Fifth Circuit Court blocks enforcement of sanctions on smart-contracts

On the 26 of November, 2024 the Fifth Circuit Court of Appeals has issued a landmark decision in the Tornado Cash case, ruling that the Office of Foreign Assets Control (OFAC) cannot impose sanctions on immutable smart contracts under current statutory frameworks, creating significant implications for the cryptocurrency industry and regulatory landscape.

On appeal, the court found that immutable smart contracts do not meet the definition of “property” under the International Emergency Economic Powers Act (IEEPA), potentially limiting federal authorities’ ability to regulate certain aspects of decentralized finance (DeFi) technologies.

The court’s decision establishes a crucial distinction between mutable and immutable smart contracts. While mutable contracts remain subject to traditional regulatory oversight due to their controllable nature, immutable contracts – which operate autonomously once deployed – fall outside the current statutory framework due to their lack of traditional ownership and control characteristics.

This ruling affects an undetermined number of DeFi protocols and blockchain-based applications, particularly those utilizing immutable smart contract technology. For cryptocurrency businesses and financial institutions, this creates both opportunities and compliance challenges in their U.S. operations.

While this decision provides temporary clarity on regulatory boundaries, businesses should note that this may not represent the final word on the matter. A parallel case in the Eleventh Circuit, where the trial court upheld OFAC’s sanctions authority, is pending appeal. This circuit split could potentially lead to Supreme Court review.

The court’s focus on statutory definitions raises broader questions about the federal government’s authority to regulate emerging technologies under existing laws. This may prompt legislative action to update the IEEPA or create new regulatory frameworks specifically designed for blockchain and DeFi systems.

For strategic planning purposes, companies should monitor several key developments: potential government appeals, parallel litigation outcomes, and possible legislative or regulatory responses. We recommend maintaining robust compliance programs while the legal landscape continues to evolve.

The decision highlights an urgent need for updated legislation that can effectively address decentralized technologies while balancing innovation with regulatory objectives. Companies operating in the cryptocurrency space should prepare for potential new regulatory frameworks that may emerge in response to this ruling.

[Contact our team for specific guidance on your situation.]