A U.S. federal appeals court has issued a landmark decision that could reshape the cryptocurrency industry. The court ruled that the U.S. Treasury Department exceeded its authority by imposing sanctions on the cryptocurrency mixer Tornado Cash. These sanctions followed allegations that the North Korean hacking group Lazarus used the service to launder over $455 million. However, the judges concluded that software itself does not fall under the scope of sanctions laws.
The ruling, delivered by a three-judge panel of the 5th U.S. Circuit Court of Appeals in New Orleans, centered on arguments from six Tornado Cash users. They asserted that software cannot be punished as an entity, unlike individuals or organizations employing it for illicit purposes. Coinbase, the largest cryptocurrency exchange in the U.S., supported the plaintiffs, organizing and partially funding the lawsuit.
Judge Don Willett, writing for the panel, acknowledged that the government’s concerns about Tornado Cash being used for money laundering are “undeniably valid.” Nevertheless, he pointed out that the International Emergency Economic Powers Act (IEEPA), enacted during the Carter administration, limits the Treasury’s sanctions authority to property, not technology.
“Congress may eventually update this law to address modern technologies like cryptocurrency mixers,” Judge Willett stated. “Until then, we find that Tornado Cash’s immutable smart contracts do not constitute the property of foreign nationals or organizations and, therefore, cannot be sanctioned.”
Following the ruling, the price of Tornado Cash’s associated token, TORN, surged by 450%, according to CoinGecko data.
In 2022, the Treasury Department sanctioned Tornado Cash, claiming the platform had facilitated the laundering of over $7 billion in cryptocurrency since its inception. Of that amount, $455 million was allegedly tied to the North Korean Lazarus Group.
The fate of Tornado Cash developer Alexey Pertsev has taken a different turn. In May 2024, a Dutch court sentenced him to five years and four months in prison for his role in laundering over $2 billion. Pertsev has since announced his intention to appeal.
Despite sanctions, Tornado Cash began recovering activity earlier in 2024. While monthly deposits had plummeted by 90% in 2022, the protocol attracted over $1.8 billion in the first half of 2024, according to analytics firm Flipside Crypto.
Paul Grewal, Chief Legal Officer at Coinbase, praised the court’s decision, calling it a “victory for privacy.” In a statement, he argued that the sanctions overstepped the Treasury’s authority and that blocking open-source code due to misuse by a minority of users contradicts the law.
However, the case is far from resolved. The appellate decision overturns an August 2023 ruling by a Texas federal court that had upheld the sanctions. The matter will now return to the federal court in Austin for further proceedings.
