In summary
- The Fifth Circuit Court ruled that Tornado Cash smart contracts cannot be considered property.
- The ruling overturned an earlier decision and was a victory for Blockchain privacy advocates.
- Although Tornado Cash remains sanctioned, the court clarified that autonomous protocols are not services and cannot be blocked completely.
The U.S. Fifth Circuit Court ruled Tuesday that the Treasury overstepped its mark in sanctioning Tornado Cash’s immutable smart contracts, stating that the autonomous software cannot be classified as proprietary.
The Fifth Circuit held that when smart contracts are immutable, meaning that no entity can modify or control them, they cannot be classified as “property” subject to penalties under existing law.
The decision reverses a lower court ruling and represents a significant victory for privacy advocates and blockchain developers seeking clarity to build similar products, according to industry leaders.
The immutable smart contracts at the center of the case “are not owned because they are not possessable,” noting that more than 1,000 participants participated in a “trust configuration ceremony” that permanently removed any ability to update or control the code, according to the court.
As a result, these contracts remain accessible to anyone, including sanctioned North Korean entities, regardless of Treasury’s Office of Foreign Assets Control (OFAC) designation.
“Fixing the blind spots of a law or softening its disruptive effects is beyond our reach,” quotes the ruling issued by a panel of judges. “We decline the Department’s invitation to make judicial laws: to review the work of Congress under the guise of interpreting it.
“Legislating is the job of Congress, and only Congress.”
Because protocols built on smart contracts operate without “human intervention,” they cannot be classified as services since services, by definition, require “an intangible good in the form of human effort, such as work, skill, or advice,” the decision states. on Tuesday.
“No one wants criminals to use Cryptocurrency protocols,” Coinbase Chief Legal Officer Paul Grewal wrote in a post on X on Tuesday. “Blocking open source technology entirely because a small portion of users are malicious actors is not what Congress authorized.
“These sanctions expanded Treasury’s authority beyond recognition, and the Fifth Circuit agreed,” Grewal added.
The US Treasury sanctioned Tornado Cash in August 2022 for allegedly facilitating more than $7 billion in illicit transactions, including funds linked to North Korea’s Lazarus Group.
In August 2023, two developers, Roman Storm, and Roman Semenov, were charged with money laundering and sanctions violations. In May 2024, Alexey Pertsev, another developer, was sentenced to 64 months in prison for laundering $1.2 billion.
In September 2023, Joseph Van Loon and other plaintiffs appealed the decision, challenging the U.S. Department of the Treasury’s Office of Foreign Assets Control sanctions against Tornado Cash.
The plaintiffs argued that OFAC exceeded its authority under the International Emergency Economic Powers Act (IEEPA) by designating Tornado Cash’s immutable smart contracts as “property” subject to sanctions. The appeal followed a district court decision upholding OFAC’s actions.
While the appeals court ruled Tuesday that Tornado Cash’s immutable smart contracts cannot be classified as a sanctioned entity, its broader designation and locked status remain intact.
The case will now be sent back to the district court “with the idea that it must decide the merits again by applying the law as the Fifth Circuit says it applies,” wrote Bill Hughes, an attorney for ConsenSys, in a post on X on Tuesday.
However, the ruling only specifies self-executing code that could operate without any administrative control, meaning that some parts of Tornado Cash or other forked protocols from its codebase could still face sanctions.
Edited by Sebastian Sinclair
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