Appeals court overturns Treasury sanctions against crypto mixer Tornado Cash

A U.S. federal appeals court has ruled that the Treasury Department exceeded its authority by sanctioning the embattled cryptocurrency mixer Tornado Cash. 

The ruling on Tuesday reversed a decision from the U.S. District Court for the Western District of Texas upholding sanctions imposed in 2022 against Tornado Cash, which the Treasury Department’s Office of Foreign Assets Control said had been used to launder $455 million stolen by the North Korean state-backed Lazarus Group. 

The case, which was bankrolled by the cryptocurrency trading platform Coinbase, was brought by six users of the service who said the government exceeded its regulatory powers by prohibiting dealings with any Tornado Cash “property.”

The court ruled that the executive branch’s authority to “block ‘property’ in which a foreign ‘national’ or ‘person’ has an ‘interest’” did not apply in the case of Tornado Cash because its immutable smart contracts — lines of autonomous code on the blockchain intended to preserve anonymity in transactions — do not qualify as property. The smart contracts, which despite their name are not actually contracts, pool together and mix users’ cryptocurrencies. 

In his opinion, Judge Don Willett of the 5th U.S. Circuit Court of Appeals pointed to limitations in the International Emergency Economic Powers Act (IEEPA), the 1977 law granting the executive branch the authority to freeze assets of a foreign actor on national security grounds.

“OFAC’s concerns with illicit foreign actors laundering funds are undeniably legitimate,” he said. “Perhaps Congress will update IEEPA … to target modern technologies like crypto-mixing software. Until then, we hold that Tornado Cash’s immutable smart contracts (the lines of privacy-enabling software code) are not the “property” of a foreign national or entity, meaning (1) they cannot be blocked under IEEPA, and (2) OFAC overstepped its congressionally defined authority.” 

Coinbase legal officer Paul Grewal celebrated the decision on social media as a “historic win for crypto.” 

“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,” he wrote. 

In recent years, the federal government has gone after the infrastructure viewed as powering the cybercrime economy, including cryptocurrency mixers. Two Tornado Cash founders, Roman Semenov and Roman Storm, were charged last year with money laundering and sanctions violations, and a Tornado Cash developer, Alexey Pertsev, was sentenced in May to more than five years in prison in the Netherlands for money laundering.