The U.S. Fifth Circuit Court ruled Tuesday that the Treasury overstepped by sanctioning Tornado Cash’s immutable smart contracts, stating the autonomous software cannot be classified as property.

The Fifth Circuit held that when smart contracts are immutable—meaning no entity can modify or control them—they cannot be classified as "property" subject to sanctions under existing law.

The decision reverses a lower court ruling and marks a significant win for privacy advocates and blockchain developers seeking clarity to build similar products, according to industry stalwarts.

Immutable smart contracts at the center of the case "are not property because they are not capable of being owned," noting that over 1,000 participants engaged in a "trusted setup ceremony" that permanently removed any ability to update or control the code, the court found.

As a result, these contracts remain accessible to anyone—including sanctioned North Korean entities—regardless of the Treasury's Office of Foreign Assets Control (OFAC) designation, 

"Mending a statute's blind spots or smoothing its disruptive effects falls outside our lane," the ruling, handed down by a panel of judges, reads. “We decline the Department's invitation to judicial lawmaking—revising Congress's handiwork under the guise of interpreting it. 

“Legislating is Congress's job—and Congress's alone."

Because protocols built on smart contracts operate without “human intervention,” they cannot be classified as services since services, by definition, require "an intangible commodity in the form of human effort, such as labor, skill, or advice," Tuesday's ruling states.

"No one wants criminals to use crypto protocols," Coinbase's Chief Legal Officer Paul Grewal wrote in a post to X on Tuesday. "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," Grewal added.

The U.S. Treasury sanctioned Tornado Cash in August 2022 for allegedly facilitating over $7 billion in illicit transactions, including funds tied to North Korea's Lazarus Group.

In August 2023, two developers, Roman Storm, and Roman Semenov, were charged with money laundering and sanctions violations. In May 2024, Alexey Pertsev, another developer, was convicted and sentenced to 64 months in prison for laundering $1.2 billion.

In September 2023, Joseph Van Loon and other plaintiffs appealed, challenging the U.S. Department of the Treasury's Office of Foreign Assets Control sanctions against Tornado Cash.

The plaintiffs argued that OFAC exceeded its authority under the International Emergency Economic Powers Act (IEEPA) by designating Tornado Cash's immutable smart contracts as "property" subject to sanctions. The appeal followed a district court ruling that upheld OFAC's actions.

While the appeals court ruled Tuesday that Tornado Cash's immutable smart contracts cannot be classified as a sanctioned entity, its broader designation and blocked status remain intact.

The case will now be returned to the district court "with the idea that it has to decide the merits again while applying the law as the Fifth Circuit now says it applies," Bill Hughes, a ConsenSys lawyer, wrote in a post to X on Tuesday.

However, the ruling only specifies self-executing code that could operate without any administrative control, which means some parts of Tornado Cash or other protocols forked from its codebase could still face sanctions.

Edited by Sebastian Sinclair