By Nate Raymond (NS:RYMD)
(Reuters) - The U.S. Treasury Department acted outside its authority when it sanctioned cryptocurrency mixer Tornado Cash in 2022 and accused it of helping launder over $7 billion for North Korean hackers and other malicious cyber actors, a U.S. appeals court ruled.
A three-judge panel of the New Orleans-based 5th U.S. Circuit Court of Appeals on Tuesday sided with six users of Tornado Cash who with the financial backing of the cryptocurrency exchange Coinbase (NASDAQ:COIN) filed a lawsuit challenging the sanctions.
Cryptocurrency mixers are anonymized software tools that allow users to conceal the source or owner of digital assets. The sanctions had been imposed by the Treasury Department's Office of Foreign Assets Control pursuant to the International Emergency Economic Powers Act.
OFAC blacklisted Tornado Cash after concluding it was helping launder proceeds of cyber crimes, including more than $455 million stolen by the Lazarus Group, a North Korean government-backed hacking group.
Writing for a panel comprised of conservative judges, U.S. Circuit Judge Don Willett said federal law only gave OFAC the authority to regulate property, which Tornado Cash's immutable crypto-mixing smart contracts did not constitute.
Such self-executing smart contracts, or "mixers," provided increased anonymity by collecting, pooling and shuffling cryptocurrencies that were deposited by many users and could not be altered, removed or controlled, Willett said.
The judge, who was appointed by Republican President-elect Donald Trump during his first four-year term, said the design of that privacy-enabling software code rendered it incapable of being owned or deemed legally as property.
He acknowledged "the real-world downsides of certain uncontrollable technology falling outside of OFAC's sanctioning authority." But Willett said it was up to Congress to update the 1977 law for the internet age, not the court.
The Treasury Department did not respond to requests for comment.
Paul Grewal, the chief legal officer of Coinbase, in a post on X hailed the ruling as "a historic win for crypto and all who cares about defending liberty." Coinbase had argued that OFAC's decision to sanction an entire technology could stifle innovation and undermine privacy.
In May, one of Tornado Cash's developers, Alexey Pertsev, was sentenced to five years and four months in prison in the Netherlands for money laundering. Two Tornado Cash founders, Roman Semenov and Roman Storm, were separately charged last year with money laundering and sanctions violations by federal prosecutors in New York.