On November 26, 2024, the Fifth Circuit Court of Appeals held that the United States Office of Foreign Assets Control (“OFAC”) exceeded its authority by adding an entity that pools and anonymizes crypto transactions to OFAC’s Specially Designated Nationals and Blocked Persons list (“SDN list”). Van Loon, et al. v. Dep’t of Treasury, et al., No. 23-50669, — F.4th — (5th Cir. Nov. 26, 2024). Ruling on a petition that had been filed by the impacted firm, the Court determined that immutable smart contracts offered by the plaintiff firm could not be exchanged or controlled, and therefore were not “property” that could be blocked by OFAC sanctions.
In 2022, OFAC added the plaintiff firm to the SDN list under the International Emergency Economic Powers Act (“IEEPA”). IEEPA permits OFAC to block “any property in which any foreign country or a national thereof has any interest.” In the absence of a statutory definition, OFAC has defined the term “property” to include “contracts of any nature” and “services of any nature.” Drawing on its IEEPA power, OFAC designated plaintiff firm as an entity organized by its decentralized autonomous organization, and blocked all property interests associated with it that were under U.S. jurisdiction. In designating plaintiff firm to the SDN list, OFAC asserted in a press release that plaintiff firm had used smart contracts to launder hundreds of millions of dollars’ worth of cryptocurrency from bad actors, including a North Korean state-sponsored group.
The Fifth Circuit reviewed OFAC’s action under the Administrative Procedure Act in the wake of Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024), in which the Supreme Court held that federal courts do not owe deference to executive agencies’ interpretation of statutory terms. The Fifth Circuit observed that property rights involve the exercise of dominion and control and, most importantly, the right to exclude. Through that lens, the Court considered plaintiff firm’s use of smart contracts, which are software programs that automatically execute terms of a contract or agreement where the terms are written into lines of code in distributed ledgers like blockchain. The right to exclude anyone from using immutable smart contracts is not available, the Court reasoned, because such smart contracts do not permit anyone to update, remove, or otherwise control them. The Court observed that dominion and control also are not possible because immutable smart contracts are unchangeable and unremovable. More generally, the Court observed that smart contracts are not even contracts that could fall under OFAC’s preferred definition because while contracts are necessarily between two parties, smart contracts can be used to facilitate transactions at one party’s behest.
This case illustrates the complex interaction between distributed ledger technology and efforts to fight money laundering and financing of terrorism. The Fifth Circuit’s decision may attract the attention of the Supreme Court, particularly because another case involving plaintiff firm is currently before the Eleventh Circuit. But the incoming administration may be less inclined to pursue strategies like OFAC’s here in any event, given the broad calls for regulatory clarity in how cryptoassets and blockchain technology should be treated. In the meantime, OFAC may pursue other means to identify and pursue potential money laundering using such technology.
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