Curbing the Treasury Department's Overreach on Cryptocurrency Mixer Tornado Cash

This past Thanksgiving, cryptocurrency enthusiasts had plenty to be grateful for, thanks to a landmark ruling by the Fifth Circuit. A unanimous three-judge panel determined that the Treasury Department's Office of Foreign Assets Control (OFAC) had overstepped its authority by sanctioning Tornado Cash's open-source software, rather than targeting the individuals and entities that misuse it. In essence, the court found that Congress did not grant OFAC the power to sanction software code that belongs to no one. To understand the context, Tornado Cash is a cryptocurrency mixer that makes it more difficult to track transactions. While the service has legitimate uses, it has also been exploited by cybercriminals and hostile state actors. As a result, OFAC added numerous Tornado Cash addresses to its list of blocked persons. However, the court ruled that OFAC only has the authority to sanction the property of specific individuals, and that the immutable smart contracts in question do not constitute property. The court's decision, written by Judge Don Willett, emphasized that the smart contracts cannot be owned and therefore do not meet the definition of property. The ruling also addressed the broader implications for cryptocurrency and smart contracts. The court clarified that the immutable smart contracts are not, in fact, contracts, as they lack the necessary two-party agreement. Instead, they are simply software code. Furthermore, the court distinguished between the smart contracts and services, stating that the former are merely tools used to perform a service, rather than the service itself. Ultimately, the court's decision serves as a reminder of the importance of upholding the rule of law and respecting the boundaries of congressional authority. While the government may choose to appeal the decision, the ruling marks a significant victory for the cryptocurrency community and highlights the need for clear and effective regulation in this rapidly evolving field.