Tornado Cash Sanctions Overturned: US Appeals Court Rules Against Treasury in Landmark DeFi Privacy Case

A federal appeals court has delivered a seismic ruling for the decentralized finance sector, overturning the US Treasury Department’s sanctions against Tornado Cash and establishing a precedent that immutable smart contracts cannot be treated as sanctionable property. The decision, handed down on November 26 and rippling through markets on November 27, represents the most significant legal victory for crypto privacy advocates in years.

TL;DR

• The US Court of Appeals for the Fifth Circuit rules that OFAC overstepped its authority by sanctioning Tornado Cash’s immutable smart contracts
• The court finds that immutable software code cannot be classified as “property” of a foreign entity under IEEPA
• Tornado Cash’s native token TORN surges over 500% in the hours following the ruling
• Coinbase chief legal officer Paul Grewal calls it a “historic win for crypto”
• The ruling does not absolve individuals who used Tornado Cash for criminal purposes

The Court’s Reasoning

The three-judge panel of the Fifth Circuit Court of Appeals ruled unanimously that the Treasury Department’s Office of Foreign Assets Control (OFAC) exceeded its congressionally defined authority when it added Tornado Cash to the Specially Designated Nationals list in August 2022. The core of the court’s argument centers on a critical distinction: Tornado Cash’s immutable smart contracts — the lines of privacy-enabling software code deployed on the Ethereum blockchain — are not the “property” of any foreign national or entity.

“Tornado Cash’s immutable smart contracts are not the ‘property’ of a foreign national or entity,” the ruling states, meaning they cannot be blocked under the International Emergency Economic Powers Act (IEEPA). The court concluded that OFAC “overstepped its congressionally defined authority” when it sanctioned the protocol. The judges acknowledged the real-world implications of their decision but emphasized that it is Congress, not the executive branch, that must adapt the law to address new technological realities.

“We readily recognize the real-world downsides of certain uncontrollable technology falling outside of OFAC’s sanctioning authority,” the judges wrote. “But we must uphold the statutory bargain struck by Congress, not tinker with it.”

Background: From Sanctions to Landmark Ruling

OFAC first sanctioned Tornado Cash in August 2022, alleging that the Ethereum-based privacy protocol had been used to launder more than $7 billion worth of cryptocurrency since its creation in 2019. The agency specifically cited North Korea’s Lazarus Group, which allegedly used the mixer to launder over $455 million stolen from crypto platforms including the Axie Infinity Ronin bridge hack.

The sanctions effectively made it illegal for US persons to interact with Tornado Cash, and most major centralized exchanges delisted or blocked access to the protocol. The legal challenge, backed by Coinbase and advocacy groups, argued that sanctioning open-source software code was fundamentally different from sanctioning a person or entity — and that the government’s approach threatened the broader principle of software freedom.

A district court had initially sided with the government in August 2023, but the Fifth Circuit’s reversal now sends the case back with instructions to remove Tornado Cash’s immutable smart contracts from the sanctions list.

Market Reacts: TORN Explodes

The crypto market’s response to the ruling was swift and dramatic. Tornado Cash’s native governance token, TORN, rocketed upward by over 500% in the hours following the decision, briefly trading above $20 before settling into a range. The token had been decimated since mid-2022, falling from above $30 to below $8 as the protocol faced sanctions, founder Alexey Pertsev’s arrest in the Netherlands, and delistings from major exchanges.

The ruling also injected fresh optimism into the broader DeFi sector, particularly among privacy-focused protocols and decentralized applications that had been operating under the shadow of potential regulatory action. The decision provides at least a temporary legal framework suggesting that immutable, open-source code deployed on public blockchains enjoys a degree of protection from executive-branch sanctions.

Industry Leaders Celebrate

Paul Grewal, chief legal officer of Coinbase, celebrated the ruling in a post on X, calling it a “historic win for crypto and all who care about defending liberty.” Grewal emphasized that the smart contracts must now be removed from the sanctions list and that US persons will once again be allowed to use the privacy-protecting protocol.

“Put another way, the government’s overreach will not stand,” Grewal wrote. Coinbase had been a key financial and legal backer of the challenge against the Treasury Department’s sanctions, viewing the case as a bellwether for the broader question of whether software code can be regulated as if it were a person or business entity.

What This Does Not Mean

While the ruling is a significant victory for crypto privacy advocates, it is important to understand its limits. The decision specifically addresses the sanctioning of immutable smart contracts — it does not shield individuals who use Tornado Cash for criminal purposes from prosecution. The US Department of Justice can still pursue money laundering charges against individuals, and the developers of Tornado Cash who face criminal proceedings are not directly affected by this civil ruling.

Furthermore, the ruling applies to immutable smart contracts specifically. Protocol components that are controlled or upgradable by identifiable parties may still be subject to sanctions under different legal reasoning. The Treasury Department also retains the option to appeal the decision to the Supreme Court or to seek new legislation from Congress that would explicitly grant OFAC the authority to sanction software code.

Implications for DeFi

The ruling has far-reaching implications for the DeFi ecosystem. For months, protocol developers and DeFi platforms have operated under uncertainty about whether their smart contracts could be sanctioned by OFAC simply because criminals used them. The Fifth Circuit’s decision provides a measure of clarity: at least in the Fifth Circuit’s jurisdiction, which covers Texas, Louisiana, and Mississippi, immutable smart contracts deployed on public blockchains cannot be treated as sanctionable property.

This clarity could accelerate development of privacy-preserving DeFi protocols and encourage greater institutional participation in the decentralized finance ecosystem. However, legal experts caution that the regulatory landscape remains complex and that this ruling is likely just one chapter in an ongoing legal saga that could eventually reach the Supreme Court.

Why This Matters

The Tornado Cash ruling represents a watershed moment in the relationship between decentralized technology and government regulation. By establishing that immutable smart contracts are not property subject to sanctions, the court has drawn a line that protects the fundamental principle of open-source software development while still allowing law enforcement to pursue individual bad actors. For the DeFi sector, this decision removes one of the most significant legal overhangs and provides a clearer path forward for innovation in privacy-preserving financial technology.

Disclaimer: This article is for informational purposes only and does not constitute legal or financial advice. Cryptocurrency and DeFi investments carry significant risk. Always conduct your own research and consult qualified professionals before making investment decisions.