Compliance Starting Point: Clarifying the Legal Classification of Smart Contracts in Different Scenarios

Author: Bennett Ma

In the face of the complexity of smart contract applications, we should abandon the simplistic thinking of “code is law” and instead adopt a more nuanced, more pragmatic “scenario-based analysis” perspective. Only by doing so can we embrace technological innovation while clearly defining rights and responsibilities, management benefits and risks.

Introduction

The concept of “Smart Contract” initially described a kind of digital protocol capable of automatic execution. However, when this concept is implemented in practice, people find that this code, which can run automatically, beyond serving as a “contract,” can also become rules for organizational governance, channels for asset transfer, or even tools for illegal activities.

Although smart contracts are not always used as “contracts” in many scenarios, people generally refer to them collectively as “smart contracts.” This indicates that “smart contract” is not a legal concept but a technical concept with various application scenarios. Different scenarios correspond to different social relationships, which, once legally recognized, become legal relationships. Slight variations in scenarios can lead to different social and legal relationships.

Based on this, this article aims to explore the legal characterization of smart contracts under different application scenarios. While it cannot cover all cases, it hopes to help readers gain a basic understanding of relevant legal issues.

Why Clarify the Legal Nature of Smart Contracts? — Characterization Determines Fate

To understand the importance of clarifying the legal nature of smart contracts, there is no better way than to examine real judicial conflicts.

Tornado Cash is a decentralized, non-custodial mixing protocol deployed on Ethereum. Its core consists of a series of immutable smart contracts, allowing users to deposit cryptocurrencies into “fund pools” built by these contracts for mixing, thereby concealing transaction sources and destinations.

Since its creation in 2019, the protocol has been used for money laundering exceeding $7 billion. In August 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), based on an executive order, listed Tornado Cash on the sanctions list. A key point to note is that the executive order stipulates that sanctions must target “property” owned or controlled by “legal entities.”

Additionally, in August 2023, the U.S. Department of Justice also filed criminal charges against the co-founders of Tornado Cash, accusing them of conspiracy to money laundering, conspiracy to violate sanctions, and conspiracy to operate an unlicensed remittance business.

These actions raise several core legal disputes:

• Is “smart contract” itself a “legal entity”, or is it “property,” or merely a “contract,” or just “code”?
• Are “smart contracts” and the large pools of funds managed by them considered “property” that can be sanctioned?
• Regarding criminal liability, how should “smart contracts” be viewed, and how does their legal nature affect the legal responsibilities of the founders?

The outcome is:

In sanctions rulings, the U.S. Fifth Circuit Court of Appeals in November 2024 ruled that OFAC’s sanctions exceeded its authority. The court’s core view was that “smart contracts” are merely “a neutral, autonomous technical tool” rather than a legal entity, and these “immutable smart contracts” cannot be owned or controlled by any individual or entity, nor can anyone prevent their use. Therefore, they do not meet the traditional legal definition of “property”, and OFAC has no authority to list them for sanctions.

However, regarding developer liability, technological victory does not mean developers can rest easy. Smart contracts are regarded as “the core tools and components of unlicensed money transfer services”, and both the smart contracts and the developers’ actions are characterized as “operation of illegal financial services.” As a result, in the criminal trial at the end of 2024, the founder Roman Storm was convicted of “operating an unlicensed money transfer business.”

The Tornado Cash case clearly demonstrates that the legal characterization of a smart contract may directly determine the direction of the case and the fate of the parties involved. The code itself may be neutral, but those who create, deploy, and participate in it may need to be responsible for its actual impacts and consequences.

This reminds us that careful assessment of the legal nature of “smart contracts” in specific scenarios is no longer optional but an essential requirement for ensuring transaction security and understanding legal risks.

The Legal Nature of Smart Contracts — Scenario-Determined

The legal nature of a smart contract depends on the specific scenario in which it is deployed and operated.

Different scenarios reflect or construct different social relationships, and the law’s evaluation of them varies accordingly, corresponding to different rights, obligations, and responsibilities.

Below, I will present some typical application scenarios:

(1) The legal nature of smart contracts used to construct contracts

When discussing the legal nature of smart contracts, the most common concern is: Can they be recognized and enforced by law? Do they possess contractual legal effect?

