In a landmark decision, a U.S. Appeals Court has overturned sanctions imposed by the Treasury Department’s Office of Foreign Assets Control (OFAC) on Tornado Cash, a blockchain-based privacy protocol. This ruling marks a pivotal moment in the ongoing debate over decentralized technology and the scope of regulatory authority.
The Treasury had sanctioned Tornado Cash in August 2022, alleging the platform was used to launder over $7 billion in cryptocurrency, including funds linked to hacking groups such as the North Korean Lazarus Group. The sanctions added 44 Tornado Cash smart contract addresses to the Specially Designated Nationals (SDN) list, effectively banning U.S. users from interacting with the protocol. This prompted lawsuits by Tornado Cash users, supported by Coinbase and the advocacy group Coin Center, who argued that OFAC’s actions exceeded its authority.
The appeals court found that Tornado Cash’s immutable smart contracts do not qualify as “property” under the International Emergency Economic Powers Act (IEEPA). Unlike traditional assets, the court noted, these contracts cannot be owned or controlled and function autonomously once deployed. “We hold that Tornado Cash’s immutable smart contracts are not the ‘property’ of a foreign national or entity, meaning they cannot be blocked under IEEPA,” the judges wrote. Consequently, the court invalidated the sanctions against these smart contracts.
The decision has significant implications for cryptocurrency users in the United States. U.S. users can now legally interact with Tornado Cash’s privacy protocols, and the protocol’s native token, TORN, has seen a dramatic surge in value, reaching a two-year high. However, the ruling does not shield Tornado Cash from further regulatory scrutiny. The court’s decision is limited to the smart contracts and does not address the broader operations of Tornado Cash or its developers.
Roman Storm, a Tornado Cash developer, remains entangled in legal battles. Storm is facing charges of conspiracy to facilitate money laundering, operating an unlicensed money-transmitting business, and violating sanctions. His trial is scheduled to begin in April 2024, with a potential prison sentence of up to 45 years if convicted. Storm’s defense argues that he merely wrote the code and had no control over how it was used, but a federal judge has allowed the case to proceed.
This ruling underscores the growing tension between decentralized technologies and traditional regulatory frameworks. Tornado Cash’s case highlights the challenges of applying laws designed for centralized entities to blockchain-based protocols. While the court’s decision may provide relief to privacy advocates, it leaves unanswered questions about the future of decentralized finance (DeFi) and the legal responsibilities of its developers.
As the cryptocurrency landscape evolves, this case is likely to influence regulatory policies and legal interpretations surrounding blockchain technology and privacy-focused platforms. The Treasury Department has yet to comment on the ruling, but industry experts anticipate that this will not be the last word on Tornado Cash or the broader implications for DeFi protocols.
