Immutable Code Is Not Property: Fifth Circuit Reverses Tornado Cash Sanctions Ruling
The United States Court of Appeals for the Fifth Circuit ruled that the Office of Foreign Assets Control ("OFAC") exceeded the authority granted by the International Emergency Economic Powers Act ("IEEPA") when it added the open-source software project Tornado Cash and its immutable, self-executing "smart contracts" to the list of Specially Designated Nationals and Blocked Persons ("SDN List").
On November 26, 2024, a unanimous three-judge panel of the Fifth Circuit Court of Appeals sided with users of Tornado Cash software—a crypto "mixer" used to anonymize crypto asset transactions—by holding in Van Loon, et al. v. Dep't of the Treasury, et al., No. 23-50669, that Tornado Cash's immutable smart contracts are not "property" for purposes of sanctions under IEEPA.
In late 2022, OFAC placed Tornado Cash on the SDN List. This designation prohibited dealings with "all real, personal, and other property and interests in property" that Tornado Cash may have, including, under OFAC's interpretation, the underlying smart contracts.
Six Tornado Cash users sued the Department of the Treasury, arguing that Tornado Cash smart contracts are beyond OFAC's reach because: (i) immutable smart contracts are not "property" under the IEEPA and (ii) Tornado Cash is incapable of being designated as an entity. Deferring to OFAC's interpretation, the district court held that the underlying smart contracts were "property," and Tornado Cash was an entity capable of being designated under the IEEPA.
Reaching only the first issue, the Fifth Circuit reversed and remanded the case to the lower court. Although it recognized OFAC's money-laundering concerns with mixing software, the court concluded that the plain meaning of the term "property" requires something "capable of being owned." The court found that the smart contracts at issue are "just software code" deployed by individuals without contractual counterparties. And because they are immutable and unilateral, the Fifth Circuit held that they are not controlled by anyone and cannot be "property" under the IEEPA.
This ruling is significant but likely not the final word on the matter. The Eleventh Circuit is set to rule on this issue in a case pending that also involves Tornado Cash. Further, Congress may decide that clarity in this area is important enough to update IEEPA, which was enacted during the Carter administration.
