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The ‘code is law’ crowd got a harsh lesson in reality as Tornado Cash developer/co-founder Alexey Pertsev was sentenced to over five years in prison for money laundering.
On May 14, the district court in the Dutch city of ‘s-Hertogenbosch handed down its verdict in the trial of Pertsev, who was arrested in the Netherlands in August 2022. Pertsev was accused of allowing criminals to launder US$1.2 billion worth of the Ethereum network’s ETH token through the Tornado Cash coin mixing service.
Prosecutors had asked for a 64-month sentence for the Russian national, who was alleged to have ties to Russian intelligence services. The three judges handling the case agreed with this proposal, issuing a statement that rejected Pertsev’s arguments that he just wrote code, had no control over who used Tornado Cash and never took custody of the assets flowing through the mixer.
The statement notes that “Tornado Cash functions in the way the defendant and his co-founders developed Tornado Cash. So the operation is completely their responsibility. If the defendant had wanted to have the possibility to take action against abuse, then he should have built it in. But he did not. Tornado Cash does not pose any barrier for people with criminal assets who want to launder them. That is why the court regards the defendant guilty of the money laundering activities as charged.”
The statement goes on to say that Pertsev was aware that Tornado Cash was being used for money laundering, citing group chats in which Pertsev was a participant. These groups “discussed the hacks in which Ether had been stolen. They also discussed cryptocurrency with a criminal origin being deposited into Tornado Cash.”
In case anyone mistook their view, the judges spelled it out plainly: “Tornado Cash is not a legitimate tool that has unintentionally been abused by criminals, as the defendant presents. Tornado Cash suits criminal use.” Pertsev and Tornado’s other developers “were of great value to the underworld” and Pertsev “accepted the risk of the simple, unlimited, foreseeable, and evident use by criminals.”
Even when presented with pleas from victims of crime or investigative authorities, Pertsev “behaved lazily” and claimed he couldn’t help anyone. “Under the pretense of an ideology, he did not care about law and regulations and felt untouchable … He chose to look away from the abuse and did not take any responsibility.”
In a final indignity, the court ruled that €1.9 million in tokens and a Porsche seized from Pertsev “will not be returned.” At this rate, we assume Pertsev made his undignified ride to prison in a drab gray van, over a bumpy gravel road, with an endless loop of Rebecca Black’s Friday on the stereo.
While Pertsev’s attorneys will have 14 days in which to file an appeal, there appears to be little legal sympathy for their client in the Netherlands. As a Dutch prosecutor put it during Pertsev’s trial, the defendant’s claims that he had no control over Tornado Cash’s use didn’t absolve him of responsibility for how it was used. “Building and deploying something unstoppable is also a decision.”
Pertsev’s sentence doesn’t bode well for Tornado Cash developers Roman Storm and Roman Semenov, both of whom were charged with money laundering, sanctions violations and other offenses by U.S. authorities last August. Storm was arrested in the U.S. while Semenov remains at large in Russia. Storm’s trial is scheduled to get underway on September 23.
One year prior to Storm’s arrest—around the time of Pertsev’s detention by Dutch authorities—the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash for failing to impose effective controls that would have prevented the mixer’s use for illicit purposes.
Other ‘crypto’ entities that have similarly washed their hands of responsibility for criminals and terrorists using their platforms/products are now on notice that their ‘code is law’ defense is less of a defense than they maintain. Just don’t tell that to the ‘crypto’ crowd, because they’re having a rough time coping with this logic.
And this just in from the Department of Fortuitous Timing, the not-at-all-sketchy folks behind the Tether (USDT) stablecoin reportedly froze $5.2 million across 12 blockchain addresses that were allegedly the proceeds of a phishing scam.
Since the date of Pertsev’s sentencing was telegraphed long ago, the timing of Tether’s action is extremely convenient. That is, should Tether for whatever reason be super sensitive about its own history of enabling rampant criminality (and sanctions evasion) and desperate to show that it’s turned over a new leaf.
