An appeals court in the United States has overturned the Treasury Department’s sanctions on the controversial crypto mixer Tornado Cash in what is considered a big win for the blockchain sector.

The Fifth Circuit’s Court of Appeals reviewed the 2022 case and concluded that the government exceeded its regulatory powers when the Office of Foreign Assets Control (OFAC) blocked all assets and properties within the United States that were associated with this crypto protocol and issued a prohibition to third parties to engage in dealings with this entity.

The Treasury Department alleged that Tornado Cash enabled criminal groups like the notorious hacking collective Lazarus Group to launder nearly $500 million through its service while also allowing other criminal organizations to launder as much as $7 billion.

“Despite public assurances otherwise, Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risks. Treasury will continue to aggressively pursue actions against mixers that launder virtual currency for criminals and those who assist them,” the Department emphasized back then.

Court Claims the Government Overstepped its Authority on This One

At the heart of the court’s ruling was an interpretation of the law that could dramatically challenge the government’s approach to regulating cryptocurrency technologies.

Circuit Judge Don Willett, writing for the three-judge panel, articulated a crucial distinction that has profound implications for the crypto industry: immutable smart contracts cannot be classified as “property” subject to sanctions.

The panel was explicit when he stated that the coding that enabled Tornado Cash to offer its crypto-mixing services was not a property under the control of a foreign entity. They emphasized that the government “overstepped” its Congressional authority in this case.

Also read: Russia Pushes to Embrace Cryptocurrencies to Circumvent Sanctions

Judge Willet acknowledged the concerns brought up by the Treasury Department in terms of how the protocol could be used by criminals to launder the proceeds from their activities and obfuscate the money trail to avoid authorities.

However, he stressed that it should be the US Congress, not a court of law, the institution in charge of updating the law, which dates back to the Carter administration in 1977, to “target modern technologies like crypto-mixing software.”

Crypto Execs Celebrate Tornado Cash’s Victory

Industry observers and crypto executives celebrated the ruling as it marked a victory for the blockchain sector and the defense of its core principles, which include anonymity to some extent.

The Chief Legal Officer of Coinbase, Paul Grewal, described it as a “historic win for crypto and all who care about defending liberty.”

“Blocking open source technology entirely because a small portion of users are bad actors is not what Congress authorized,” Grewal further stressed.

He emphasized that the court’s decision pushes back the government in its attempt to regulate the sector by enforcement rather than working with Congress to enact or amend existing laws that take into consideration the unique dynamics that blockchain technology brings to the table in the financial field.

Meanwhile, Hayden Adams, the founder of the decentralized exchange Uniswap Labs, also expressed his excitement claiming that “immutable smart contracts just beat the Treasury Department in court.”

His remarks reflect the broader opinion of the crypto sector that the government’s attempts to intervene in the sector have all been detrimental to its growth and advancement.

Crypto Mixers May Be Unethical But OFAC Can’t Sanction Them

This victory in court does not make crypto mixers any less controversial. These protocols allow individuals and organizations across the globe to execute thousands of transactions rapidly to conceal their identities and hide the money trail.

While these services can be used for legitimate privacy protection, they have also been exploited by criminal entities for money laundering and sanctions evasion.

It is worth noting that the court’s ruling does not absolve the individuals involved in the creation of the protocol from their criminal responsibility. The founders of Tornado Cash, Roman Storm and Roman Semenov, still face separate indictments for alleged money laundering activities.

Also read: Hackers Stole $20M in Crypto From the US Government

Additionally, one of the platform’s developers, Alexey Pertsev, was previously sentenced to over five years in prison in the Netherlands for money laundering as well.

Although the intended purpose of the crypto mixer remains questionable from an ethical standpoint, what the court’s ruling upheld is that Tornado Cash cannot be considered property as it is a smart contract – which is, in essence, a bunch of code.

The government has no legal basis to impose sanctions on code. Thus, it overstepped its Congress mandate with its 2022 prohibitions.

TORN Rises by Over 600% Shortly After the Court’s Ruling Became Public

The market responded immediately to the ruling. The native token of Tornado Cash, TORN, experienced a stunning surge of over 400%, jumping from $3.60 to around $27 per token shortly after the news came out.

tornado cash native token torn rises by 600% after court's ruling
TORN 7-day chart – Source: CoinMarketCap

This spike in the token’s volatility reflects the huge impact that the court’s ruling has on the protocol.

Moreover, the court’s decision to overturn OFAC’s sanctions on Tornado Cash is setting an important precedent that would prevent the government from taking similar action against other blockchain initiatives.

The federal government has thus far adopted a simplistic approach to regulate web3 technologies. The industry expects that this will change now that President-elect Donald Trump, a vocal supporter of the crypto space during his campaign, will push Congress to take action to update old laws that have fallen short to adequately regulate the sector.