When mentioning “contract,” many first think of “consent.” Indeed, using smart contracts for trading digital collectibles is a form of consent; participating in voting decisions within decentralized autonomous organizations (DAOs) is also a form of consent. However, not all “consent” can constitute a “contract” in legal terms.

“Consent” is a relatively broad concept, similar in meaning to “agreement,” but they cannot be directly equated with “contract.” From a legal perspective, a contract is a subordinate concept of “agreement” or “accord,” characterized by having legal enforceability. While resolutions are also products of agreement, the law often only “confirms” their procedural validity without necessarily granting enforceability.

In simple terms, we can use a streamlined framework to determine whether a smart contract constitutes a “contract”: Contract = Consent + Legality

• Consent refers to the parties’ mutual expression of intent, usually requiring multiple parties. Smart contracts often reflect a pre-set common intention.
• Legality has two aspects:
  • Legal recognition of such consent as a contract: Not all consent is regarded as a contract. For example, internal resolutions executed via smart contracts are generally not classified as contracts but as organizational governance acts.
  • The content of the consent does not violate laws or regulations: This includes not contravening specific prohibitions (such as money laundering, fraud, concealment, etc.) or principles of public order and good morals. The former is relatively straightforward to judge; the latter requires specific analysis based on judicial practice and regional legal culture.

This framework helps us preliminarily judge whether a specific smart contract application might be recognized as a contract and where its enforceability originates.

For example, we can apply this approach to analyze the following scenarios:

Potential Contract Formation:

• Two parties sign a digital collectible sale agreement via digital signatures. If the intent genuinely reflects consent and the content is lawful, this smart contract can have contractual effect.
• On the basis of an existing written contract, new terms are added via a smart contract. If these new terms are lawful, they can be regarded as part of the contract.
• If a smart contract is merely used as a tool to perform existing contractual obligations, and the agreement reflects mutual consent and lawful content, it may also be recognized as a contract (if conflicting with the written contract, the issue of priority needs separate judgment).

Non-Contract Scenarios:

• A single person uses a mixer for money laundering—lacking a counterparty, so no “consent” exists.
• Parties use smart contracts for virtual currency transactions that are illegal (e.g., for money laundering, gambling). Due to illegal content, they do not constitute valid contracts.
• In a DAO, executing voting, dividends, and governance via smart contracts—such consent is usually regarded as an internal organizational resolution rather than a contract.

It should be noted that the legality of a smart contract and the legality of the virtual currency involved are two separate issues. Even if the virtual currency is recognized as property, if the contract violates public order, morals, or financial regulation, it may still be invalid.

Furthermore, although some smart contracts may be recognized as contracts, they still possess features different from traditional contracts, such as:

These features profoundly influence the rights, risks, and remedies of the parties.

For example, when a smart contract has technical flaws, the risk attribution requires layered consideration:

• For the contracting parties: Risk division should consider multiple factors, including the specific design of the contract terms, the execution mechanism of the smart contract, the technical understanding of each party, the depth of participation, and the duty of due diligence.
• For the programmers: Responsibility often hinges on whether they provide paid services:
  • If the programmer acts as a paid service provider, their legal status can be similar to a product provider, and they may bear responsibility for code flaws. The scope of liability—limited to service fees or extending to transaction amounts—is still under judicial debate.
  • If the code is open-source or provided free of charge, the likelihood of legal responsibility is relatively low.

(2) The legal nature of smart contracts used to build decentralized autonomous organizations (DAOs)

Smart contracts are widely used in DAOs, mainly serving three functions:

1. Defining organizational rules—governing mechanisms, member rights and obligations, decision-making processes;

2. Forming collective resolutions—aggregating member will to make specific decisions;

3. Ensuring automatic execution—implementing rules and resolutions via code.

From a legal characterization perspective, different functions correspond to different legal natures:

• If the contract mainly defines organizational rules, it may be regarded as organizational articles, partnership agreements, or autonomous regulations, with the specific classification depending on the contract content, which also shapes the DAO’s legal attributes.
• If the contract forms collective resolutions, it is usually regarded as resolutions with binding force on the organization and involved members.
• If the contract serves solely as an automatic execution tool, it may not have an independent legal status but is viewed as a technical means to realize organizational functions. Even so, it remains subject to laws, regulations, or internal rules, such as requiring consistency with existing bylaws, disclosure of functions, and potential liability for execution errors.

