International Emergency Economic Powers Act
Van Loon v. Department of the Treasury
Date: Nov. 26. 2024
Issue: Whether the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) exceeded its authority under the Internation Emergency Economic Powers Act by placing place Tornado Cash on its Specially Designated National and Blocked Persons (SDN) list.
Case Summary: In a 3-0 decision, a Fifth Circuit panel reversed a Texas federal court decision that upheld the U.S. Department of Treasury’s decision to place Tornado Cash on its SDN list.
The International Emergency Economic Powers Act (IEEPA) authorizes the president to freeze the assets of and prohibit transactions with any foreign actor determined to threaten America’s national security. This power is carried out by OFAC, which oversees various economic-based sanctions programs.
In 2022, OFAC sanctioned Tornado Cash, an open-source cryptocurrency transaction software protocol that facilitates anonymous transactions by concealing the origins and destinations of digital asset transfers. OFAC sanctioned Tornado Cash for its role in laundering virtual currency for malicious cyber actors. Notably, a North Korea-linked hacking group used Tornado Cash to launder the proceeds of cybercrimes. For this reason, OFAC added Tornado Cash to the SDN list and imposed an across-the-board prohibition against any dealings with Tornado Cash “property.” OFAC defined “property” as open-source computer code known as “smart contracts.” Smart contracts provide two key features: privacy, by anonymizing digital transactions, and immutability, as the software code cannot be owned, controlled, or altered, even by its creators.
Six plaintiffs sued the U.S. Department of Treasury and OFAC, arguing that including Tornado Cash on the SDN list exceeded OFAC’s statutory authority. Plaintiffs claimed OFAC lacked the authority to designate Tornado Cash as an SDN because Tornado Cash is not a foreign “national” or “person,” smart contracts are not “property,” and Tornado Cash cannot hold a property “interest” in smart contracts. However, the Western District of Texas granted the Treasury’s motion for summary judgment. The court ruled that Tornado Cash qualifies as an “entity that may be properly designated as a person under the IEEPA,” and that smart contracts count as “property.” The decentralized autonomous organization (DAO) running Tornado Cash holds an “interest” in its smart contracts because it profits from crypto mixing and relaying services operating on those contracts.
On appeal, the Fifth Circuit panel reversed, ruling smart contracts are not the “property” of a foreign or national entity. As a result, smart contracts cannot be blocked under the IEEPA. The panel clarified that the IEEPA and the North Korea Sanctions and Policy Enhancement Act give the president authority to regulate or block “property” in which a foreign “national” or “person” has an “interest.” Plaintiffs argued the district court erred by giving “heightened deference” to OFAC’s definition of “property” and by concluding that smart contracts met that definition. The panel relied on the Supreme Court’s recent decision in Loper Bright v. Raimondo, which overturned Chevron deference. Under Loper Bright, the Supreme Court requires courts to independently identify and uphold constitutional delegations of authority, enforce the statutory limits of those delegations, and ensure agencies act within the Administrative Procedure Act through reasoned decision-making. Based on this framework, the panel concluded it must independently interpret the IEEPA rather than deferring to OFAC’s interpretation.
To determine whether smart contracts qualified as “property,” the panel analyzed the statute’s text. The panel noted that, although the statute does not define “property,” the term’s plain meaning suggests it must be something capable of being owned. As smart contracts cannot be “owned,” the panel concluded they do not meet the definition of “property.” On that basis, it also held that OFAC exceeded its statutory authority as defined by Congress. While the panel recognized the downsides of certain uncontrollable technology falling outside OFAC’s sanctioning authority, and that the IEEPA grants the president broad powers to regulate various economic transactions, it concluded the statute is not limitless.
Bottom Line: As of Dec. 31, 2024, the Treasury has not filed for an en banc (full panel) petition for rehearing.
Document: Opinion
