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Can smart contract account (address starting with KT1) transfer Tezos to other accounts? I know this is possible for plain vanilla KT1 account.

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This Arthur's answer from Slack:

Depends. If they are marked as "spendable" they can, or if they have some internal logic that allows that transfer to happen

Spendable was deprecated in Athens and is fully replaced in Babylon with internal logic.

https://tezos-baking.slack.com/archives/CC4FD2HUY/p1569757418006400

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