Legal Insights
Reading Time: 4 min.
On November 26, 2024, the U.S. Court of Appeals for the Fifth Circuit reversed the district court’s decision regarding the Office of Foreign Assets Control’s (OFAC) designation of Tornado Cash.
In 2022, OFAC had added 53 Ethereum addresses associated with Tornado Cash protocol to its Specially Designated Nationals (SDN) list, effectively prohibiting U.S. persons from engaging in transactions with these addresses. This action was based on the assertion that Tornado Cash, organized under its Decentralized Autonomous Organization (DAO), facilitated transactions involving the North Korean Lazarus Group, which was already on the SDN list.
Six users of Tornado Cash challenged OFAC’s designation, arguing that:
- Tornado Cash is neither a foreign “national” nor a “person” as defined under the International Emergency Economic Powers Act (IEEPA).
- The immutable pool smart contracts are not “property” subject to OFAC’s authority.
- Tornado Cash does not have a property “interest” in these immutable smart contracts.
The district court had previously ruled in favor of OFAC, determining that Tornado Cash could be designated as a person under IEEPA, that smart contracts constitute property, and that the DAO has an interest in these contracts due to profits derived from its services.
Upon appeal, the Fifth Circuit found that the immutable smart contracts are not property because they cannot be owned or controlled. These contracts were designed to operate autonomously, without the possibility of modification or removal, allowing anyone to use them without restriction. The court noted that, despite OFAC’s sanctions, the smart contracts continue to function, and even sanctioned entities like the Lazarus Group could still access them.
The court also rejected the notion that these immutable smart contracts constitute services, emphasizing their autonomous and unalterable nature. Consequently, the court concluded that OFAC exceeded its authority by designating Tornado Cash’s immutable smart contracts as property subject to sanctions.
This ruling emerges against the backdrop of heightened legal scrutiny surrounding Tornado Cash. Last year, two of its founders faced charges from the U.S. Department of Justice: Roman Storm is awaiting trial, while Roman Semenov remains listed as wanted by the FBI.
Despite these ongoing challenges, the Fifth Circuit’s decision is hailed as a major victory for privacy advocates and blockchain technology supporters. By establishing clear limits to regulatory overreach, the judgment acknowledges the unique characteristics of decentralized systems.
In light of the recent elections, it also marks a fresh start for the DeFI industry in the United States, sparking hope that the era of prolonged hostility toward cryptocurrency may finally be drawing to a close.
Get the latest exclusive insights on crypto regulations, case studies, and legal strategies for Web3 & Crypto entrepreneurs →