Van Loon v. Treasury: Victory for Tornado Cash and Decentralized Finance
Case Summary: Van Loon et al. v. Department of the Treasury et al. (5th Cir. 2024)
Overview of Tornado Cash case
Tornado Cash is a decentralized, open-source cryptocurrency mixer designed to enhance the privacy of blockchain-based transactions. Operating on the Ethereum blockchain, Tornado Cash allows users to obscure the link between the sender and recipient of cryptocurrency transactions. This is achieved through the use of advanced cryptographic techniques and self-executing smart contracts.
Office of Foreign Assets Control (OFAC), pursuant to authority delegated to it under the International Emergency Economic Powers Act (IEEPA) designated Tornado Cash as a Specially Designated National (SDN) for its alleged use in laundering funds by entities such as North Korea’s Lazarus Group. Six plaintiffs, sponsored by large crypto companies, challenged the designation in federal court in the Western District of Texas, arguing, primarily, that OFAC had overstepped its authority in regulating Tornado Cash itself. The district court ruled in favor of OFAC, finding that Tornado Cash’s smart contracts constitute "property" under IEEPA and that the DAO (Decentralized Autonomous Organization) controlling Tornado Cash had an "interest" in the contracts. Specifically, district court granted the Department’s motion for summary judgment and denied that of the Tornado Cash users, concluding: (1) Tornado Cash is an “entity that may be properly designated as a person under IEEPA,” (2) that smart contracts constitute “property,” (3) and that the DAO, which runs Tornado Cash, has an “interest” in its smart contracts because it derives profits from its crypto mixing and relaying services that run on smart contracts
The plaintiffs appealed.
Just yesterday, the Fifth Circuit Court of Appeals reversed the district court’s grant of summary judgment to the Treasury Department. The Fifth Circuit Court of Appeals in Van Loon et al. v. Department of the Treasury et al. addressed whether the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) exceeded its statutory authority by sanctioning Tornado Cash, a decentralized, open-source crypto-mixing software, under the International Emergency Economic Powers Act (IEEPA). The Fifth Circuit ruled as follows:
Perhaps Congress will update IEEPA, enacted during the Carter Administration, to target modern technologies like crypto-mixing software. Until then, we hold 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.
Key Legal Issues and Analysis
1. Statutory Scope of “Property” under IEEPA
IEEPA authorizes a President to block “property” in which a foreign entity has an “interest.” Likewise, the North Korea Sanctions and Policy Enhancement Act permits the President to “designate . . . any person that [he] determines” is engaged in certain prohibited activities with respect to North Korea., and once a person is so designated, the President may “exercise all of the powers granted to [him] under the International Emergency Economic Powers Act” “to the extent necessary to block and prohibit all transactions in property and interests in property of [that] person.”
President Obama invoked these Acts in two relevant executive orders. First, he blocked the property and interests in property of those persons that Treasury determined “to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of” North Korea or other persons that materially supported it in its “continuing pursuit” of “nuclear and missile programs.” Second, President Obama blocked the property and interests in property of both (1) “any person” determined by the Department to be “responsible for,” or “directly or indirectly” “engaged” in certain cyber-enabled activities that threaten the United States’ national security, foreign policy, and economy, and (2) any person determined “to have materially assisted, sponsored, or provided financial, material, or technological support for” such activities.
Both orders conferred rulemaking authority on the Treasury Dept, which in turn, delegated authority to block persons under these orders to OFAC.
Given the scope of the orders, one of the key issues was whether Tornado Cash software, and specifically smart contracts, are “property” that can be sanctioned. Neither IEEPA nor OFAC regulations explicitly define “property,” so the 5th Circuit turned to its ordinary meaning and legal precedents.
Plaintiffs’ Arguments:
Immutable smart contracts are not property because they cannot be owned, controlled, or excluded from use.
The term "property" implies an ownership interest or rights to possess, exclude others, or dispose of the item in question. Tornado Cash’s immutable smart contracts, rendered autonomous by their coding, fall outside these criteria.
Court’s Analysis:
The court agreed with the plaintiffs, finding that “property” under IEEPA must be capable of ownership, control, or exclusion. Immutable smart contracts, by their design, are self-executing and cannot be altered or controlled, even by their creators.
The court emphasized that statutory terms must be interpreted using their plain meaning and referenced Blackstone’s conception of property as requiring the ability to exclude others.
