U.S. Appeals Court Overturns Tornado Cash Sanctions in Landmark Privacy Ruling

In a landmark decision for the cryptocurrency industry, the U.S. Fifth Circuit Court of Appeals ruled that the Treasury Department’s Office of Foreign Assets Control (OFAC) exceeded its authority when it sanctioned Tornado Cash, a blockchain-based cryptocurrency mixer. The ruling overturned a lower court’s decision and marked a significant victory for advocates of blockchain privacy and technological innovation.

The court concluded that Tornado Cash’s immutable smart contracts — self-executing code designed to anonymize crypto transactions — do not qualify as “property” under the International Emergency Economic Powers Act (IEEPA), a 1977 law granting the president authority to regulate economic transactions tied to foreign threats.

Tornado Cash came under scrutiny in 2022 when OFAC sanctioned the platform, alleging it had facilitated over $7 billion in illicit transactions, including funds stolen by North Korea’s Lazarus Group. The sanctions blocked U.S. individuals and entities from using Tornado Cash and added 44 of its associated smart contract addresses to the Treasury’s Specially Designated Nationals (SDN) list.

The plaintiffs — six Tornado Cash users, supported by cryptocurrency exchange Coinbase — argued that these sanctions were an overreach, as immutable smart contracts are neither owned nor controlled by any individual or entity. The three-judge appeals court panel agreed, stating, “We hold that Tornado Cash’s immutable smart contracts… are not the ‘property’ of a foreign national or entity,” and therefore cannot be blocked under IEEPA.

The ruling represents a critical moment for privacy in the digital age. Blockchain developers and privacy advocates have long argued that open-source technology like smart contracts should not be targeted simply because some users misuse them. Coinbase’s Chief Legal Officer Paul Grewal described the decision as a “historic win for crypto and all who care about defending liberty.”

However, the ruling doesn’t entirely exonerate Tornado Cash. While the immutable smart contracts must be removed from the sanctions list, broader sanctions against the platform remain intact, and other aspects of Tornado Cash’s operations — such as its governance structures — could still face legal scrutiny.

The court acknowledged the challenges of applying decades-old legislation to modern technologies. Judge Don Willett, writing for the panel, noted, “The real-world downsides of certain uncontrollable technology falling outside OFAC’s sanctioning authority are evident, but legislating is Congress’s job.”

The ruling underscores the need for updated laws to address the dual concerns of privacy protection and national security in the cryptocurrency space. The judges emphasized that only Congress can fill gaps in existing statutes to address technologies like blockchain and crypto mixers effectively.

News of the ruling spurred an unprecedented surge in Tornado Cash’s governance token, TORN, which skyrocketed over 800% to a two-year high before stabilizing.

Despite the court victory, legal battles surrounding Tornado Cash are far from over. Developers associated with the platform, including Alexey Pertsev and Roman Storm, face charges of money laundering and sanctions violations in separate cases.

The decision has sparked renewed debate about the balance between privacy, innovation, and security in the blockchain industry, setting the stage for ongoing legal and legislative battles in the evolving world of cryptocurrency.