On November 26, 2024, the United States Court of Appeals for the Fifth Circuit unanimously ruled that the Office of Foreign Assets Control (“OFAC”) had exceeded its statutory authority under the International Emergency Economic Powers Act (“IEEPA”) by placing Tornado Cash and its “immutable smart contracts” on the list of Specially Designated Nationals and Blocked Persons (“SDN”). The Van Loon v. Department of Treasury ruling held that immutable smart contracts are not “property” under the IEEPA and therefore are beyond OFAC’s ability to sanction. While this decision limits OFAC’s ability to regulate certain decentralized finance technologies using existing sanction laws, it leaves largely untouched the Department of Justice’s ability to investigate and prosecute such entities and individuals for sanctions violations via various theories of criminal liability, such as conspiracy. Thus, persons in this space must remain vigilant.

Background

In 2022, OFAC sanctioned Tornado Cash, a decentralized open-source software that functions as a crypto mixer to anonymize crypto asset transactions. OFAC claimed that over $7 billion in cryptocurrency had been laundered by bad actors using the software since its creation in 2019. As a result, Tornado Cash was designated as an SDN, and all property interests in the entity, including the digital currency addresses of the smart contracts, were blocked. 

Tornado Cash users sued the Department of Treasury alleging OFAC had exceeded its statutory authority under the IEEPA by doing so. As background, under the IEEPA, OFAC has the authority to block or prohibit transactions in “any property in which any foreign country or a nation thereof has any interest.” (Emphasis added.) The IEEPA does not define “property,” though it is key in determining whether OFAC may impose sanctions under the IEEPA.

Here, Tornado Cash users argued, among other things, that the immutable smart contracts were not “property” capable of being sanctioned under the IEEPA. That is because, as they explained, immutable smart contracts, once deployed on a decentralized blockchain, cannot be changed, removed, or controlled by anyone, including its developers. And once certain conditions are met, they automatically execute programmed tasks, like transferring cryptocurrency, and do not require any additional intervention to do so. The district court disagreed with the Tornado Cash users and deferred to OFAC’s interpretation, upholding the sanction. 

Court Decision

The Fifth Circuit reversed and remanded. It rested its decision primarily on the premise that immutable smart contracts are not “property” that can be blocked under the IEEPA. The court determined that “property” must be something that can be owned and controlled, but Tornado Cash’s immutable smart contracts operate autonomously and are not owned or controlled by anyone. Thus, the court concluded, OFAC had exceeded its authority by sanctioning immutable smart contracts created by Tornado Cash.

Van Loon is one of the first cases to review OFAC’s interpretation of the IEEPA following Loper Bright Enterprises v. Raimondo – a Supreme Court decision ending deference to certain agency interpretations. The court thus accorded no deference to OFAC’s construction of the term “property” under the IEEPA; rather, the court conducted a robust de novo interpretation based on the plain meaning of the statute. 

Implications

Van Loon is an important ruling that highlights a limit to OFAC’s ability to regulate decentralized finance technologies using existing sanction laws. However, Van Loon’s formal legal effect is narrow: the decision is binding only in the Fifth Circuit, it focuses solely on OFAC’s inability to sanction immutable contracts, and it is still subject to appeal by the Treasury Department.

Importantly, the decision does not remove the possibility of sanctions or criminal liability for entities or individuals who utilize cryptocurrency or mixers to circumvent sanctions or engage in money laundering, or conspire to do the same. For example, Roman Storm and Roman Semenov, the creators of Tornado Cash, were charged with conspiracy to commit money laundering by the Southern District of New York and remain sanctioned under Van Loon. A conspiracy theory avoids Van Loon’s “property” hurdle. Thus, Van Loon’s holding, while notable, may be limited in practice, necessitating continued vigilance with respect to compliance.

Finally, time will soon tell whether Van Loon’s interpretation of “property” will be reinforced or cast into doubt. Beyond the prospect of a government appeal in Van Loon itself, Coin Center v. Department of Treasury, a parallel case challenging OFAC’s Tornado Cash designation, is currently pending in the Eleventh Circuit. We will continue to monitor developments in this important space.