Court Overturns Tornado Cash Sanctions, Raising New Questions About Crypto Regulation

A U.S. federal appeals court has overturned Treasury Department sanctions on Tornado Cash, a crypto-mixing platform that uses decentralized smart contracts to anonymize transactions.

The Fifth Circuit Court of Appeals ruled that the Treasury’s Office of Foreign Assets Control (OFAC) overstepped its authority under the International Emergency Economic Powers Act (IEEPA). The court determined that Tornado Cash’s immutable smart contracts, which function autonomously on the Ethereum blockchain, do not qualify as “property” since they cannot be owned or controlled.

The decision marks a major victory for advocates of privacy and decentralized technology while reigniting debates over how to regulate blockchain tools used in illicit activities. Coinbase, which had challenged the sanctions, hailed the ruling as a step toward protecting privacy and innovation. Critics, however, warn that it could embolden bad actors exploiting such technologies.

Despite the ruling, some lawmakers and regulators have expressed concern over the broader implications for crypto-mixing services and the potential for increased misuse by criminal groups.

While the court’s decision shields Tornado Cash’s smart contracts, its founders still face legal challenges, including allegations of enabling money laundering. The ruling highlights the ongoing challenge of crafting regulations that balance innovation with the need to combat misuse. As decentralized technologies continue to evolve, lawmakers face the complex task of determining how to regulate them without stifling privacy rights or innovation.