A significant legal ruling has cleared Tornado Cash’s immutable smart contracts of U.S. sanctions, with a U.S. appeals court asserting that these smart contracts are beyond the scope of federal property laws. The Fifth Circuit Court of Appeals, on November 26, overturned an earlier decision by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), declaring that smart contracts, which operate autonomously and without human intervention, cannot be classified as “property” under U.S. law.
This ruling addresses the Treasury’s controversial decision in August 2022 to sanction Tornado Cash, a decentralized crypto mixing service, accusing it of facilitating over $7 billion in illicit transactions. The Treasury had placed 44 Tornado Cash smart contract addresses on its Specially Designated Nationals (SDN) list, effectively blocking U.S. persons from interacting with the platform.
The appeals court, however, concluded that the Treasury exceeded its jurisdiction by applying sanctions to smart contracts. Unlike entities that can be owned or controlled, the court argued that Tornado Cash’s smart contracts are immutable lines of code, with no owner or governing body that can be held responsible or “blocked” under the International Emergency Economic Powers Act (IEEPA), which grants the U.S. government the authority to regulate foreign property or services.
In making its decision, the court referenced the “trusted setup ceremony” in May 2020, a key event where over 1,000 participants contributed cryptographic data to finalize the parameters of Tornado Cash’s smart contracts. This process ensured that the contracts were immutable and could not be altered or updated, making them distinct from traditional services or properties that could be regulated under IEEPA.
The ruling emphasized that smart contracts’ autonomous nature made them incompatible with the Treasury’s interpretation of the law. The judges stated that legislative changes, such as the imposition of sanctions on technology like Tornado Cash, must come from Congress, not the executive branch.
The decision was hailed as a victory for open-source technology and cryptocurrency advocates. Paul Grewal, Coinbase’s Chief Legal Officer, supported the ruling, arguing that sanctioning open-source technology due to its misuse by a minority of users was outside the Treasury’s mandate. Coinbase, which helped fund the legal challenge, has been vocal in defending the open-source ethos within the crypto industry.
While the decision removes the sanctions from Tornado Cash’s specific smart contracts, legal experts note that other elements of the Tornado Cash platform or its associated protocols could still face scrutiny or sanctions. ConsenSys lawyer Bill Hughes stated that the court’s ruling was unlikely to be overturned by the Supreme Court, calling it “a good win” for the crypto sector.
This ruling marks a pivotal moment for blockchain technology, as it sets a precedent for how autonomous systems and open-source projects are treated under U.S. law, particularly when they are disconnected from direct human control or ownership.
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