Fifth Circuit Limits OFAC’s Authority Over Immutable Smart Contracts

In Joseph Van Loon et al. v. Department of the Treasury, the Fifth Circuit Court of Appeals ruled that “immutable” smart contracts are not “property” under the International Emergency Economic Powers Act (IEEPA).

The Bracewell firm notes that the November 26, 2024 decision invalidates a 2022 Biden administration executive order designating Tornado Cash, a decentralized cryptocurrency mixer, as a Specially Designated National under Executive Order (EO) 13694 and EO 13722.

The ruling marks a significant victory for decentralized finance advocates. It limits the regulatory reach of the Treasury’s Office of Foreign Assets Control (OFAC) and underscores a broader judicial trend of curtailing administrative agency authority.

The case arose from the Treasury Department’s 2022 designation of Tornado Cash under executive orders targeting malicious cyber activities and North Korean entities. The decision alleged that a hacker group connected to the North Korean government had used Tornado Cash to launder nearly $7 billion of cryptocurrency, including almost $560 million. 

Treasury sanctioned 53 Ethereum addresses linked to Tornado Cash, citing its use of immutable smart contracts to obscure the source of cryptocurrency transactions. The plaintiffs, US-based Tornado Cash users, argued that the immutable nature of these smart contracts rendered them non-sanctionable under IEEPA, as they were not “property” capable of ownership or exclusion.

The Fifth Circuit sided with the plaintiffs, rejecting the lower court’s ruling and OFAC’s interpretation of IEEPA. The court emphasized that immutable smart contracts, being unalterable and unknowable once deployed on the blockchain, do not meet the legal definition of “property.”

It further noted that such smart contracts are not true contracts under black-letter law, as they lack mutual agreement between parties. The decision invoked the Supreme Court’s recent curtailing of Chevron deference, signaling a stricter judicial review of agency actions.

The case illustrates the importance of statutory clarity and raises questions about the scope of sanctions authority in the context of immutable code. It highlights evolving challenges in regulating blockchain technology and other decentralized systems. Attorneys advising on compliance or blockchain innovation should closely monitor legislative and judicial developments.