Silver digital crypto-currency coins standing on metal floor

The court ruled OFAC overstepped its authority in sanctioning Tornado Cash, holding that its smart contracts are not “property” under the governing statutes.

By Eric Volkman, Jenny Cieplak, Stephen P. Wink, and Deric Behar

On November 26, 2024, a three-judge panel of the US Court of Appeals for the Fifth Circuit reversed a Texas District Court decision and overturned the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctions designations against certain smart contracts associated with decentralized virtual currency “mixer”1 Tornado Cash.

OFAC added Tornado Cash to the Specially Designated Nationals (SDN) list on August 8, 2022, marking the first economic sanctions against a decentralized finance (DeFi) protocol (for more information, see this Latham blog post). OFAC stated that Tornado Cash had “indiscriminately” processed transactions and “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.” Importantly, OFAC sanctioned not only the Tornado Cash “entity,” but over 50 Ethereum addresses representing Tornado Cash smart contracts.

Six individual users of the platform sued Treasury under the Administrative Procedure Act (APA). The US District Court for the Western District of Texas granted summary judgment to Treasury on August 17, 2023, finding Tornado Cash subject to OFAC’s sanctioning authority. The plaintiffs appealed in September 2023, and the Fifth Circuit reversed the lower court, holding that OFAC’s action against the smart contracts were not conducted within the parameters of the governing statute, the International Emergency Economic Powers Act (IEEPA). Specifically, the Fifth Circuit held that “Tornado Cash’s immutable smart contracts (the lines of privacy-enabling software code) are not the “property” of a foreign national or entity, meaning (1) they cannot be blocked under IEEPA, and (2) OFAC overstepped its congressionally defined authority.”

Analysis

After engaging in an extended discussion of blockchain technologies, smart contracts, and the Tornado Cash platform, the Fifth Circuit explained the simple and straightforward reasoning underlying its holding.

Under the IEEPA, the US president (and by extension, executive agencies) may block “any property in which any foreign country or a national thereof has any interest by any person, or with respect to any property, subject to the jurisdiction of the United States.”2 In addition, the North Korea Sanctions and Policy Enhancement Act allows the president to designate any person engaging in certain prohibited activities with respect to North Korea, which then places them under the president’s IEEPA authority.

The statutes, however, do not define “property.” OFAC, through its sanctions regulations, has provided a definition of “property,” but the Fifth Circuit noted that in the wake of the US Supreme Court’s decision in Loper Bright v. Raimondo, it was required to independently “determine the best reading of a statute.”

With that framework in mind, the Fifth Circuit found that “property has a plain meaning: It is capable of being owned.” Applying that definition to the case, it held that the immutable Tornado Cash smart contracts are not capable of being owned because they operate without “the option for anyone to update, remove, or otherwise control [the] lines of code.”3 In fact, the court noted that even in the wake of OFAC’s sanctions, the Tornado Cash smart contracts continue to operate unimpeded for “anyone with an internet connection.”

According to the Fifth Circuit, even employing OFAC’s broader definition of property4 to include “contracts [and] services of any nature,” Tornado Cash immutable smart contracts are still not ownable; are not actually contracts5 (but are simply independent and autonomous software code); and are not services (but rather provide a service, or are a tool used in performing a service). On the services point, the court found it particularly relevant that Tornado Cash does not profit from the operation of the immutable smart contracts.

The court granted partial summary judgment in the appellant’s favor, indicating that its ruling on the property issue was dispositive. The court’s decision did not disturb the sanctions designation of Tornado Cash itself, as it declined to consider under the relevant statutes whether Tornado Cash qualifies as an “entity” capable of being sanctioned.

Conclusion

The digital asset industry generally applauded the Fifth Circuit’s ruling as a win for privacy over government intrusion generally, and for crypto and DeFi specifically, although the ruling could also further perceptions of crypto and DeFi as a means of engaging in illegitimate activity.

However, the win is only provisional and is limited in several important respects. As an initial matter, the smart contracts remain on OFAC’s sanctions list pending remand to the District Court and a possible OFAC appeal to the Supreme Court. A circuit split is also possible, as Coin Center is currently appealing a district court decision in OFAC’s favor to the Eleventh Circuit.

The Fifth Circuit ruling does not prevent OFAC from sanctioning other mixers, platforms, or mutable smart contracts that meet the definition of property as adopted by the court. As noted above, the ruling also does not implicate the sanctions on Tornado Cash itself. Nor does it directly affect the criminal cases that the Department of Justice brought against Tornado Cash’s founders.

Regardless, the ruling is a net positive for users of mixer services. It also could be one of several upcoming victories for the digital assets industry as a whole, as the president-elect and his choices for the administration have clearly indicated a more crypto-friendly stance.

  1. Mixers (or “blenders”) are centralized platforms or decentralized protocols (software that operates on the Ethereum blockchain) that specialize in masking the source and flow of digital assets via randomized and deliberately obfuscating transactions. They can therefore be an attractive resource for those seeking to maximize anonymity, launder stolen digital assets, or evade law enforcement. ↩︎
  2. 50 U.S.C. § 1702(a)(1)(B), available at https://www.law.cornell.edu/uscode/text/50/1702. ↩︎
  3. Practitioners of intellectual property law may be surprised by this part of the ruling given that software is subject to copyright, which is generally considered “intangible property” and certainly can be owned regardless of whether the software is subject to an open source license. ↩︎
  4. The court emphasized that it was not required to apply OFAC’s definition under Loper Bright. For a more detailed discussion of that case and its ramifications, see this Latham Client Alert. ↩︎
  5. According to the court, “contracts require “[a]n agreement between two or more parties.” Immutable smart contracts have only one party in play” [internal citation to Black’s Law Dictionary omitted]. ↩︎