Ruling:
The court held that immutable smart contracts are not “property” under IEEPA. OFAC’s designation, therefore, exceeded its statutory authority.
2. OFAC’s Regulatory Definitions and Chevron Deference
The court examined OFAC’s regulatory definition of “property,” which includes contracts, services, and intangible rights. Critically, the Court noted that Chevron deference to agency rulemaking no longer applied. Rather, post-Loper Bright Enterprises v. Raimondo, the Supreme Court eliminated the judicial deference previously afforded to agency interpretations under Chevron. Courts now independently interpret statutes without deference to agency definitions unless explicitly authorized by Congress.
Fifth Circuit’s Approach:
The court analyzed OFAC’s argument that immutable smart contracts could fall under its definition of "property" as “contracts of any nature whatsoever” or “services.”
Applying principles of statutory interpretation, the Court found that 31 CFR Section 510.323 examples of property (e.g., contracts, financial instruments) all shared the characteristic of being ownable, controllable, or excludable:
See 31 C.F.R. § 510.323 (“The terms property and property interest include money, checks, drafts, bullion, bank deposits, savings accounts, debts, indebtedness, obligations, notes, guarantees, debentures, stocks, bonds, coupons, any other financial instruments, bankers acceptances, mortgages, pledges, liens or other rights in the nature of security, warehouse receipts, bills of lading, trust receipts, bills of sale, any other evidences of title, ownership, or indebtedness, letters of credit and any documents relating to any rights or obligations thereunder, powers of attorney, goods, wares, merchandise, chattels, stocks on hand, ships, goods on ships, real estate mortgages, deeds of trust, vendors' sales agreements, land contracts, leaseholds, ground rents, real estate and any other interest therein, options, negotiable instruments, trade acceptances, royalties, book accounts, accounts payable, judgments, patents, trademarks or copyrights, insurance policies, safe deposit boxes and their contents, annuities, pooling agreements, services of any nature whatsoever, contracts of any nature whatsoever, and any other property, real, personal, or mixed, tangible or intangible, or interest or interests therein, present, future, or contingent.”).
An immutable smart contract, under this definition, was not property because the immutable smart contracts could not qualify as “property” because they lack any element of ownership or control.
3. Are Immutable Smart Contracts “Contracts” or “Services”?
Contracts:
The court rejected OFAC’s argument that immutable smart contracts are unilateral contracts. While mutable smart contracts could be seen as facilitating agreements between parties, immutable smart contracts operate independently of human intervention. There is no party capable of forming or fulfilling contractual obligations.
Services:
The court further rejected the characterization of smart contracts as “services.” Immutable smart contracts are akin to tools facilitating services, not services themselves. A "service" under OFAC’s definition implies human effort or labor, which immutable smart contracts lack.
Court’s conclusion:
The court ruled that immutable smart contracts are neither “contracts” nor “services,” further undermining OFAC’s position.
4. Tornado Cash’s Decentralized Autonomous Organization (DAO)
The court declined to fully analyze whether Tornado Cash’s DAO qualifies as a “person” or “entity” under IEEPA. However, it noted that the DAO’s governance capabilities do not extend to the immutable smart contracts, which remain autonomous and uncontrolled by the organization or its members.
Impact of the Van Loon Decision
This decision will have a significant impact on the law of “crypto” going forward.
First, the Fifth Circuit’s decision underscores the judiciary’s role in curtailing agency overreach, particularly after the fall of Chevron. By applying the plain meaning of statutory terms and rejecting expansive agency definitions, the court reaffirmed the principle that agencies cannot exceed the authority explicitly granted by Congress. Clearly, courts will second-guess all rulemaking done by agencies when it comes to crypto.
Second, by excluding immutable smart contracts from the definition of “property,” the decision restricts OFAC’s ability to sanction decentralized technologies without further legislative action.
Third, by holding that immutable, autonomous code is not property, the decision will incentivize the creation of decentralized tools that cannot be easily regulated or controlled, complicating enforcement of existing crypto laws. Developers will be emboldened to just create software products for a variety of uses without any fear that the products themselves will be sanctionable. For potential money laundering prosecutions, this will be a major issue.
Dynamis, a law firm based in Boston, New York and Miami, has significant experience litigating all types of crypto disputes. For personalized legal assistance with cryptocurrency matters, contact Eric Rosen today. He can be reached via email at: erosen@dynamisllp.com