In practice, a single smart contract may serve one or multiple of these functions, and its specific characterization should be based on the actual functions and usage scenarios.

(3) The legal nature of smart contracts used for illegal activities such as money laundering

The application of smart contracts in illegal activities is increasingly common, with various complex modes emerging, especially in money laundering. In such cases, the core dispute often does not lie in the legal nature of the smart contract itself but in the potential criminal or administrative liabilities of developers, users, and node participants once used for illegal purposes.

Taking the Tornado Cash case as an example: although the U.S. Treasury’s sanctions were later declared invalid, its developer Roman Storm remains embroiled in legal disputes. Storm was charged with conspiracy to operate an unlicensed remittance business, conspiracy to money laundering, and conspiracy to violate U.S. sanctions against North Korea. On August 6, 2025, a jury in the U.S. federal court in Manhattan found him guilty of “conspiracy to operate an unlicensed remittance business,” with a maximum sentence of five years.

While the post-trial motions filed by Storm’s defense and the prosecution are still pending, the case clearly shows that: In the context of ongoing ambiguity about the legal nature of smart contracts, judicial practice’s expectations of developers’ responsibilities have gone far beyond “maintaining technical neutrality” or “avoiding actual control.”

(4) Smart contracts as objects of intellectual property rights

Today, it is widely accepted that intellectual achievements are protected by law. However, whether smart contracts qualify as objects of intellectual property rights, and what kind of rights they can enjoy (such as copyright, patent, trade secret), still requires specific analysis based on their form, innovation content, and protection intent.

1. Text of smart contracts and copyright

For most programmers, writing smart contract code mainly aims to realize certain functions, not necessarily involving groundbreaking innovation. But this does not mean their intellectual achievements cannot be protected.

Copyright provides a path for protection. Although “works” often evoke books, paintings, etc., it actually protects the expression of intellectual achievements that meet the “work” criteria, not the underlying technical ideas or functional logic. There are no special requirements for the “technical” level of the code.

Therefore, if a smart contract’s code expression meets the criteria of originality, intellectual effort, and tangible fixation, it may be classified as a “work” and enjoy copyright protection.

• Originality: The code is independently created by the developer, reflecting personal choices, arrangements, and expression, rather than simple copying of public domain code or common functions.
• Intellectual effort: The code is a product of professional knowledge and logical thinking, representing a result of intellectual activity, not mechanical or purely functional arrangements.
• Tangible fixation: The code is fixed in text form, perceivable, reproducible, and distributable. Note that copyright protection covers only the textual expression, not the underlying technical solutions, algorithms, or functional logic.

If a smart contract is recognized as a copyright work, the rights holder automatically enjoys rights such as publication, attribution, modification, reproduction, and communication via information networks.

Copyright arises automatically upon creation, and while registration or timestamping can strengthen proof of ownership, they are not prerequisites for validity.

2. Technical aspects of smart contracts and patents

If a smart contract not only contains code expression but also implements a technically innovative solution, it may be classified as a “patent” and protected via patent rights.

Unlike copyright, patent rights must be applied for, examined, and granted. If the technical solution in a smart contract meets the following three criteria, it may be patentable:

• Novelty: The solution is not part of the prior art and has not been disclosed or used publicly.
• Inventiveness: Compared to existing technology, it has notable substantive features and significant progress.
• Practical applicability: It can be manufactured or used and produces positive technical effects.

Patents are categorized into inventions, utility models, and designs, each with different scope and application strategies. The core of the patent system is “disclosure in exchange for protection,” meaning applicants must fully disclose their technical content to the public in exchange for exclusive rights for a limited period. This involves higher disclosure requirements and stricter examination but can provide longer and stronger protection.

