Tornado Cash Passes OFAC’s Fifth Circuit Rules Banning Immutable Smart Contracts

The U.S. Fifth Circuit Court of Appeals ruled on Tuesday that the Treasury Department's Tornado Cash immutable smart contracts could not be classified as proprietary software because they passed sanctions.

The fifth court held that while smart contracts are immutable – no party can modify or control them – they cannot be classified as “property” under existing law.

The ruling reverses a lower court decision and marks a significant victory for privacy advocates and blockchain developers who want transparency in building similar products, industry insiders said.

The immutable smart contracts at the heart of the issue are not proprietary, as more than 1,000 participants engaged in a “trusted configuration protocol” that permanently removed the ability to update or control the code. found.

As a result, these contracts remain accessible to anyone – including sanctioned North Korean entities – regardless of whether the Treasury's Office of Foreign Assets Control (OFAC).

“Fixing the law's blind spots or mitigating its disruptive effects falls outside our purview.” BuyerPassed by a panel of judges, it reads. “We decline the Department's invitation to issue a Judiciary Act – a review of congressional handiwork by interpretation.

Legislation is the job of Congress and Congress alone.

Protocols built on modern contracts cannot be classified as services because they operate without “human intervention,” because services by definition “require a commodity that cannot be touched by human effort, such as labor, skill or advice,” Tuesday's ruling said. .

“No one wants criminals to use crypto protocols,” said Paul Grewal, Coinbase's chief legal officer. He wrote In a post to X on Tuesday. “To completely ban open source technology because a small portion of users are bad actors is not what Congress authorized.

“These sanctions stretched the Treasury's authority beyond recognition, and the Fifth Circuit agreed,” Grewal added.

The US Treasury imposed sanctions Tornado Cash In the year In August 2022, he was accused of facilitating more than $7 billion in illicit transactions, including funds linked to North Korea's Lazar group.

In August 2023, two developers, Roman stormand Roman Semenov, were charged with embezzlement and embezzlement. In May 2024, another developer, Alexei Persev, was sentenced to 64 months in prison for embezzling $1.2 billion.

In September 2023, Joseph Van Loon and other plaintiffs filed an appeal against the sanctions imposed on Tornado Cash by the US Treasury's Office of Foreign Assets Control.

The plaintiffs argued that OFAC exceeded its authority under the International Emergency Economic Powers Act (IEEPA) by classifying Tornado Cash's immutable smart contracts as “assets” and imposed sanctions. The appeal follows a district court decision affirming OFAC's action.

Although the appeals court ruled Tuesday that TornadoCash's immutable smart contracts cannot be classified as part of sanctions, the broader designation and ban remain in place.

The case will now return to the circuit court “with the assumption that the Fifth Circuit will have to re-determine the merits of applying the law as it now applies,” Bill Hughes, an attorney for ConsenSys, wrote in a joint statement. Post Tuesday to X.

But the ruling only defines self-executing code that runs without any administrative oversight, meaning that some Tornado Cash or other protocols from forks of the codebase could still be sanctioned.

Edited by Sebastian Sinclair