US Appeals Court Reverses Tornado Cash Sanctions

A U.S. federal appeals court ruled U.S. Department of Treasury exceeded its authority by sanctioning Tornado Cash, a cryptocurrency mixing service used by North Korean hackers to launder more than $455 million.

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The decision issued by a unanimous three-judge panel of the U.S. Court of Appeals for the Fifth Circuit sided with six Tornado Cash users who argued the software’s privacy-focused code does not constitute “property” subject to sanctions under the International Emergency Economic Powers Act. The decision overturns a 2023 lower court ruling and grants Tornado Cash users a partial summary judgment.

Circuit Judge Don Willett wrote that the immutable smart contract the cryptocurrency uses to mix currency are not property. “They are not capable of being owned,” he said – and sanctions authority applies to property.

“In fact, because these immutable smart contracts are unchangeable and unremovable, they remain available for anyone to use and ‘the targeted North Korean wrongdoers are not actually blocked from retrieving their assets,’ even under the sanctions regime,” he wrote.

Willett acknowledged concerns about foreign entities laundering funds through Tornado Cash but said that federal law only permits action against property tied to foreign nationals. Congress might need to update the 1970s-era Carter Administration law to address modern tools such as cryptocurrency mixers, he said. Until then, Tornado Cash’s immutable smart contracts do not meet the legal definition of property belonging to foreign nationals.

The news had an immediate impact on Tornado Cash’s token TORN, which surged over 900% to hit a two-year high of $40.

Treasury sanctioned Tornado Cash in 2022 for facilitating the laundering of over $7 billion in virtual currency since its inception, including funds stolen by North Korean hackers. Following the sanctions, monthly deposits to Tornado Cash plummeted by about 85%, but there has been a resurgance since, with users depositing more than $1.8 billion in the first half of this year.

The ruling was celebrated as a victory for the crypto industry. Coinbase Chief Legal Officer Paul Grewal praised the judgment, declaring, “Privacy wins.” He argued that targeting open-source technology because of its misuse by some users stretched Treasury’s authority beyond its limits. “No one wants criminals to exploit crypto protocols, but blocking open-source technology entirely because of a small number of bad actors goes beyond what Congress authorized,” he said. The appeal was funded and organized in part by Coinbase Global, Inc.

Critics echoing that sentiment included Vivek Ramaswamy, a member of the incoming Donald Trump administration, who reportedly said that penalizing an entire protocol was “illegal and unconstitutional.”

Dutch authorities sentenced in May Tornado developer Alexey Pertsev to five years and four months in prison for helping launder more than $2 billion – a sentencing he said last week he would be planning to appeal. The U.S. Department of Justice charged two others last year. Roman Storm awaits trial while Roman Semenov is wanted by the FBI.

Although the ruling is a victory for Tornado Cash users, legal experts caution that the decision does not necessarily shield all aspects of the platform from Treasury oversight. Bill Hughes, a lawyer at Consensys, said the Supreme Court would likely uphold the Fifth Circuit but noted that the appeals court decision “applies only to the smart contracts without administrative keys.”