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A US Court of Appeals has ruled that the smart contracts behind Tornado Cash, a "notorious" cryptocurrency mixing service, cannot be sanctioned because they are "not capable of being owned".
The ruling, issued by fifth circuit judges in Texas on Tuesday (November 26), means that the smart contracts that power Tornado Cash must now be removed from the US sanctions list.
It also means that US persons will be able to interact with Tornado Cash once again without breaking the law — something that has not been possible since August 2022, when the sanctions were first applied.
Tornado Cash is an open-source protocol that is used to anonymise cryptocurrency transactions.
By sending payments via Tornado Cash, cryptocurrency users can obfuscate both the origin and destination of their transactions, making them untraceable, even by Tornado Cash itself.
On X, the crypto industry welcomed the verdict as a “historic win” for privacy and for open-source software development.
Brian Armstrong, CEO of Coinbase, said that he is “proud” of the legal challenge, which Coinbase has publicly supported since 2022.
“The courts ruled in our favor that the US Treasury cannot sanction open-source code,” he said. “Coinbase will keep holding the government accountable to protect your freedoms.”
Paul Grewal, chief legal officer at Coinbase, said the outcome is a major win for privacy and for “all who care about defending liberty”.
“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 said.
“These sanctions stretched Treasury’s authority beyond recognition, and the Fifth Circuit agreed.
“Looking ahead, Coinbase will not relent in our efforts to advocate for clear, fair rules that foster innovation in the US and abroad.”
The appeal was brought by six plaintiffs, all of whom are described in court documents as users of Tornado Cash.
They were led by Joseph Van Loon, a former engineer at Amazon, and include Nate Welch, a former engineer at Coinbase.
The ruling could also alter the dynamic in the criminal prosecution of Roman Storm, co-founder of Tornado Cash, who is facing charges of conspiracy to commit money laundering and violate US sanctions.
Storm faces a maximum of 45 years in prison when his trial begins in New York next month.
Alexey Pertsev, another co-founder, was sentenced in the Netherlands to five years in prison for laundering $1.2bn of illicit cryptocurrency.
Roman Semenov, the third and final co-founder, has been indicted by the US Department of Justice (DOJ) but remains at large.
A 'notorious' mixer gets shaken
In August 2022, the US Treasury’s Office of Foreign Assets Control (OFAC) placed sanctions on dozens of wallet addresses where Tornado Cash users deposit cryptocurrency to anonymise their transactions.
At the time, OFAC said it was blacklisting the “notorious” mixer for its role in laundering more than $7bn of cryptocurrency for malicious cyber actors, including fraudsters, hackers and ransomware attackers.
According to OFAC, the cryptocurrency laundered through Tornado Cash included $455m that was stolen by Lazarus Group, North Korea’s state-sponsored hackers.
By adding Tornado Cash to the list of Specially Designated National and Blocked Persons (SDN), OFAC imposed an across-the-board prohibition against any dealings with Tornado Cash “property”.
In its original application of the sanctions, OFAC defined the “property” of Tornado Cash to mean the open-source computer code, i.e., the smart contracts and associated wallet addresses, that power the protocol.
The appeal begins
In 2022, the six plaintiffs filed an appeal arguing that Tornado Cash’s inclusion on the SDN list exceeded OFAC’s statutory authority.
The district court disagreed, granting summary judgment to the Treasury and finding Tornado Cash subject to OFAC’s sanctioning authority.
Van Loon and the other plaintiffs continued to appeal, however, arguing that Tornado Cash’s open-source, self-executing software is not sanctionable under US law.
The statute in question, the International Emergency Economic Powers Act (IEEPA), authorises the president to freeze the assets of, and prohibit transactions with, any foreign actor determined to be a threat to the US' national security. This delegated power is carried out by OFAC.
In upholding the appeal, the fifth circuit judges agreed with the plaintiffs' argument that Tornado Cash’s smart contracts are not the “property” of a foreign national or entity, and therefore cannot be sanctioned under the IEEPA.
By extension, the circuit judges also agreed with the plaintiffs that OFAC had overstepped its congressionally defined authority when it originally sanctioned Tornado Cash.
Circuit judges reject 'vending machine' analogy
In the words of the circuit judges, Tornado Cash’s crypto-mixing smart contracts offer two “prized attributes” to users: privacy and immutability of transactions.
Privacy is guaranteed by Tornado Cash’s anonymising function, while immutability is guaranteed by the fact that the underlying code is not owned or controlled by any individual entity.
Tornado Cash, which was launched in 2019, did not start out this way, but in 2020 its founders made the code the "irreversibly immutable”.
As part of what they called a “trusted setup ceremony”, the developers disabled their ability to edit their own code.
“Consequently,” as the circuit judges recognised, “the pool smart contracts became self-executing and could no longer be altered, removed, or controlled.”
In its original decision, the district court had analogised Tornado Cash to a vending machine for money launderers and criminals.
The circuit judges rejected this analogy, however, pointing out that a vending machine has an owner who exercises control over it.
“He can update or remove inventory or can unplug, move, or, if he so chose, destroy the vending machine,” they said. “And the vending machine’s owner can revoke the open offer to purchase snacks or drinks at a set price (by turning off the vending machine).”
However, in the case of Tornado Cash, no one has control over the protocol and it cannot be “unplugged”.
“Even if Tornado Cash did not want North Korea, the Lazarus Group, or anyone else, for that matter, using the immutable smart contracts that the Tornado Cash developers created, Tornado Cash — let alone the Department of the Treasury — would be powerless to stop them,” they said.
