Fifth Circuit Rules Tornado Cash Sanctions Exceeded US Treasury’s Authority

Fifth Circuit Rules Tornado Cash Sanctions Exceeded US Treasury’s Authority

Court Rebukes Treasury Department Overreach in Tornado Cash Case

On January 21, 2025, the Fifth Circuit Court of Appeals delivered a major ruling, overturning the sanctions placed on Tornado Cash, a decentralized cryptocurrency mixing platform. The court determined that the U.S. Treasury Department, specifically the Office of Foreign Assets Control (OFAC), had acted beyond its legal authority when it sanctioned Tornado Cash.

The sanctions, first imposed in August 2022, accused Tornado Cash of facilitating the laundering of illicit funds tied to North Korea’s Lazarus Group. These sanctions restricted any transactions involving Tornado Cash and designated its immutable smart contracts as "property" subject to restrictions. However, the court strongly disagreed with this classification, concluding that Tornado Cash’s smart contracts are unalterable, autonomous programs that cannot be owned or controlled by anyone, not even their creators.

The lawsuit, filed by six plaintiffs, argued that the sanctions violated the Administrative Procedure Act. The court agreed, stating that the Treasury’s actions overstepped the bounds of its jurisdiction, as the immutable nature of Tornado Cash’s smart contracts means they don’t qualify as "property" under the International Emergency Economic Powers Act.

Tornado Cash’s smart contracts are self-executing and operate independently, immune to any modifications, shutdowns, or direct control. This ruling signifies a key moment for blockchain privacy advocates, as it challenges the government’s power to impose sanctions on decentralized technologies that operate outside traditional systems.

In addition, the plaintiffs cited the lawful uses of Tornado Cash, such as preserving financial privacy and protecting against cyber threats. One plaintiff revealed using the service to anonymously donate to Ukraine’s war efforts, fearing retaliation. Another shared how Tornado Cash protected their identity after receiving threats related to their cryptocurrency holdings.

This decision is seen as a pivotal point in the ongoing debates over cryptocurrency regulation, blockchain privacy, and the governance of open-source blockchain systems. Legal analysts expect this case to influence future discussions on the balance between decentralized technology and government oversight.

As of now, OFAC has not stated whether it will pursue an appeal to the Supreme Court. The case will now return to the district court, where further proceedings will follow in light of the appellate court’s findings.