Deciding whether to apply for a patent for smart contract-related technology should consider factors like the technology’s lifecycle, market competition, and trade secret strategies. Due to the complexity and strategic importance, it is generally advisable to seek professional patent attorney assistance.

3. Information and trade secrets of smart contracts

If the technical solutions or business information in a smart contract do not meet the conditions for patent or copyright protection, or if developers prefer not to disclose their content, they may consider whether it qualifies as a “trade secret.”

If a contract meets the following criteria, it may be classified as a “trade secret” and protected as such:

• Secrecy: The information is not publicly known and not easily accessible legally.
• Valuable: It can bring actual or potential competitive advantages or economic benefits to the holder.
• Confidentiality measures: The rights holder has taken reasonable and continuous measures to keep it secret, such as access controls, encryption, confidentiality agreements, etc.

Trade secrets cover a broad range of technical and business information that is not publicly known, has commercial value, and is kept confidential through appropriate measures. Core algorithms, unique architectures, business logic, or undisclosed parameters within a smart contract can all fall under trade secrets.

Protection of trade secrets does not rely on registration or examination but mainly on internal confidentiality agreements and management. This approach does not require public disclosure but depends heavily on ongoing internal compliance and management to maintain secrecy.

(5) The legal nature of smart contracts in litigation

Because of their transparency and immutable nature, smart contracts are often regarded as ideal electronic evidence. However, in legal practice, using them as evidence is more complex than traditional forms. This complexity mainly arises from the following technical features:

1. Smart contracts are written in code language. On one hand, the technical complexity and specialization increase the cost of understanding and argumentation in litigation, requiring more resources from authorities and parties to interpret. On the other hand, code cannot fully and clearly express all of the parties’ true intentions as natural language does, and parties may reach agreements outside the code. Therefore, smart contracts often cannot serve as sole basis for judgment and need to be corroborated with other evidence.

2. Smart contracts have anonymity. In many cases, the identities of the involved parties are difficult to trace directly. Although in major criminal cases like money laundering, authorities can use technical means to break anonymity, in many civil or non-criminal disputes, identity recognition remains a significant challenge.

3. Smart contracts operate on decentralized architectures. Their execution does not depend on a single central authority, which makes responsibility attribution difficult in disputes—the code author, deployer, node participants, etc., may all be involved, but clear legal rules for responsibility are lacking.

Therefore, although the evidentiary effectiveness of smart contracts has not been legally denied, and issues like burden of proof are still within traditional rules, their technical language and operational mechanisms require higher professional standards in judicial review and recognition.

Compliance Recommendations for Participants

Given the complexity of the legal nature of smart contracts, at least the following points should be considered:

• Be proactive in rights protection and compliance: Industry development drives social change, inevitably raising new legal issues. Whether risks or opportunities, practitioners should actively engage.
• Clarify scenarios and define precisely: In legal practice and important legal documents, avoid vague use of “smart contract” and specify concepts when necessary.
• When used for transactions, pay full attention to legality, technical details, and remedies: Parties should ensure the legality of the scenario, conduct security audits of the code, verify that it accurately reflects true intentions, and consider remedies and responsibilities in case of disputes.
• When used for specific functions, consult relevant laws and regulations: Smart contract applications are diverse and may involve different legal departments. Especially in fields like DAO, finance, or asset issuance, it is essential to check whether there are specific laws or regulations applicable to the domain or region to ensure compliance.
• Pay attention to jurisdiction and applicable law: Smart contracts are inherently cross-border, but laws are territorial. Even the same dispute may have different legal outcomes in different jurisdictions. Early consideration of these issues can reduce legal risks. For example, participants can pre-agree on applicable law and dispute resolution venues or arbitration institutions to clarify cross-border legal risks.

Conclusion

Real-world scenarios and legal practice are far more complex than what is presented here. Therefore, I do not claim to “clarify” all legal issues in this article. Instead, I hope to promote legal awareness and convey the following ideas:

In facing the complexity of smart contract applications, we should abandon the simplistic view of “code is law” and instead adopt a more nuanced, more pragmatic “scenario-based analysis” perspective. Only through this approach can we embrace technological innovation while clearly delineating rights and responsibilities, managing benefits and risks.