The Fifth Circuit Court has ruled that the U.S. Treasury’s sanctions against Tornado Cash smart contracts are unlawful, marking a pivotal victory for cryptocurrency privacy and open-source technology advocates. Paul Grewal, chief legal officer at crypto exchange Coinbase (Nasdaq: COIN), hailed the decision as a landmark win for liberty and innovation. He shared on social media platform X this week:

Privacy wins. Today the Fifth Circuit held that U.S. Treasury’s sanctions against Tornado Cash smart contracts are unlawful. This is a historic win for crypto and all who cares about defending liberty. Coinbase is proud to have helped lead this important challenge.

“These smart contracts must now be removed from the sanctions list and US persons will once again be allowed to use this privacy-protecting protocol. Put another way, the government’s overreach will not stand,” he added.

In August 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash, a cryptocurrency mixer, alleging its involvement in laundering over $7 billion in virtual currency since its inception in 2019. This included approximately $455 million stolen by the North Korean-linked Lazarus Group. The sanctions prohibited U.S. persons from engaging with Tornado Cash and aimed to curb its use in illicit activities. The U.S. Fifth Circuit Court of Appeals overturned these sanctions, ruling that the Treasury had overstepped its authority, as Tornado Cash’s immutable smart contracts do not constitute “property” under federal law.

The Coinbase legal chief explained:

In particular, the court ruled that while Treasury has the power to take action against ‘property,’ the open-source, immutable smart contracts at the core of Tornado Cash can’t be owned by anyone and so are not ‘property’ subject to sanctions.

Grewal emphasized the broader implications of the ruling for crypto regulation and innovation, advocating against sweeping measures that hinder technological progress. “No one wants criminals to use crypto protocols, but blocking open source technology entirely because a small portion of users are bad actors is not what Congress authorized. These sanctions stretched Treasury’s authority beyond recognition, and the Fifth Circuit agreed,” he said.

Coinbase, which played a critical role in challenging the sanctions, reaffirmed its commitment to fighting for fair and clear regulations that protect privacy and foster innovation. This decision not only underscores the limits of governmental authority but also strengthens the foundation for a secure and open crypto ecosystem.

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