Sanctions on Tornado Cash Invalidated by US Federal Appeals Court

The US Fifth Circuit Court of Appeals overturned sanctions imposed by the Treasury Department on Tornado Cash, the infamous cryptocurrency mixer.

The service, also known as a crypto tumbler, was used to anonymize digital transactions, a technique cybercriminals often use to cover their tracks.

The court concluded that the Treasury in 2022 overstepped its legal authority under the International Emergency Economic Powers Act (IEEPA).

Tornado Cash Allegedly Facilitated Laundering Over $7 Billion

In August 2022, the Office of Foreign Assets Control (OFAC), a division of the Treasury, imposed austere sanctions on the crypto-tumbling service, alleging that the platform facilitated the laundering of over $7 billion in crypto tokens.

The staggering amount included $455 million allegedly stolen by North Korea’s Lazarus Group. After the sanctions were imposed, usage of Tornado Cash dropped sharply.

The court decision raised a critical legal question: does Tornado Cash’s technology qualify as “property” under IEEPA? A three-judge panel concluded it does not, saying that the platform’s smart contracts, which are self-executing lines of immutable code, cannot be owned or controlled by any entity.

Sanctions Overturned on Grounds of Anonymity Technology Misclassification

Writing for the panel, Judge Don Willett highlighted that IEEPA authorizes the Treasury to sanction property, not technology itself.

“Tornado Cash, as defined by OFAC, does not own the services provided by the immutable smart contracts,” Willett stated.

Drawing an analogy, he wrote: “A homeowner may own the right to trash-removal services and a client may own the right to legal services performed by a lawyer, but neither the homeowner nor the client owns the person performing the trash-removal services or the lawyer.”

Coinbase-Backed Legal Challenge

Six Tornado Cash users, financially backed by cryptocurrency exchange firm Coinbase, initiated the legal battle. The plaintiffs argued that the sanctions were inappropriate, claiming that the platform’s smart contracts were ownerless and decentralized, which would place them outside of OFAC’s jurisdiction. The court sided with this argument.

Paul Grewal, Coinbase’s Chief Legal Officer, celebrated the decision on X (formerly Twitter), writing, “Privacy wins […] 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.”

Crypto Mixers and their Implications

However, despite the court decision, Tornado Cash is still entangled in legal challenges, after one of the developers associated with the platform was sentenced to over five years in prison for laundering more than $2 billion. The accused, Alexey Pertsev, plans to appeal the verdict.

Despite the court’s decision, critics argue that Tornado Cash and other similar services often provide cover for illicit activities. The service’s core functionality revolves around mixing cryptocurrencies to obscure transaction origins and destinations, making it an attractive option for threat actors seeking to launder proceeds from phishing attacks, crypto scams, ransomware payments, fraudulent investment schemes or other cybercrimes.