Van Loon v. Department of the Treasury: A Landmark Decision on Cryptocurrency and Sanctions

In a decision with significant implications for blockchain technology and sanctions law, the Fifth Circuit Court of Appeals ruled on November 26, 2024, in Van Loon v. Department of the Treasury. The case challenged the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) designation of Tornado Cash, a cryptocurrency mixer, as a sanctioned entity under the International Emergency Economic Powers Act (IEEPA).

Background
Tornado Cash facilitates privacy in cryptocurrency transactions by mixing funds to obscure their origins. While the tool has legitimate uses, the government has argued that it was also exploited by bad actors, including North Korea’s Lazarus Group, to launder stolen cryptocurrency.

In 2022, OFAC blacklisted Tornado Cash, including its immutable smart contracts, under IEEPA. This designation effectively prohibited Americans from interacting with the software. Think of it this way. The government essentially banned using a public vending machine because some people were using it for illegal purposes, leaving everyday users who relied on it for privacy unable to access its legitimate functions.

As of January 2025, North Korea remains designated by the United States as a State Sponsor of Terrorism (SST). This designation was reinstated in November 2017, following its removal in 2008, due to North Korea’s involvement in acts of international terrorism.

The SST designation matters because it imposes strict sanctions on North Korea, limiting its access to global financial systems and deterring international businesses from engaging with it. This means heightened compliance requirements for individuals and companies, no matter where they are located, to avoid inadvertently violating sanctions laws, which can result in severe penalties.

In 2022, OFAC blacklisted Tornado Cash, including its immutable smart contracts, under IEEPA. This designation effectively prohibited Americans from interacting with the software.

The Legal Dispute
The plaintiffs, Tornado Cash users, argued that OFAC overstepped its authority. They contended that the immutable smart contracts—self-executing lines of open-source code—are not “property” as defined under IEEPA. The district court sided with OFAC, but the plaintiffs appealed.

The Court’s Ruling
The Fifth Circuit reversed the lower court’s decision, ruling that immutable smart contracts are not “property” because they cannot be owned, controlled, or altered. The court emphasized that these contracts function autonomously and independently, even from their creators. Consequently, OFAC’s inclusion of these contracts in its designation exceeded its statutory authority under IEEPA.

Some Key Takeaways

• Limits of IEEPA: The ruling underscores that IEEPA’s definitions, particularly “property,” must adhere to their plain and ordinary meaning.
• Implications for Blockchain Technology: The decision highlights the unique legal challenges posed by decentralized technologies, where traditional concepts like ownership and control may not apply.
• Sanctions and Innovation: While the court recognized the legitimate concerns surrounding illicit uses of Tornado Cash, it left updating IEEPA to address modern technologies squarely with Congress.
• Regulatory Red Flag: If you are in this industry, the government and civil society may ask Congress to amend IEEPA or other laws to regulate the blockchain and cryptocurrency space.

Conclusion
This landmark decision delineates the boundaries of OFAC’s authority in the context of decentralized technologies. It signals the need for legislative clarity to address the evolving landscape of cryptocurrency and blockchain innovation, or stakeholders in this market may prevail on Congress to allow the marketplace to make these decisions. We expect more policymaking in the near future.