Fifth Circuit Rules Treasury Overstepped Authority in Cryptocurrency Case
Commentary by Gage Raju-Salicki
The US Court of Appeals for the Fifth Circuit ruled that the Treasury Department's Office of Foreign Assets Control ("OFAC") improperly sanctioned Tornado Cash, "an open-source, crypto- transaction software protocol that facilitates anonymous transactions by obfuscating the origins and destinations of digital asset transfers."
OFAC claimed that the software was being used to launder stolen funds, including by North Korean hackers. OFAC targeted Tornado Cash's "smart contracts"—computer programs that run automatically on a blockchain network—arguing they were "property" under US law and could be blocked under the International Emergency Economic Powers Act ("IEEPA"). The Fifth Circuit rejected the argument, concluding that these smart contracts operate on their own and cannot be owned or controlled by anyone.
The Court found that the smart contracts were:
- Not "Property," explaining that the law defines property as something that can be owned or controlled, and that Tornado Cash's smart contracts are unchangeable and self-executing, meaning no one can modify or possess them.
-
Not "Contracts," reasoning that although "smart contracts" were at issue, these smart contracts are not unilateral offers because of their immutability and the inability of Tornado Cash to "control or own [the] smart contracts."
- Not a "Service," saying that while the software can anonymize transactions, it is not a service provided by a person or organization—it is simply code running independently.
As a result, the Fifth Circuit held that Tornado Cash's immutable smart contracts cannot be blocked under IEEPA.
The Fifth Circuit noted that its decision was informed by the Supreme Court's recent ruling in Loper Bright v. Raimondo, which overruled the Chevron doctrine of deference to administrative agency interpretations. Under Loper Bright, courts must independently interpret statutory language without deferring to agency discretion. Applying this principle, the Fifth Circuit emphasized that OFAC's interpretation of "property" was not supported by the statutory text of IEEPA.
The Court also found that OFAC overstepped its congressionally defined authority. The Court acknowledged concerns about misuse of new technological tools but made it clear that expanding the law to cover them is Congress's responsibility, not Treasury's.
The Fifth Circuit remanded the case to the District Court with instructions to grant the Plaintiffs' Motion for Partial Summary Judgment.
Commentary
The Fifth Circuit held that Tornado Cash, a cryptocurrency mixer operated through "immutable smart contracts," is not "ownable," nor is it a set of "contracts" or "services" under the OFAC's definition of "property." In the ruling, the Fifth Circuit provided a clear explanation of blockchain technology and smart contracts, evincing a deep understanding of the underlying technology. This depth of understanding not only informs the opinion, but underscores the need for lawyers to thoroughly familiarize themselves with blockchain as a novel technology. Absent such an understanding, this case might have had a different result.
The Fifth Circuit reasoned that the International Emergency Economic Powers Act "grants the President broad powers to regulate a variety of economic transactions, but its language is not limitless." OFAC's definitional regulation for the word "property" is now recognized as one such limit with respect to immutable smart contracts. As the Court said, immutable smart contracts like these are not "owned" by anyone—they are just software. In this regard, SEC Commissioner Hester Peirce was prescient in her remarks on the SEC's final dealer rule, when asking "[h]ow can a software protocol register as a dealer?" Here, the case is not that Tornado Cash is a "dealer" under securities law, of course, but the principle nevertheless rings true: how can immutable software be owned in any meaningful way?
The Fifth Circuit's ruling is a landmark victory for crypto, protecting developers who seek only to create software.