Fifth Circuit Rules Immutable Smart Contracts Aren't "Property" Under Current Law, Overturning Previous Decision

The Fifth Circuit recently made an important ruling. They decided that immutable smart contracts—those that can’t be changed or controlled by anyone—aren’t considered “property” under current law.

The judges stated, “Mending a statute's blind spots or smoothing its disruptive effects falls outside our lane. We decline the Department's invitation to judicial lawmaking. Legislating is Congress's job—and Congress's alone.” This ruling overturned a previous court decision.

This is a big win for privacy advocates and blockchain developers. They’re looking for clear guidelines to create similar products. Industry leaders are pleased with the outcome.

Paul Grewal, Coinbase's Chief Legal Officer, shared his thoughts on X. He said, “No one wants criminals to use crypto protocols. Blocking open-source technology because a few users are bad actors isn't what Congress authorized. These sanctions pushed Treasury's authority too far, and the Fifth Circuit agreed.”

Back in August 2022, the U.S. Treasury sanctioned Tornado Cash. They claimed it helped facilitate over $7 billion in illegal transactions. This included funds linked to North Korea's Lazarus Group. In August 2023, two developers were charged with money laundering and sanctions violations. Then, in May 2024, another developer received a 64-month prison sentence for laundering $1.2 billion.

The court ruled that Tornado Cash’s immutable smart contracts cannot be classified as a sanctioned entity. However, its broader designation and blocked status still stand. The case will return to the district court for further review according to the new legal interpretation.

In September 2023, Joseph Van Loon and other plaintiffs appealed to the Fifth Circuit. They challenged the U.S. Treasury's Office of Foreign Assets Control sanctions against Tornado Cash. The plaintiffs argued that OFAC overstepped its authority by classifying Tornado Cash’s smart contracts as “property” subject to sanctions. This appeal followed a district court ruling that upheld OFAC's actions.

The court emphasized that these immutable smart contracts “are not property because they are not capable of being owned.” They pointed out that over 1,000 participants took part in a “trusted setup ceremony.” This ceremony permanently removed any ability to update or control the code.

As a result, the court found that these contracts remain accessible to everyone, including sanctioned North Korean entities, regardless of OFAC's designation.

Since smart contract protocols work without “human intervention,” they cannot be classified as services. By definition, services require “an intangible commodity in the form of human effort, such as labor, skill, or advice.”

In simple terms, the court stated, “Regardless of OFAC's designation of Tornado Cash, the immutable smart contracts continue operating.” However, this ruling only applies to self-executing code that operates without administrative control. Some parts of Tornado Cash or other protocols derived from its code could still face sanctions.