Appeals court tosses sanctions on Tornado Cash crypto mixer

The U.S. Fifth Circuit Court of Appeals ruled Tuesday that the U.S. Treasury Department exceeded its legal authority when it sanctioned the cryptocurrency mixer Tornado Cash in 2022. 

The court’s decision centered on whether Tornado Cash, a tool designed to anonymize cryptocurrency transactions, constitutes “property” under the International Emergency Economic Powers Act (IEEPA). A three-judge panel concluded that Tornado Cash’s immutable smart contracts — automated and self-executing lines of code — do not meet this classification. Judge Don Willett, writing for the panel, underscored that the authority granted by the IEEPA allows the Treasury Department to sanction property, not technology.

The sanctions were imposed by the Treasury Department’s Office of Foreign Assets Control (OFAC) in August 2022, citing Tornado Cash’s role in laundering more than $7 billion in cryptocurrency, which included $455 million allegedly stolen by North Korea’s Lazarus Group.

As the sanctions went into effect, they severely restricted the use of Tornado Cash, causing a dramatic drop in activity.

The legal challenge against these sanctions was spearheaded by six users of Tornado Cash, who were financially backed by Coinbase, the largest cryptocurrency exchange in the United States. They contended that because the smart contracts underpinning Tornado Cash could not be owned or controlled by any entity, they should not have been subject to OFAC’s sanctions list. The court agreed, stating that OFAC’s actions overstepped its legal bounds.

“Tornado Cash, as defined by OFAC, does not own the services provided by the immutable smart contracts,” Willett wrote. “A homeowner may own the right to trash-removal services and a client may own the right to legal services performed by a lawyer, but neither the homeowner nor the client owns the person performing the trash-removal services or the lawyer—for good reason. Similarly, Tornado Cash as an “entity” does not own the immutable smart contracts, separate and apart from any rights or benefits of the services performed by the immutable smart contracts.”

Paul Grewal, Coinbase’s chief legal officer, supported the ruling in a post on X, stating “privacy wins.” 

“No one wants criminals to use crypto protocols, but blocking open source technology entirely because a small portion of users are bad actors is not what Congress authorized,” Grewal wrote. 

Despite the legal victory, others involved in the development of Tornado Cash continue to face legal challenges. In May, Alexey Pertsev, a developer associated with the platform, was sentenced to over five years in prison by Dutch authorities for money laundering activities exceeding $2 billion. Pertsev, however, plans to appeal the ruling.

The decision of the Fifth Circuit overturns a previous ruling by a federal judge in Texas that upheld the government’s sanctions. The case will now return to federal court in Austin for additional proceedings. 

You can read the full ruling below.