The U.S. Fifth Circuit Court of Appeals has overturned a Treasury Department decision to sanction Tornado Cash’s immutable smart contracts, declaring them beyond the scope of federal property laws.
In a ruling issued on November 26, the court determined that autonomous smart contracts, which operate without human intervention, cannot be classified as “property” under the International Emergency Economic Powers Act (IEEPA).
The court has ruled against the Treasury’s interpretation of its authority to regulate technology in the crypto space under the International Emergency Economic Powers Act (IEEPA). The IEEPA’s scope is limited to regulating property or services linked to foreign entities. The court found that immutable smart contracts do not qualify as such. It rejected the Treasury’s argument to categorize Tornado Cash as an “entity” under Office of Foreign Assets Control (OFAC) regulations. The court emphasized that legislative authority lies with Congress, not the Treasury.
Coinbase, a vocal supporter of open-source technology, backed the legal challenge against the sanctions. Paul Grewal, Coinbase’s Chief Legal Officer, hailed the decision, stating, “Blocking open-source technology entirely because some users misuse it is not what Congress authorized.”
Legal experts believe the ruling sets a significant precedent. Bill Hughes, a lawyer at ConsenSys, noted that the court’s decision requires removing Tornado Cash’s immutable smart contracts from the sanctions list. However, other elements of the Tornado Cash protocol may still face legal scrutiny.
In August 2022, the U.S. Treasury sanctioned Tornado Cash for allegedly enabling over $7 billion in illicit transactions by adding 44 smart contract addresses to the Specially Designated Nationals (SDN) list. This action prompted a lawsuit from six users, including two Coinbase employees. A Texas district court initially upheld the sanctions, but the Fifth Circuit later reversed the decision. Legal analysts believe the Supreme Court is unlikely to overturn this ruling, indicating a significant shift in the regulation of open-source technology within the crypto industry.
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