On Tuesday, a significant victory for the cryptocurrency sector was announced as a federal appeals court overturned the US Treasury’s sanctions on the crypto mixer Tornado Cash. This decision signifies a pivotal moment in the ongoing debate surrounding the regulation of cryptographic technologies.
Court’s Ruling on Tornado Cash
The 5th US Circuit Court of Appeals in New Orleans ruled that privacy-enhancing tools like Tornado Cash, which operates on the Ethereum blockchain, are immune from sanctions imposed by the Treasury Department. The court determined that the government did not possess the necessary framework to categorize the underlying technology of Tornado Cash as a sanctioned entity, even though it had been misused by a North Korean hacking group to launder more than $455 million.
In a detailed resolution, the court emphasized that Tornado Cash’s immutable smart contracts should not be considered the property of any foreign person or entity. Judge Don Willett stated, “The immutable smart contracts at issue in this appeal are not property subject to sanction.” This ruling underscores a crucial precedent in how the government can engage with software that facilitates financial privacy.
Impact of the Decision
The ruling has had immediate effects on the crypto market, notably causing the governance token TORN to skyrocket by an astonishing 435%, trading at around $19.06 as of 11:00 PM ET on the same day. This surge indicates robust market confidence in the ongoing acceptance and utilization of privacy-centric technologies in the cryptocurrency space.
Government’s Authority Under Scrutiny
The court’s decision resolves a contentious debate about the extent of government authority to impose sanctions on technologies associated with illegal activities. This ruling overturns a prior decision from August that supported the government’s sanctions against Tornado Cash, which had become infamous for its role in facilitating illicit cryptocurrency transactions.
Judge Willett recognized the government’s valid concerns regarding money laundering but clarified that current federal law permits the Treasury to target tangible property, not abstract software solutions. He noted, “Perhaps Congress will update (the law), enacted during the Carter Administration, to target modern technologies like crypto-mixing software,” highlighting a potential for legislative evolution to keep pace with technological advancements.
Tornado Cash’s Journey Post-Sanctions
Following the sanctions imposed in 2022 by the US Treasury’s Office of Foreign Assets Control (OFAC), which condemned Tornado Cash for fostering anonymous transactions linked to illicit activities, the platform saw a drastic decline in usage. Reports indicated a staggering drop of over 90% in monthly deposits as the sanctions restricted the ability of US persons to engage with the service and resulted in the blacklisting of related Ethereum addresses.
However, 2024 marked a surprising resurgence for Tornado Cash. Despite facing various legal challenges and the arrest of one of its developers, Alexey Pertsev, there was a remarkable increase in activity. According to Blockchain analytics firm Flipside Crypto, the service processed over $1.8 billion in deposits in the first half of 2024, showcasing its resilience in the face of regulatory scrutiny.
A Historic Win for Crypto
Paul Grewal, the legal head of Coinbase, lauded the court’s ruling as a “historic win” for the cryptocurrency industry. He emphasized that this decision protects the rights of those who uphold principles of freedom and privacy in the evolving landscape of digital finance. As the legal frameworks surrounding cryptocurrency continue to unfold, this ruling represents a landmark moment for advocates of digital privacy and innovation.