The U.S. Court of Appeals for the Fifth Circuit recently issued its decision in Van Loon v. Department of the Treasury, a case that has been closely watched by the press and Bitcoin advocates. As set forth below, this decision has important implications for Bitcoin. In particular, it effectively precludes the federal government from banning Bitcoin under the International Emergency Economic Powers Act (“IEEPA”) and the North Korea Sanctions and Policy Enhancement Act (“NKSPEA”) – a scenario that Bitcoin advocates have worried about in recent years.

The Fifth Circuit’s Decision in Van Loon

In Van Loon, the Office of Foreign Assets Control (“OFAC”) – an internal agency within the U.S. Department of the Treasury that oversees various economic-based sanctions programs – imposed sanctions on Tornado Cash. Tornado Cash is “an open-source, crypto-transaction software protocol that facilitates anonymous transactions by obfuscating the origins and destinations of digital asset transfers.” OFAC blacklisted Tornado Cash because malicious cyber actors such as the Lazarus Group – a North Korea-linked hacking group that OFAC sanctioned in 2019 – use it to launder the proceeds of cybercrimes. OFAC “imposed an across-the-board prohibition against any dealings with Tornado Cash ‘property,’ which OFAC defined to include open-source computer code known as ‘smart contracts.’”

As the Fifth Circuit explained, the smart contracts that OFAC banned are essentially software that runs on the Ethereum blockchain. There are two types of smart contracts on this blockchain: “mutable” and “immutable.” A mutable smart contract is one that “is managed by some party or group and may be changed.” By contrast, an immutable smart contract “cannot be altered or removed from the blockchain.”

The smart contracts at issue in Van Loon were immutable smart contracts. A group of Tornado Cash users challenged the sanctions on these immutable smart contracts, arguing that OFAC lacked the power to sanction them because OFAC is limited to imposing sanctions on “property” and the immutable smart contracts do not constitute property. As explained below, the Fifth Circuit embraced this argument, finding that the immutable smart contracts are not property and thus “beyond the scope of OFAC’s blocking power.”

There were two statutes at issue in Van Loon. The first was IEEPA, which is codified at 50 U.S.C. § 1701 et seq. Under 50 U.S.C. § 1701(a), the President may exercise extraordinary economic powers after “declar[ing] a national emergency with respect to” any “unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States.” As set forth in 50 U.S.C. § 1702(a)(1)(B), the President’s powers include the ability to block “any property in which any foreign country or a national thereof has any interest.” In addition, 50 U.S.C. § 1704 authorizes the President to “issue such regulations, including regulations prescribing definitions, as may be necessary for the exercise of the authorities granted” by IEEPA.

The other statute at issue in Van Loon was NKSPEA, which is codified at 22 U.S.C. § 9201 et seq. Under 22 U.S.C. § 9214, the President may “designate . . . any person that the President determines” is engaged in certain prohibited activities with respect to North Korea. 22 U.S.C. § 9214 further provides that once the President designates a person, the President may “exercise all of the powers granted to the President under [IEEPA] . . . to the extent necessary to block and prohibit all transactions in property and interests in property of [that] person.”

President Obama invoked these acts in two executive orders relevant to Van Loon. First, he blocked the property and interests in property of those persons that the Treasury Department determined “to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of” North Korea or other persons that materially supported it in its “continuing pursuit” of “nuclear and missile programs.” Second, he blocked the property and interests in property of both: (1) “any person” determined by the Department to be “responsible for,” or “directly or indirectly” “engaged” in certain cyber-enabled activities that threaten the United States’ national security, foreign policy, and economy; and (2) any person determined “to have materially assisted, sponsored, or provided financial, material, or technological support for” such activities. Both orders conferred rulemaking authority on the Treasury Department, allowing it “to employ all powers granted to the President” by IEEPA “as may be necessary to carry out” their purposes. The Treasury Department, in turn, delegated authority to block persons under these orders to OFAC. 

