United States prosecutors aren’t buying legal arguments made by a Tornado Cash co-founder that he’s not responsible for criminals using the Ethereum-based coin mixing service.
On April 26, the U.S. Department of Justice (DOJ) filed its opposition to Tornado Cash’s motion to dismiss the money laundering, sanctions violations and other charges filed against co-founders Roman Storm and Roman Semenov last year. Storm has been released on bond after being arrested in Washington State last August, while Semenov remains at large in Russia.
The DOJ alleged that Storm, Semenov and Tornado Cash facilitated the illegal laundering of over $1 billion in ETH by criminal outfits ranging from private crooks to North Korea’s infamous Lazarus Group of state-sponsored hackers. The DOJ also claimed that Tornado Cash failed to obtain the necessary money-transmitting license to deal with U.S. customers.
Storm’s attorneys argued that he never conspired with anyone to launder stolen cash, let alone help Lazarus evade U.S. economic sanctions. Also, Tornado Cash isn’t/wasn’t a money-transmitting business so no such license was required (nor the associated anti-money laundering and ‘know your customer’ tools).
Storm’s team further claimed that Tornado Cash never took control of users’ ETH and its developers earned no fees from the service’s most basic functions. (Additional anonymity features were available for a fee from so-called ‘relayers.’)
However, Storm and the other developers did profit from the sale of the proprietary TORN token, which allowed holders to vote on governance issues involving the mixer’s decentralized autonomous organization (DAO). As such, the DOJ alleged that the defendants “made millions of dollars in profits from operating the Tornado Cash service.”
Storm’s team also argued the now common ‘crypto bro’ belief that Tornado Cash is mere software code, and as such, it’s protected by the First Amendment to the U.S. Constitution, guaranteeing free speech.
Oh, no it isn’t
The DOJ’s opposition motion takes issue with Storm seeking dismissal of the indictment “by simply making factual assertions about his own contested view as to how the Tornado Cash service operated and based on his own self-serving version of his intent or lack thereof when taking certain acts.”
Storm is engaging in “an exercise in misdirection” by claiming that the Tornado Cash referred to in the indictment refers only to the actual mixing pools. In the DOJ’s view, Storm is asking the court to “ignore” the website, user interface, smart contracts and the relayer network that processed withdrawals in exchange for fees.
Basically, the DOJ says these are questions for a jury to decide, and Storm “cannot obtain dismissal of the Indictment by advancing his own contested version of how the overall service actually operated.”
As for Storm’s First Amendment argument, the DOJ says Storm’s team appeared to be suggesting that “any misconduct committed through computer software is absolutely protected and that cryptocurrency … is inherently beyond the reach of law enforcement. That is not the law, and such a broad assertion of immunity would undermine the enforcement of not only criminal law, but all regulatory efforts that address conduct using computers or taking place on the Internet.”
Storm’s trial is scheduled to get underway in September, but in the meantime, new information on Tornado Cash’s escapades keeps emerging.
On April 29, the blockchain sleuth known as ZachXBT published an analysis of over 25 ‘crypto’ hacking incidents involving the Lazarus Group in the period spanning August 2020 to October 2023. The total value of the stolen tokens laundered for fiat through exchanges, peer-to-peer platforms and mixers—including Tornado Cash—is over $200 million.
Fallout boys
Meanwhile, there have been some additional developments regarding last week’s takedown of the Samourai Wallet coin mixer, which the feds claim helped launder over $100 million in transactions from illegal dark web markets like Silk Road and Hydra.
Keonne Rodriguez, who was arrested in Pennsylvania last week, has pleaded not guilty to charges of conspiracy to commit money laundering and conspiracy to operate an unlicensed money-transmitting business. Rodriguez was released on a $1 million bond after entering his plea. Samourai’s other co-founder, William Lonegan Hill, is awaiting extradition from Portugal.
The takedown resulted in the Google Play (NASDAQ: GOOGL) marketplace removing the Samourai Wallet app. Now, it seems that other non-custodial wallet app developers are pulling their own plugs before the whip comes down on them.
On April 26, the team behind the PhoenixWallet app announced that the app “will be removed from U.S. app stores” on May 3. Both Android and iOS users were advised to empty their wallets before that date.
Phoenix Wallet operated on BTC’s ‘layer 2’ Lightning Network and the Phoenix team said “recent announcements from U.S. authorities cast a doubt on whether self-custodial wallet providers, Lightning service providers, or even Lightning nodes could be considered Money Services Businesses and be regulated as such.”
On April 27, zkSNACKs, the company behind the privacy-focused Wasabi Wallet, published a blog post saying it was “now blocking U.S. citizens and residents from visiting its websites, downloading and using Wasabi Wallet and any related products and services.” The ban, which was “effective immediately and until further notice,” was imposed “in light of recent announcements by U.S. authorities.”
Both wallet announcements came shortly after the Federal Bureau of Investigation (FBI) issued a warning about “recently conducted law enforcement operations against cryptocurrency services which were not licensed in accordance with federal law.” The FBI warned consumers that dealing with other unregistered operators “may put you at risk of losing access to funds after law enforcement operations target those businesses.”
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