Tornado Cash Sanctions Overturned by U.S. Appeals Court

11/27/2024 07:37

The decision answers the controversial debate over whether the crypto-mixing service, which anonymizes transactions, can be banned for its use by criminals.

Nov 27, 2024, 12:26 a.m.

U.S. sanctions against Tornado Cash, a service that anonymizes crypto transactions, must be abandoned, a federal appeals court ruled Tuesday.

The decision answers a controversial privacy debate on whether the government — via a sanctions list maintained by the U.S. Treasury Department — has a right to target the technology because it's associated with criminals. The ruling reversed a district court's August ruling that had sided with the government's pursuit of what it had characterized as a "notorious" crypto-mixing service.

"Tornado Cash’s immutable smart contracts (the lines of privacy-enabling software code) are not the 'property' of a foreign national or entity," according to a U.S. Court of Appeals for the 5th Circuit ruling, so they can't be blocked under the International Emergency Economic Powers Act, and the Treasury's Office of Foreign Assets Control "overstepped its congressionally defined authority" when it did so.

OFAC had sanctioned Tornado Cash last year, contending that it was a vital tool used by bad actors including North Korea's Lazarus Group to launder crypto tokens pilfered from platforms and games such as Axie Infinity.

Coinbase Inc. (COIN) and others had sued the government, claiming it had overreached. Paul Grewal, chief legal officer of crypto exchange Coinbase, cheered the ruling in a Tuesday posting on X, calling it a "historic win for crypto."

"These smart contracts must now be removed from the sanctions list and U.S. persons will once again be allowed to use this privacy-protecting protocol," Grewal wrote. "Put another way, the government’s overreach will not stand."

The circuit court recognized the difficulty of this situation.

"We readily recognize the real-world downsides of certain uncontrollable technology falling outside of OFAC’s sanctioning authority," the judges said, referencing the ineffectiveness of a law that was established well before the world moved online. "But we must uphold the statutory bargain struck (or mis-struck) by Congress, not tinker with it."

Jesse Hamilton

Jesse Hamilton is CoinDesk's deputy managing editor on the Global Policy and Regulation team, based in Washington, D.C. Before joining CoinDesk in 2022, he worked for more than a decade covering Wall Street regulation at Bloomberg News and Businessweek, writing about the early whisperings among federal agencies trying to decide what to do about crypto. He’s won several national honors in his reporting career, including from his time as a war correspondent in Iraq and as a police reporter for newspapers. Jesse is a graduate of Western Washington University, where he studied journalism and history. He has no crypto holdings.