Landmark Court Ruling: Crypto Smart Contracts Escape Sanctions
On November 26, a significant legal decision by the Fifth Circuit Court of Appeals marked a pivotal moment for the cryptocurrency sector. The court determined that the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC) had overstepped its authority by imposing sanctions on Tornado Cash’s immutable smart contracts. These contracts, which function autonomously without human intervention, were deemed not to qualify as “property” under federal law. Consequently, they fall outside the regulatory reach of the International Emergency Economic Powers Act (IEEPA).
Victory for Cryptocurrency Autonomy
This ruling has reversed OFAC’s previous decision to place Tornado Cash’s smart contracts on the sanctions list, a decision that had profound implications for privacy and the decentralized nature of the crypto ecosystem. The court highlighted that immutable smart contracts are essentially strings of code that cannot be owned or controlled. Therefore, they cannot be sanctioned as property.
Tornado Cash operates as an open-source, decentralized protocol that enhances transaction privacy on the Ethereum blockchain. By mixing transactions and obfuscating the financial trail, it provides users with a layer of anonymity.
In August 2022, OFAC accused Tornado Cash of being involved in laundering over $7 billion in cryptocurrency since 2019, including funds tied to North Korean cyber operations. This move marked the first time the U.S. government targeted a decentralized protocol rather than individual actors.
Legal Interpretation of “Property”
The core of the Fifth Circuit’s ruling lies in the definition of “property” under the IEEPA. The court concluded that immutable smart contracts, which autonomously execute code on a blockchain, do not constitute property because they cannot be owned or controlled by any person or entity. This is a critical distinction since the IEEPA permits the Treasury to regulate or ban transactions involving foreign property interests but does not extend this power to autonomous code without ownership.
The court noted, “Immutable smart contracts are self-executing and function independently of human control. They lack the traditional attributes of property as defined by federal law.”
Reactions from the Cryptocurrency Community
Paul Grewal, representing Coinbase, which supported the legal battle against the Treasury, celebrated the decision as a monumental victory for the cryptocurrency community. On social media, he declared, “Privacy triumphs. The Fifth Circuit’s decision to declare the Treasury’s sanctions against Tornado Cash smart contracts unlawful is a historic victory for crypto and the defense of freedom. Coinbase is proud to have played a leading role in this crucial challenge.”
Grewal further emphasized the court’s acknowledgment that targeting open-source technology entirely due to a minority of users being bad actors is not within Congress’s mandate. He also argued that the sanctions “overextended the Treasury’s authority,” and the court’s decision corrects this overreach.
Variant Fund CLO Jake Chervinsky described the ruling as a “remarkable win for crypto,” highlighting that the court determined immutable smart contract protocols are not “property” subject to sanctions because they cannot be owned. This decision nullified OFAC’s 2022 designation of Tornado Cash, signifying a triumph for decentralization.
Matt Corva, a legal expert at Ethereum development firm ConsenSys, stressed the ruling’s importance in checking administrative overreach. He stated, “The Fifth Circuit’s ruling in favor of those challenging the previous addition of Tornado Cash smart contracts to the sanctions list under IEEPA is significant. It’s an impressive win, striking a blow against an administrative state acting without clear congressional authority.”
Corva also highlighted the excessive burden placed on those affected by such government actions, noting that the victory wouldn’t have been feasible without Coin Center, Coinbase’s Paul Grewal, and the many individuals and organizations that contributed to similar legal challenges nationwide.
Uniswap Labs CEO Hayden Adams expressed his surprise at the ruling: “Incredible. Immutable smart contracts have triumphed over the Treasury Department in court. […] The extent to which cryptocurrency is succeeding in federal courts is astonishing.”
As of now, the Treasury Department has not disclosed whether it will appeal the Fifth Circuit’s decision. The case may advance to the Supreme Court if the government opts to challenge the ruling further.
At the time of writing, the Tornado Cash token (TORN) was trading at $18.08, experiencing a remarkable 415% increase within 24 hours.
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