Crypto Contracts Not Property

The International Trade and National Security group of Morgan Lewis brings to our attention the following:

The Fifth Circuit Court of Appeals ruled that immutable smart contracts on Tornado Cash, a cryptocurrency transaction protocol, are not “property” under the jurisdiction of the Office of Foreign Assets Control (OFAC).

This decision restricts OFAC’s ability to sanction Tornado Cash based on such contracts. The court relied on the Supreme Court’s Loper Bright Enterprises v. Raimondo decision, emphasizing that immutable smart contracts lack traditional characteristics of property, such as ownership and control.

Key points of their article [Link]  include:

1.Nature of Immutable Smart Contracts: The court determined that immutable contracts cannot be owned or controlled, and their functionality remains unaffected by OFAC’s sanctions. This undermines OFAC’s designation of Tornado Cash as a sanctionable entity.

2.Legal Interpretation: The ruling reflects stricter limits on OFAC’s authority under the International Emergency Economic Powers Act (IEEPA). It highlighted that legislative action, not judicial interpretation, is required to address regulatory gaps for emerging technologies.

3.Impact on Technology Regulation: The decision illustrates challenges in applying existing laws to rapidly evolving technologies like blockchain. It underscores the need for legislative updates to address these gaps.

The decision primarily affects immutable contracts but leaves open questions regarding mutable contracts and whether platforms like Tornado Cash qualify as sanctionable entities. The ruling, while significant, may be subject to appeal or legislative action.

Van Loon v. Department of the Treasury : No. 23-50669, (5th Cir., 2024)