The Court overturns the Treasury’s decision: smart contracts are not sanctionable property.
On November 26, the U.S. Fifth Circuit Court issued a ruling against the authority of the U.S. Department of the Treasury, declaring the sanctions against the Tornado Cash mixer illegal.
The decision marks a turning point in the legal definition of smart contracts. A panel of three judges determined that Tornado Cash’s smart contracts cannot be classified as property and are therefore not subject to sanctions under the International Emergency Economic Powers Act (IEEPA).
The judges dismantled the Treasury’s accusations, asserting that the Office of Foreign Assets Control (OFAC) exceeded its regulatory powers. Since Tornado Cash’s smart contracts are autonomous and lack ownership, they fall outside OFAC’s jurisdiction.
The court opposed the government’s regulatory strategy by establishing three key principles:
- it defined smart contracts as mere “lines of code” that cannot be sanctioned under current OFAC regulations.
- it emphasized that smart contracts are not controlled by developers, distinguishing between “mutable” and “immutable” software
- it acknowledged that OFAC’s regulatory framework might be outdated for modern technologies but explicitly stated that it “declines the Department’s invitation to judicial lawmaking,” asserting that: “Legislating is Congress’s job—and Congress’s alone.”
This ruling overturns a previous court decision.
Bill Hughes, an attorney with Consensys, commented that smart contracts are merely “lines of code,” more akin to tools than services. This legal interpretation could have significant implications for the future of open-source technology.
In August 2022, the Treasury had accused Tornado Cash of facilitating the laundering of over $7 billion in digital assets between 2019 and 2022. Despite this allegation, the Court found that sanctioning immutable code was beyond congressional authority.
Paul Grewal, Chief Legal Officer at Coinbase, emphasized the importance of the decision, stating that blocking open-source technology due to the actions of a small fraction of its users does not fall within the powers of the U.S. Congress.
The lawsuit was filed by six Tornado Cash users, supported by Coinbase, who challenged the inclusion of 44 smart contract addresses on the Specially Designated Nationals (SDN) list. The plaintiffs argued that the sanction was an overreach, as Tornado Cash is neither a person nor an entity but software.
Although the ruling is a positive development, Hughes noted that Tornado Cash’s blocked status remains unchanged. The case will now return to the district court for review under the newly established criteria.
