The following is a guest article by Matthew Niemerg, co-founder of Aleph Zero.
The Fifth Circuit Court of Appeals yesterday issued a landmark ruling that could fundamentally change the way crypto protocols are regulated. in Van Loon v. Treasurythe court found that the Treasury Department's Office of Foreign Assets Control (OFAC) overstepped its authority when it sanctioned Tornado Cash's immutable smart contract.
The decision hinges on a seemingly simple question: Can computer code that cannot be changed or controlled be considered “property”? The Court of Appeal's answer was a resounding no.
Tornado Cash is a cryptocurrency anonymization service that helps protect your privacy by pooling your digital assets and making transactions difficult to trace. OFAC in 2022 authorized The document was released after North Korean hackers allegedly used it to launder more than $455 million in stolen funds. However, the court ruled that Tornado Cash's core protocols are “immutable,” meaning they cannot be changed or controlled by anyone, and therefore do not qualify as sanctionable property under current law.
A turning point for virtual currencies
Judge Don Willett said, “These immutable smart contracts cannot be modified or deleted, so they remain available for anyone to use,'' and that even under sanctions, “the targeted North Korean “This does not prevent criminals from actually recovering their assets.”
This is a watershed moment for the cryptocurrency industry. For the first time, a federal appeals court has recognized that certain decentralized protocols function as something entirely different from traditional property or business. Because no one “owns” the underlying protocols of email or the web, these autonomous smart contracts exist independently of any controlling entity.
The impact is significant. This ruling effectively creates a safe haven for truly decentralized protocols that cannot be changed or controlled. OFAC can still sanction individuals and companies, but it cannot sanction the underlying code itself, at least under current law.
Balance privacy and security
However, the court clearly left the door open for Congress to update the International Emergency Economic Powers Act of 1977 (IEEPA) to accommodate modern technology. “Congress will likely update IEEPA, enacted during the Carter Administration, to cover emerging technologies such as cryptocurrency blending software,” the ruling states. “Until then, we believe that Tornado Cash’s immutable smart contracts cannot be blocked under IEEPA.”
This highlights the broader challenge of regulating privacy-preserving technologies that can be used for both legitimate and illegitimate purposes. Tornado Cash was used by individuals seeking to protect their privacy and avoid harassment when donating to the war effort in Ukraine, court records show. However, it has also been misused by malicious actors for money laundering.
The cryptocurrency industry still has work to do to prevent unauthorized use while protecting privacy rights. Some of the approaches that have been proposed include allowing users to voluntarily prove the legitimacy of their funds, and creating an “anonymous” system that allows users to be unmasked only under certain circumstances and with appropriate supervision. This includes implementing a “gender cancellation” system.
way forward
Judge Willett acknowledged that the government's concerns about illicit funds were “undoubtedly legitimate”. But he stressed that courts must apply the law as written, rather than “tinkering with it.” The judgment concludes:
“It is beyond our realm to repair the statute’s blind spots or mitigate its destructive effects.”
This balanced approach, which recognizes both the importance of preventing criminal activity and the need to protect privacy-enhancing innovations, provides the way forward. Rather than trying to force new technology into old regulatory frameworks, legislators create modern laws that understand the unique nature of decentralized systems while addressing legitimate security concerns. There is a need.
But for now, the ruling represents a victory for technological innovation and a recognition that not everything in the digital age fits neatly into traditional legal categories of property and ownership. The challenge ahead is to create regulatory frameworks that are as sophisticated as the technologies they regulate.
