Tornado Cash case could criminalize software code publication, Coin Center says

Crypto policy advocacy group Coin Center responded to yesterday’s indictment of Tornado Cash co-founders Roman Semenov and Roman Storm, saying the case “could potentially criminalize the publication of software code.”

The organization argues that the charges brought by the U.S. Department of Justice, which allege Semenov and Storm were involved in unlicensed money transmission, may not align with Financial Crimes Enforcement Network guidelines.

The indictment claims that the defendants "engaged in the business of transferring funds on behalf of the public" without registering with FinCEN. However, the activities described in the indictment seem more related to software provision and communication services than money transmission, Coin Center’s Research Director Peter Van Valkenburgh said in a post yesterday.

The Bank Secrecy Act defines money transmitter services as “the acceptance of currency, funds or other value that substitutes for currency from one person and the transmission of currency, funds or other value that substitutes for currency to another location or person by any means.”

According to the 2019 FinCEN Virtual Currency Guidance, anonymizing software providers are not considered money transmitters, Van Valkenburgh said. The guidance states, “FinCEN regulations exempt from the definition of money transmitter those persons providing 'the delivery, communication, or network access services used by a money transmitter to support money transmission services.' This is because suppliers of tools (communications, hardware or software) that may be utilized in money transmission, like anonymizing software, are engaged in trade and not money transmission.”

Tornado Cash's tools were provided in a manner consistent with this guidance, Van Valkenburgh argued.

The indictment's allegations, including the defendants' control over UI and smart contract software hosting, their design and advertising of the Tornado Cash tool, and profiting from a governance token, do not necessarily equate to the "acceptance and transmission" of money, Van Valkenburgh said. “Advertising or profiting from the creation of mere software, that fact alone doesn’t change the provision of software into the provision of regulated financial services,” he added.

Tornado Cash is open-source software that can be used to anonymize transactions on the Ethereum blockchain.

Tornado Cash indictments, arrests and sanctions

The DOJ charged Storm and Semenov with "conspiracy to commit money laundering, conspiracy to commit sanctions violations and conspiracy to operate an unlicensed money transmitting business," according to a statement yesterday.

The charges relate to the pair’s alleged creation, operation and promotion of Tornado Cash — “a cryptocurrency mixer that facilitated more than $1 billion in money laundering transactions and laundered hundreds of millions of dollars for the Lazarus Group, the sanctioned North Korean cybercrime organization,” the DOJ said.

The U.S. Department of the Treasury's Office of Foreign Assets Control also announced Wednesday that Roman Semenov had been added to its Specially Designated Nationals list of sanctioned companies and individuals subject to having their assets blocked and prohibited from doing business with U.S. persons. OFAC previously sanctioned Tornado Cash and 44 associated Ethereum and USDC wallets last year.

Furthermore, the Federal Bureau of Investigation and the Internal Revenue Service arrested Storm on Wednesday, OFAC said. Semenov remains at large, according to the DOJ. A third co-founder, Alexey Pertsev, was arrested in August 2022 in the Netherlands but freed in April, pending trial.

Coin Center sued the Treasury Department over its Tornado Cash sanctions in October. Earlier this month, the non-profit organization urged Congress to provide more-precise crypto tax regulation.