Tornado Cash Co-Founder Seeks $1M in Additional Funding to Lodge an Appeal

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