The Fifth Circuit Court of Appeals Ruling on Cryptocurrency Protocols
The Fifth Circuit Court of Appeals recently made a landmark ruling that could have a significant impact on the regulation of cryptocurrency protocols. In Van Loon v. Department of Treasury, the court found that the Treasury Department’s Office of Foreign Assets Control (OFAC) exceeded its authority when it sanctioned Tornado Cash’s immutable smart contracts.
The Issue of Property in Computer Code
The central question in this ruling is whether computer code that is immutable and cannot be modified or controlled can be considered “property.” The appellate court determined that it cannot.
- Tornado Cash is a cryptocurrency anonymizing service that pools users’ digital assets to enhance privacy.
- OFAC sanctioned Tornado Cash in 2022 for alleged money laundering by North Korean hackers.
- The court ruled that Tornado Cash’s immutable protocols do not qualify as property that can be sanctioned.
A Turning Point for the Crypto Industry
This ruling marks a significant moment for the cryptocurrency industry. The court recognized that decentralized protocols like Tornado Cash operate differently from traditional property or businesses.
Implications of the Ruling
- Decentralized protocols that cannot be modified or controlled now have a safe harbor.
- OFAC can sanction individuals and companies but not the underlying code of decentralized protocols.
Striking a Balance Between Privacy and Security
The court suggested that Congress may need to update existing laws to address modern technologies like crypto-mixing software. Finding a balance between privacy and security remains a challenge for the industry.
Proposed Solutions
- Voluntary proof of fund legitimacy for users.
- Implementation of “anonymity revoking” systems with proper oversight.
Looking Ahead
The ruling emphasizes the need for updated laws that can effectively regulate decentralized systems while addressing security concerns. It is a win for technological innovation and a recognition that new regulatory frameworks are needed in the digital age.
