In a landmark case, the U.S. Court of Appeals has condemned as illegal the U.S. Treasury Department’s sanctions on the smart contracts of cryptocurrency mixer Tornado Cash. As declared by Paul Grewal, the Chief Legal Officer at cryptocurrency exchange Coinbase—the company who provided financing for the lawsuit brought by six users—this verdict represents a major win for both crypto and individual liberty.
Tornado Cash is an open-source program operating on the Ethereum blockchain, enhancing the privacy of crypto transactions. Users of this software can deposit cryptocurrency into a shared pool from one wallet and then retrieve it with a different wallet, facilitating anonymous transactions and asset protection. However, it has been charged by U.S. and Dutch authorities of being exploited extensively to camouflage illegally-sourced funds, including those stemming from cryptocurrency thefts.
When this issue was raised by Coinbase’s team two years prior, they contended that penalizing open-source software is akin to closing down a highway due to its misuse by bank robbers. They argued that it’s an erroneous measure as it unduly punishes innocent users and consequently curtails privacy and security for all. They asserted that law-abiding citizens possess the right to privacy, particularly in matters relating to their financial concerns.
The law court declared that the smart contracts of Tornado Cash, which are coded to ensure transaction privacy, cannot be deemed as “property” belonging to a foreign individual or entity. As a result, they don’t fall under the purview of the International Emergency Economic Powers Act (IEEPA), and thus, the Treasury Department overstepped its authority by enforcing sanctions under this law, since it only pertains to properties.
With this decision, the Treasury would now need to remove these smart contracts from the sanctions list, which would allow American citizens to use the privacy enhancing protocol once again, as explained by Grewal. Lawyer Bill Hughes further clarified that the ruling does not imply that Tornado Cash has got blanket immunity from investigations. “The case specifically addressed smart contracts without an admin key,” he noted. In an earlier episode this year, a developer of Tornado Cash faced a prison sentence of five years and four months by the District Court of East Brabant.