Sticks bundle

We thought this was going to be about sticks.

We ain’t gonna pretend we understand cryptocurrency or blockchain. I’m just a caveman. Your world frightens and confuses me!

And there’s a lot there to confuse us in the U.S. Court of Appeals’ recent opinion in Van Loon v. Dep’t of the Treasury, No. 23-50669 (Nov. 26, 2024), where one of the questions was the meaning of the term “property” as used in the International Emergency Economic Powers Act. Under that statute, the President may “block … any property in which any foreign country or national thereof has any interest.”

The Treasury Department blocked “Tornado Cash” which, as far as we can tell, is a computery way to anonymously transfer asserts digitally, and “obfuscat[e] the origins and destinations” of the transfer. Slip op. at 2. The Department’s regulations define “property” broadly, and it blacklisted Tornado Cash “for its role in laundering virtual currency for malicious cyber actors — for example, a North Korea-linked hacking group that used Tornado Cash to launder the proceeds of cybercrimes.” Id.

The plaintiffs are users of Tornado Cash who objected to the Department’s blacklisting. as beyond the authority of statute. This isn’t property they argued, and therefore isn’t subject to blacklisting notwithstanding the Department’s regulations. The statute, they argued, does not define the term “property,” and the issue was whether “immutable smart contracts” (lines of privacy-enhancing software that are part of Tornado Cash) qualify. 

The court was not daunted by the lack of statutory definition, concluding that “property has a plain meaning: It is capable of being owned.” Slip op. at 20. Applying an original public meaning approach, the court first held that the 1977 dictionary (the statute was adopted that year) defined property as being “everything which is or may be the subject of ownership[.]” Id. There’s also a dominion aspect (One-L flashback to Pierson!). Slip op. at 21 (“Sure, ‘[o]wnership does not always mean absolute dominion,’ but it at least requires some dominion.”). 

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This guy.

The opinion also touches on Blackstone and his Commentaries and the right to exclude. Applying those principles to the smart contracts, the court held they are not property:

The immutable smart contracts at issue in this appeal are not property because they are not capable of being owned. More than one thousand volunteers participated in a “trusted setup ceremony” to “irrevocably remov[e] the option for anyone to update, remove, or otherwise control those lines of code.” And as a result, no one can “exclude” anyone from using the Tornado Cash pool smart contracts. In fact, because these immutable smart contracts are unchangeable and unremovable, they remain available for anyone to use and “the targeted North Korean wrongdoers are not actually blocked from retrieving their assets,” even under the sanctions regime. Simply put, regardless of OFAC’s designation of Tornado Cash, the immutable smart contracts continue operating. And furthermore, because the software continues to operate regardless of the sanctions, and the blockchain technology “allows peer-to-peer transfers . . . without requiring the recipient to consent to transfer,” some users may become liable whenever someone transfers them digital assets via Tornado Cash, even without their knowledge or consent.

Sure, some smart contracts are capable of being owned in the sense that Tornado Cash developers can create new smart contracts and disconnect old mutable contracts. In theory, should Tornado Cash developers choose to comply with sanctions on mutable smart contracts, those developers could disconnect those mutable smart contracts to make them inaccessible and unusable by anyone on the Ethereum blockchain. But they cannot discard, change, disconnect, or control smart contracts that are immutable—like the ones currently listed on OFAC’s SDN list and at issue in this appeal. Even with the sanctions in place, “those immutable smart contracts remain accessible to anyone with an internet connection.”

Slip op. at 22-23.

In short, these things are not capable of being owned.

The court also concluded that the Department’s regulatory definition of property doesn’t cover the immutable smart contracts, even though the Department’s definition includes “contracts of any nature.” Slip op. at 27. But despite their nomenclature, “the immutable smart contracts are not contracts.” Slip op. at 28. Why? Because these are not bilaterally, but are one-party only: “[i]mmutable smart contracts have only one party in play.” Id.

As we said at the beginning: we’re not going to pretend we understand this stuff fully.

We conclude with our sense that this looks a lot like a square-peg-in-a-round-hole situation. Blockchain and immutable smart contracts (that are not really contracts) don’t easily fit into any traditional or historical conceptions of property, and although we follow the court’s thinking and its conclusion, things as amorphous as these are seem an ill-fit at best for the old bundle of sticks metaphor.

Van Loon v. Dep’t of the Treasury, No. 23-50669 (5th Cir. Nov. 26, 2024)