In a pivotal decision, the U.S. Fifth Circuit Court of Appeals has struck down sanctions imposed by the Treasury Department on Tornado Cash, a popular crypto-mixing service. This ruling is being hailed as a significant win for proponents of decentralized technologies and privacy advocates, while reigniting debates about regulating blockchain tools linked to illicit activities.

Background: Sanctions on Tornado Cash

In 2022, the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash, accusing the platform of being a key tool for criminal actors, including North Korea’s Lazarus Group, to launder stolen cryptocurrency. OFAC argued that Tornado Cash facilitated illicit transactions worth billions of dollars, justifying its inclusion on the sanctions list.

Court’s Rationale: Immutable Code and Ownership

The appellate court found that OFAC overstepped its authority under the International Emergency Economic Powers Act (IEEPA). Central to the ruling was the nature of Tornado Cash’s smart contracts—autonomous, immutable lines of code on the Ethereum blockchain. These contracts, designed to function without human intervention, are accessible to anyone and cannot be altered or controlled.

The court concluded that these smart contracts do not meet the legal definition of “property” as they cannot be owned, restricted, or controlled.

“The immutable smart contracts at issue are not property because they are not capable of being owned,” the court wrote.

The decentralized nature of Tornado Cash further complicated the enforcement of sanctions. While the sanctions might block specific individuals from interacting with the platform, the technology itself remains open to anyone, including malicious actors.

Industry Reactions and Implications

The ruling has sparked celebration within the cryptocurrency community. Coinbase Chief Legal Officer Paul Grewal praised the decision, calling it a “historic win for crypto and liberty.” Grewal emphasized that targeting open-source technologies rather than their misuse stretches government authority beyond its limits.

“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,” Grewal said on X (formerly Twitter).

Coinbase was among the entities that sued the government over the sanctions, arguing that the Treasury had overreached its authority.

However, the decision has also drawn criticism. Some argue that the ruling could embolden bad actors, allowing them to exploit blockchain technology for nefarious purposes. Critics highlight the challenge of balancing privacy protections with the need for regulatory oversight in decentralized finance (DeFi).

Regulatory Uncertainty and the Path Ahead

The decision exposes a critical gray area in crypto regulation: how to apply traditional legal frameworks to decentralized technologies. While the court ruled on the status of Tornado Cash’s smart contracts, it did not shield the platform or its founders from other legal challenges. The founders still face allegations of facilitating money laundering, and the broader debate over regulating crypto mixers remains unresolved.

Bill Hughes, a lawyer at ConsenSys, noted that the ruling does not absolve Tornado Cash entirely from regulatory scrutiny.

“This does NOT mean that the rest of Tornado Cash is out of bounds for Treasury/OFAC too. The issue was about smart contracts with no admin key,” Hughes explained.

Market Impact: TORN Token Surges

Following the court’s decision, Tornado Cash’s native token, TORN, experienced a significant rally, surging nearly 400% to $17.63 at the time of writing. This surge reflects investor optimism about the protocol’s potential resurgence and its implications for decentralized finance projects.