OFAC ultimately issued a definitional regulation for the word “property” under each of these delegations, which are set forth at 31 C.F.R. § 510.323 and 31 C.F.R. § 578.314. The regulations are identical and provide a laundry list of examples of what constitutes property. For instance, the regulations state: “The terms property and property interest include money, checks, drafts, . . . debts, . . . debentures, . . . mortgages, . . . deeds of trust, . . . services of any nature whatsoever, contracts of any nature whatsoever, and any other property, real, personal, or mixed, tangible or intangible, or interest or interests therein, present, future, or contingent.” 

Against this statutory and regulatory framework, the Fifth Circuit examined whether OFAC had the authority to sanction the immutable smart contracts. The Fifth Circuit first analyzed the meaning of “property” under IEEPA, finding that “[a]lthough the statute does not define ‘property,’ property has a plain meaning: It is capable of being owned.” The Fifth Circuit then found that the immutable smart contracts “at issue in this appeal are not property because they are not capable of being owned.” This was because no one had the ability to “update, remove, or otherwise control those lines of code.” As a result, “no one can ‘exclude’ anyone from using the Tornado Cash pool smart contracts.” Indeed, “because these immutable smart contracts are unchangeable and unremovable, they remain available for anyone to use,” including the Lazarus Group. As the Fifth Circuit explained, the right to exclude and the right to control are key components of the “bundle of rights that are commonly characterized as property.” Given that no one could exercise these key rights with respect to the immutable smart contracts, the Fifth Circuit concluded that they were not capable of being owned and thus were not property. 

The Fifth Circuit also looked to OFAC’s regulatory definition of “property,” and found that it “embrace[d] the plain meaning of ‘property.’” As the Fifth Circuit explained, “everything [listed in the regulatory definition] from money, mortgages, and merchandise to debts, debentures, and deeds is ownable. Even ‘contracts of any nature whatsoever’ and ‘services of any nature whatsoever’ are intangible things in which individuals or organizations may own rights.” Thus, the Fifth Circuit concluded, “[b]ecause even OFAC’s regulatory definition requires that property be ownable, the immutable smart contracts are beyond the scope of OFAC’s blocking power.”

The Implications of Van Loon for Bitcoin

Notably, like Tornado Cash, Bitcoin is used extensively by malicious cyber actors, including the Lazarus Group. Accordingly, after OFAC banned Tornado Cash, some Bitcoin advocates grew concerned that, at some point, OFAC might also ban Bitcoin. But following Van Loon, these Bitcoin advocates can breathe a bit easier. Indeed, this decision effectively precludes OFAC from banning Bitcoin under IEEPA and NKSPEA. 

The Fifth Circuit’s reasoning in Van Loon applies directly to Bitcoin. Bitcoin is a “free software project with no central authority.” While anyone can suggest changes to Bitcoin, this peer-to-peer payment network cannot be modified “without the cooperation of nearly all its users.” Because no one controls Bitcoin, no one can prevent others from using it. Rather, the network is open to anyone who wishes to use it. Under Van Loon, the fact that no one has the right to control Bitcoin or to exclude others from using this network means that it is “incapable of being owned.” By extension, Bitcoin is not “property” for purposes of IEEPA, and thus is “beyond the scope of OFAC’s blocking power.” 

So long as Van Loon remains good law, any attempt to ban Bitcoin under IEEPA and NKSPEA is doomed to fail. If OFAC bans Bitcoin under these statutes, Bitcoin advocates will simply challenge the ban in one of the federal district courts in the Fifth Circuit. And because Van Loon’s reasoning applies so directly to Bitcoin, the district court would almost certainly invalidate the sanctions.

Steven A. Levy is a Yale Law School graduate and an assistant district attorney in the Manhattan District Attorney’s Office. He was previously a senior associate at White & Case LLP, where he represented clients in a broad range of cases, including criminal trials and appeals, internal investigations, complex commercial disputes, and proceedings before the Committee on Foreign Investment in the United States. The views expressed in this essay do not necessarily reflect the views of his employer, if any.