Cryptocurrency users who crave privacy have a lot to be thankful for this past Thanksgiving.
Two days before the holiday, a unanimous three-judge panel of the Fifth Circuit ruled that the Treasury Department’s Office of Foreign Assets Control (OFAC) acted in an arbitrary and capricious manner, unsupported by substantial evidence when it ” had exceeded his congressionally defined authority.” » by sanctioning “Tornado Cash’s self-executing open source software” instead of “dishonest people and entities who abuse it”.
Clearly, Congress did not give OFAC the authority to do what it did: sanction software code that does not belong to anyone.
But let’s go back. As I previously explained for CoinDesk, Tornado Cash is a cryptocurrency mixer that makes it more difficult to trace cryptocurrency transactions. There are many legitimate and legal uses of such a service, but there are also illegal uses. For example, cybercriminals and hostile state actors have used Tornado Cash and other services to protect their nefarious acts.
As a result of these latest actions, OFAC has added numerous Tornado Cash addresses to its Domestic Specially Designated and Blocked Persons (SDN) list.
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But under the relevant statutory provisions, Congress gave OFAC only the authority to sanction the property, including any interest in property, of certain persons.
And here the court, in an opinion written by Justice Don Willett, said that the immutable smart contracts at issue did not constitute property and therefore OFAC could not sanction them.
The court said that “because this element is determinative, (it) need not address the other elements” at issue in the case. It stated that “the district court erred in giving ‘enhanced deference’ to OFAC’s definition of ‘property’ and concluding that immutable smart contracts met that definition.”
Due to the decision of the United States Supreme Court Loper Luminous decision of the last mandate removing Chevron deference – the requirement that courts defer to agencies’ interpretations of ambiguous statutory (or even regulatory!) provisions – the court said it was engaging with the “mundane but elementary proposition” of apply one’s own judgment to determine what a law means.
In doing so, the court stated that in the ordinary meaning of the word property and under OFAC’s regulatory definition of property, the term means something that can be possessed. And in this case, the immutable smart contracts in question are not considered property because they cannot be owned.
The court, however, went further and highlighted two points that could have broader implications for cryptography and smart contracts.
First, the court said that the immutable smart contracts at issue are not themselves contracts, despite their misleading name and contrary to what the district court found.
While the district court found that the contracts were “simply a kind of unilateral contract authorized by the code,” the Fifth Circuit panel said that in “so concluding, the district court ignored basic principles of the black letter contract law. He explains that all contracts require at least two parties, but here, immutable smart contracts “only have one party in play” because they are “just software code”, not a party that can contract with another party.
The Fifth Circuit made clear that its decision was not contrary to “blockchain jurisprudence,” which indicates that some smart contracts could, in fact, function as contracts because in those other cases, at least two willing parties agreed to conclude the contract. But here, with immutable, ownerless smart contracts, “there is no party to contract with.”
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Second, the court ruled that the immutable smart contracts at issue do not constitute a service in themselves but “rather a tool that is used to perform a service”, which is “not the same thing as be a service. »
Finally, the court concluded with a note on its proper role within our constitutional system of government. He said that while he “readily recognizes the real harms of some uncontrollable technologies beyond OFAC’s sanctioning power,” courts “must respect the statutory agreement made (or poorly made) by Congress, not tinker with it. » He refused to engage in “judicial legislation” by repairing “the law’s blind spots or mitigating its disruptive effects.” He said it “is not within (the court’s) domain” because “legislating is the job of Congress – and Congress alone.”
It is unclear whether the government will ask the full Fifth Circuit to review the decision or whether it will ask the U.S. Supreme Court to review it. Notably, the Eleventh Circuit still has a similar pending case before it. If he reaches a different conclusion or uses different reasons to reach the same or similar conclusion, that could motivate the Supreme Court to reconsider the case.
Of course, it will be interesting to see what position the new Trump administration takes on this matter as well. It may very well be that the new administration will agree that the Biden administration’s OFAC should not have taken this unprecedented step.
And of course, Congress could always take action.
So, for now, this is good news for the crypto community. But the story is far from over.