Tornado warning
In less fortunate timing, a pair of crypto-friendly U.S. senators—Cynthia Lummis (R-WY) and Ron Wyden (D-OR)—wrote a letter to U.S. Attorney General Merrick Garland the day before Pertsev’s Dutch disaster.
The letter expressed the pair’s “grave concerns” about the Department of Justice’s “recent policy arguments that dramatically expand the scope of the Federal prohibition on operating an unlicensed money transmitting business.” The senators believe this policy shift “threatens to criminalize Americans offering non-custodial crypto asset software services.”
The letter never once mentions the name Tornado Cash, but the footnotes make it clear that this is the hill the senators are determined to defend. The pair apparently believe the DoJ’s indictment of Tornado, Storm and Semenov for facilitating the laundering of over $1 billion in ETH by criminal groups—including North Korea’s Lazarus Group—“will only serve to stifle innovation and shake confidence in the DoJ’s respect for the rule of law.”
They add that “subjecting developers of non-custodial crypto asset software to potential criminal liability as unregistered money transmitters contravenes” the original definition of ‘money transmission’ established by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).
FinCEN announced last October that coin mixers such as Tornado Cash were responsible for “a class of transactions of primary money laundering concern.” In addition to charging Tornado Cash, the DoJ recently arrested the co-founders of the Samourai Wallet non-custodial app/coin mixer, in part due to its lack of a money transmitting license and its founders’ “deliberate failure to implement” anti-money laundering and ‘know your customer’ controls.
CFTC confessional hotlines are open
The past few months have offered examples of the lenient treatment that awaits ‘crypto bros’ who come forward and cop to their own malfeasance versus those—like Pertsev or FTX’s Sam Bankman-Fried—who insist to the end that nothing they did was wrong, despite irrefutable evidence to the contrary.
On May 13, the U.S. Commodity Futures Trading Commission (CFTC) announced a $1.8 million settlement with Falcon Labs aka FalconX, a Seychelles-registered ‘prime brokerage’ that acted as an intermediary for U.S. customers seeking to access ‘crypto’ derivatives products at international digital asset exchanges. It’s the first action the CFTC has taken against an unregistered futures commission merchant that “inappropriately facilitated access” to exchanges.
The CFTC says Falcon Labs solicited or accepted derivatives orders from U.S. customers—including institutional traders via a product called Edge—from October 2021 through at least March 27, 2023 (remember this last date). Falcon Labs opened accounts at various exchanges—including Binance—and then created sub-accounts through which it facilitated the U.S. customer orders.
As the settlement announcement put it, “the exchanges did not require, and Falcon Labs generally did not provide, customer-identifying information for the sub-account holders.”
However, the CFTC says Falcon Labs “voluntarily improved its controls for identifying the location of its customers” after the CFTC filed its complaint against Binance and its founder Changpeng ‘CZ’ Zhao on March 27, 2023. These belatedly improved controls resulted in the company offboarding “approximately half its Edge customers.”
CFTC enforcement director Ian McGinley said the relative lenience of the settlement with Falcon Labs was due in part due the company’s “substantial cooperation and remediation.” The CFTC expressed the hope that Falcon Labs’ example will “encourage other digital asset intermediaries operating illegally to come forward and report their activities to the agency.”
Or, you know, someone else’s activities. For all we know, the leniency shown Falcon Labs was also because they chose to follow the lead of Binance’s CZ, who recently garnered only a four-month prison sentence despite his years of flagrant lawbreaking.
Much was made at CZ’s sentencing hearing about an unspecified “compelling factor” that justified this slap on CZ’s wrist, which many have interpreted as CZ rolling over on one of his competitors/colleagues, which may or may not include Justin Sun and/or Tether.
Perhaps this is what CFTC chair Rostin Behnam was alluding to in a May 6 interview, in which he predicted that the digital asset sector was “going to probably see, in the next 6-18 months, or 6-24 months, another cycle of enforcement actions.” The race appears on to see which of the high-profile ‘crypto’ crooks has the sense to fink on the others first.
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