During Trump's presidency, the "lawsuit-style regulation" of cryptocurrencies did not stop

Author: Project Glitch, Mike Orcutt Compilation: WeChat Official Account Block unicorn

The Trump Administration's Approach to Key Crypto Cases is Not Much Different from Biden's

Donald Trump promised to make the U.S. the "world's crypto capital," and many actions seemed to support his commitment. For example, he appointed officials in the executive branch who openly "support crypto," such as Treasury Secretary Scott Banta and new SEC Chair Paul Atkins. His party controlled both houses of Congress and drafted legislation that would greatly benefit the crypto industry. Of course, he is also a proud owner of Trump-branded meme coins and stablecoins.

However, the extreme legal threats faced by cryptocurrencies during Biden's presidency—many in the industry believe this is why they supported Trump in last year's election—remain unchanged.

The most prominent example is the case involving the Ethereum-based privacy tool Tornado Cash. Advocates had hoped that the Trump administration would completely change its stance on Tornado Cash, especially that the Justice Department would drop charges against one of its developers, Roman Storm. This hope was bolstered when Trump's Deputy Attorney General Todd Blanche issued a memo in April stating that the Trump Justice Department would terminate the previous administration's "reckless strategy of using prosecution to promote regulation," echoing common criticisms from crypto advocates against the Biden administration.

Nevertheless, last month, federal prosecutors in the Southern District of New York revealed in a letter to the judge overseeing the case that they still plan to pursue nearly all charges against Storm.

Considering the subtle legal maneuvers when the Treasury removed Tornado Cash software from the sanctions list in March, the new administration does not seem to have immediate plans to quell the prosecution fears that have plagued many crypto developers for nearly three years.

Small Victories

The letter from the Southern District of New York prosecutors did make one concession, which seems minor in the Storm case but is significant in the broader legal conflict. The letter informed the judge that federal prosecutors would drop part of the charge against Storm for operating an "unlicensed money transmitting business."

Storm and another developer, Roman Semenov, were indicted in 2023. The indictment alleges that North Korean hackers used Tornado Cash to launder hundreds of millions of dollars in cryptocurrency stolen from the video game Axie Infinity. The indictment charges Storm and Semenov with conspiracy to launder money, conspiracy to violate sanctions against North Korea, and conspiracy to operate an unlicensed money transmitting business. Storm was arrested in August 2023 and is scheduled to stand trial this July, while Semenov remains at large.

The charge of operating an unlicensed money transmitting business has angered many in the crypto policy sphere and made many industry insiders feel betrayed by the government.

Under the U.S. Bank Secrecy Act (BSA), money transmitting businesses must register with the Treasury's Financial Crimes Enforcement Network (FinCEN). In 2019, FinCEN issued guidance that was widely interpreted to mean that to be considered a money transmitter, one must have "complete independent control" over user funds.

The way Tornado Cash's smart contracts operate ensures that only users control their funds. Therefore, the 2019 FinCEN guidance implied that Tornado Cash did not need to register.

However, last spring, Justice Department prosecutors presented the opposite view in a brief submitted to the court: that even without controlling user funds, one could still be considered a money transmitter. Shockingly, the judge in the case agreed with the Justice Department's view.

This clearly created a "rule of law issue," said Peter Van Valkenburgh, executive director of the policy research and advocacy organization Coin Center. "In my view, if regulators said from the start that no license was needed, then no one should be charged with failing to obtain a license," he said at Project Glitch's Washington Privacy Summit last October.

The Justice Department seems to have changed its mind. Last month, it announced that it would no longer assert that Storm violated the law by failing to register with FinCEN. Van Valkenburgh considers this a "significant news" on one hand. On the other hand, it is the only part of the charges where the government has decided to relent following the Blanche memo's release. Although the Justice Department acknowledged that registration was not required, it still charged Storm with operating an unlicensed money transmitting business. Prosecutors cited another provision in the law, claiming that even without a license, because the transactions involved "the transfer or transmission of funds," Storm allegedly knew that these funds were derived from criminal activity.

Confused? You're not alone. "This makes no sense," Van Valkenburgh said at the monthly gathering of crypto policy insiders in Washington, D.C., called PGP * for Crypto. "If you're going to convict them of unlicensed money transmission, but no one asked them to obtain a license—how crazy is that?"

The Justice Department used the same argument in another criminal case against Bitcoin privacy tool Samourai Wallet developers Keonne Rodriguez and William Lonergan Hill, dropping their unlicensed charges but continuing to charge them with conspiracy to operate an unlicensed money transmitting business. This case recently highlighted the divergence between FinCEN and the Justice Department on what constitutes a money transmitting business. The defense team publicly released a summary of a phone call between federal prosecutors and two FinCEN employees, where the FinCEN representative argued that because Samourai does not control user funds, this "strongly suggests" it is not a money transmitting business.

The continued existence of these charges dashed hopes that Blanche's memo would signal a complete policy shift from the Justice Department. Amanda Tuminelli, executive director and chief legal officer of the D.C. policy advocacy organization DeFi Education Fund, stated at the PGP * for Crypto panel that parts of the memo were favorable to the industry. "I think the spirit of the memo is good," she said. "But in the high-stakes conflict over what constitutes a money transmitting business, it solved nothing."

Tuminelli believes Congress should amend criminal law to "completely eliminate the possibility of future misunderstandings," clarifying that criminal law provisions do not apply to software developers who do not control or hold customer funds.

The North Korean Factor

Additionally, there is the issue of the U.S. Treasury's Office of Foreign Assets Control (OFAC) imposing sanctions on Tornado Cash in 2022. Coin Center and other organizations have sued OFAC, claiming it lacks the authority to sanction decentralized software. In November of last year, the cryptocurrency industry launched a fierce lawsuit against the government in one of these cases. The Fifth Circuit Court of Appeals ruled that OFAC lacked the authority to sanction Tornado Cash's "immutable" smart contracts because these contracts are not "property." In March of this year, the Treasury removed these smart contracts from the sanctions list.

However, some important signals indicate that the government is not yet prepared to relent on this issue.

First, Michael Mosier, co-founder of Arktouros Law and former OFAC official and FinCEN director, pointed out that the Treasury did not characterize this action as an admission of error. Instead, the agency stated it "decided to lift the economic sanctions on its own." Mosier noted in a recent speech in Washington, D.C., that this was an "extremely cautious response" to the Fifth Circuit's ruling. The agency may be preparing for further action.

The second important signal is how the government is handling the sanctioned Tornado Cash developer, Russian citizen Roman Semenov.

Some background: OFAC initially sanctioned Tornado Cash software under President Obama's 2015 executive order targeting cybercrime. In November 2022, OFAC reimposed sanctions, adding designations based on another Obama-era executive order aimed at preventing North Korea from funding its nuclear weapons program. In August 2023, OFAC added developer Roman Semenov to the sanctions list under both executive orders.

In March, OFAC lifted the cybercrime and North Korea-related sanctions against Tornado Cash but kept Semenov on the North Korea-related sanctions list.

Mosier explained, "The enforcement authority for North Korea projects is much broader compared to more general cybersecurity orders." This means the government would have an easier time defending such actions in court. Mosier believes that the Treasury's removal of Semenov's cyber sanctions label while keeping him on the North Korea sanctions list sends a message. "Removing the cyber sanctions label while retaining the North Korea sanctions label led to his sanctions being publicly announced in the same press release that declared they would remove the Tornado Cash address sanctions," he said. "This is a strong signal to Congress and global developers: 'We are not leaving this space.'"

Despite Trump's love for cryptocurrency, his administration seems to oppose certain types of cryptocurrencies just as much as the Biden administration does.