A U.S. appeals court has ruled that the Treasury exceeded its authority by sanctioning Tornado Cash’s immutable smart contracts, declaring them outside the scope of federal property laws.

Background on the Ruling

On November 26, the Fifth Circuit Court of Appeals overturned a previous ruling by the U.S. Department of the Treasury’s Office of Foreign Assets Control. The court stated that smart contracts operating autonomously without human intervention cannot be classified as “property.”

According to the ruling, immutable smart contracts are lines of code not subject to ownership or control, falling outside the purview of the International Emergency Economic Powers Act (IEEPA). For those unfamiliar, the IEEPA is a federal law that grants the President authority to regulate international economic transactions and impose sanctions.

Key Points from the Court Decision

The panel noted that Tornado Cash’s immutable smart contracts cannot be “blocked” under IEEPA, as they do not qualify as services or property. The judges referenced a “trusted setup ceremony,” a contract update conducted in May 2020, where over 1,000 participants contributed cryptographic data to finalize the cryptographic parameters of Tornado Cash’s smart contracts.

By eliminating the possibility of updates or administrative control, the process ensured that all smart contracts were immutable. Governance was subsequently transferred to the Tornado Cash community via the TORN token, an ERC-20 token launched in 2021 for voting on protocol changes.

As a result, these smart contracts operate autonomously without human intervention, making them distinct from entities that can be classified as property or services. The IEEPA allows for the regulation of property or services connected to foreign entities, but the autonomous nature of the smart contracts meant they did not fit within these definitions.

Legislating is Congress’s job.

Reactions and Implications

Paul Grewal, Coinbase’s Chief Legal Officer, supported the decision, stating, “Blocking open-source technology entirely because some users misuse it is not what Congress authorized.”

Coinbase, which financially backed the case against the Treasury Department’s action, has been a strong advocate for protecting open-source development in the crypto sector.

According to ConsenSys lawyer Bill Hughes, the court’s decision mandates the removal of these specific contracts from the sanctions list. However, he clarified that other parts of Tornado Cash or related protocols might still face sanctions.

A good win. One which the Supreme Court would be unlikely to reverse.

Background on Tornado Cash

Crypto mixer Tornado Cash was sanctioned by the U.S. Treasury in August 2022, accused of enabling over $7 billion in illicit transactions. Following the sanctions, six users, including two Coinbase employees, challenged the OFAC’s decision to include 44 Tornado Cash smart contract addresses on the Specially Designated Nationals (SDN) list, arguing that the Treasury misapplied its authority under IEEPA.

A Texas district court initially upheld the Treasury’s actions, ruling that Tornado Cash could be treated as an “entity” under OFAC regulations. The plaintiffs appealed, resulting in the Fifth Circuit’s recent decision.

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