Appeals court reverses sanctions against Tornado Cash

A federal appellate court ruled that privacy tools built on the Ethereum blockchain, known as Tornado Cash, cannot be subject to the sanctions imposed by the Treasury Department.

Why it matters: The ruling advances cryptocurrency law by finding that certain kinds of smart contracts are not property.

• It's also another instance where the Supreme Court's ruling in the Chevron case led to a lower court declining to defer to the judgement of a Federal agency.

How it works: Tornado Cash is a network of smart contracts that allow users who need privacy to break the chain of public transactions, so that their use of a set of funds in one instance cannot be linked to another.

• It is impossible to stop a smart contract like Tornado Cash without shutting down the entire Ethereum blockchain, which would be nearly impossible.
• The software continues to be used, though not nearly as widely as it once was.

What they're saying: The crucial issue in the court's opinion hinged on whether or not the smart contracts that make up Tornado Cash can be considered property.

• "The immutable smart contracts at issue in this appeal are not property because they are not capable of being owned," Judge Don R. Willett wrote.
• The court found the contracts aren't property because no one can control or change the application's code any longer. In fact, the creators took pains to make sure of that.

Flashback: The Treasury Department first drew the public's attention to Tornado Cash in April 2022, after attributing a $600+ million theft of crypto assets to a cybercriminal group linked to North Korea.

• In August 2022, Treasury's Office of Foreign Assets Control sanctioned all the addresses associated with Tornado Cash, forbidding Americans from using it in any way.

• In September 2022, blockchain users sued Treasury for overstepping its authority.
• They lost in the District Court, but today's decision reverses that.

Friction point: One of the app's developers has been convicted of money laundering in The Netherlands. He's currently in prison.

• Two others were charged by the U.S. Department of Justice last year. Roman Storm awaits trial. Roman Semenov is listed as wanted by the FBI.

The big picture: "We readily recognize the real-world downsides of certain uncontrollable technology falling outside of OFAC's sanctioning authority," Willett writes, noting that the legal basis for the agency's action relies on law written before the internet existed.

• "Mending a statute's blind spots or smoothing its disruptive effects falls outside our lane. We decline the Department's invitation to judicial lawmaking."