In a landmark ruling on November 26, 2024, the Fifth Circuit Court of Appeals has determined that the U.S. Treasury exceeded its authority by sanctioning the immutable smart contracts of Tornado Cash. This ruling redefines the legal landscape surrounding cryptocurrencies and decentralized finance (DeFi).
The court declared that Tornado Cash’s smart contracts, which operate autonomously without human intervention, cannot be classified as “property.” This interpretation has profound implications for how financial regulations apply to blockchain technology. The judges noted that these contracts are simply lines of code and do not meet the criteria of ownership or control as defined by federal property laws.
This ruling stems from sanctions first imposed by the Treasury in August 2022, where Tornado Cash was accused of facilitating over $7 billion in illicit transactions. However, the court rejected the Treasury’s assertion that these smart contracts could be treated as an entity subject to the International Emergency Economic Powers Act (IEEPA).
- The court emphasized the “trusted setup ceremony” from May 2020 which ensured the smart contracts’ immutability.
- Over 1,000 participants contributed data to establish cryptographic parameters, making further updates or administrative control impossible.
- This design choice transfers governance to the Tornado Cash community via the TORN token, reinforcing the autonomy of the smart contracts.
Legal experts and advocates for open-source technology welcomed this decision. Paul Grewal, Chief Legal Officer at Coinbase, remarked, “Blocking open-source technology entirely because some users misuse it is not what Congress authorized.” This statement reflects a growing sentiment among crypto advocates that the regulatory landscape must adapt to the unique characteristics of blockchain technology.
While the court’s decision mandates the removal of specific Tornado Cash contracts from the OFAC sanctions list, it is essential to understand that not all components of Tornado Cash are immune to regulation. Some aspects or related protocols may still fall under the scrutiny of U.S. sanctions.
As policymakers grapple with the implications of such innovative technologies, the ruling sets a precedent that may shape the future of cryptocurrency regulation. The Fifth Circuit clearly conveyed that “Legislating is Congress’s job,” signaling a push towards more nuanced regulatory frameworks that understand the complexities of decentralized technologies.
