Can OFAC sanction a smart contract?

Yes. The August 2022 Tornado Cash designation established that OFAC can designate smart contracts themselves as blocked property. This means US persons are prohibited from interacting with specific contract addresses, regardless of who deployed them.

What this means

The smart contract code isn't illegal — interacting with it is. If a contract address appears on the SDN list, sending a transaction to it is a sanctions violation. Front-end operators face additional exposure.