(Bloomberg) -- A federal appeals court ruled the US Treasury Department overstepped its authority by sanctioning cryptocurrency mixer Tornado Cash after a North Korea hacking group used the software to launder more than $455 million.
A three-judge panel of the 5th US Circuit Court of Appeals in New Orleans on Tuesday sided with six users of the crypto mixing service who argued the software Tornado Cash uses to conceal ownership of digital assets isn’t subject to sanction under US law, “as opposed to the rogue persons and entities who abuse it.”
Coinbase Global Inc., the biggest US cryptocurrency exchange, helped organize and fund the legal challenge, cautioning at the time that the move could hurt the crypto industry.
Circuit Judge Don Willett, writing for the panel, said the government’s concerns about foreign actors laundering funds through the software are “undeniably legitimate,” but federal law only gives the Treasury Department the authority to take action against property.
“Perhaps Congress will update (the law), enacted during the Carter Administration, to target modern technologies like crypto-mixing software,” Willett wrote. “Until then, we hold that Tornado Cash’s immutable smart contracts (the lines of privacy-enabling software code) are not the ‘property’ of a foreign national or entity, meaning they cannot be blocked.”
The price of TORN, the crypto mixer’s token, is up about 450% since the verdict, according to data from CoinGecko.
Laundering Billions
In 2022, the Treasury Department sanctioned Tornado Cash and said the mixer had been used to launder more than $7 billion of virtual currency since its creation — including $455 million stolen by North Korea-affiliated hacking group Lazarus.
In May, one of the developers of Tornado Cash, Alexey Pertsev, was sentenced to five years and four months in prison by Dutch authorities for helping launder more than $2 billion. He said in a social media post last week that he’s planning to appeal.
Monthly deposits to Tornado fell by more than 90% after the sanctions, but the software has experienced a resurgence in 2024. The protocol received more than $1.8 billion in deposits in the first half of 2024, according to blockchain analytics firm Flipside Crypto.
Paul Grewal, Coinbase’s chief legal officer, celebrated the ruling in social media posts, declaring: “Privacy wins.”
“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,” Grewal said in a post on X. “These sanctions stretched Treasury’s authority beyond recognition, and the Fifth Circuit agreed.”
The 5th Circuit decision reverses an opinion handed down by a federal judge in Texas in August 2023 upholding the government’s decision to sanction Tornado Cash. The case will now return to federal court in Austin for further proceedings.
The case is Joseph Van Loon v. Department of the Treasury, 23-50669, 5th US Circuit Court of Appeals.
--With assistance from Lydia Beyoud.
(Adds data on the price of TORN in sixth paragraph.)
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