The Breakdown - Tornado Cash Case Going to Trial

Episode Date: October 2, 2024

Is it a standard money-laundering case or are the implications for privacy and free speech more significant? The case against Tornado Cash founder Roman Storm is heading to trial after a judge has rejected his motion to dismiss. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Monday, September 30th, and today we have an update in the tornado cash case. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Tornado Cash founder Roman Storm will stand trial after a federal judge denied his motion to dismiss. Storm is facing three criminal charges of conspiracy to commit money laundering,

conspiracy to commit sanctions violations, and conspiracy to operate an unlicensed money-transmitting business. The case is being held by Catherine Polkfalia, the same judge that is overseeing the Coinbase lawsuit, and has demonstrated an impressive ability to grasp the legal issues surrounding digital assets in defy. During a hearing on Thursday, the judge found the government's allegations to be plausible enough to warrant a trial. She said, at this stage in the case, the court cannot simply accept Mr. Storm's narrative that he is being prosecuted merely for writing code. If the jury ultimately accepts this narrative, then it will acquit. If there's no basis for me to decide that as a matter of law. Instead, she was convinced that tornado cash was indistinguishable from other financial services and money transmitters.

The tornado cash case has been billed as the big code is speech lawsuit for this generation, but the judge just wasn't buying it. Again, she said, the functional capability of code is not speech within the meaning of the First Amendment. The court finds that the government has a substantial interest in promoting a secure financial system by combating money laundering, by combating the operation of unregistered money transmitting services, and by combating the evasion of sanctions. These interests are wholly unrelated to the suppression of free expression, and the applicability of these laws to destroy conduct does not burden substantially more speech than necessary.

The essential point here is that Folly will not focus on the code as mere expression, but will also consider the functionality of the code. She added, it is true that computer coding can be expressive conduct protected by the First Amendment, but when a programmer is using code to direct a computer to perform various functions, that code is not protected speech. Falia also deviated from FinCEN guidance produced in 2019. According to that interpretation, taking custody of user assets was a key element in determining whether a money transmitter license was required.

Prosecutors argued that this part of the guidance was narrowly focused on self-hosted wallet providers and did not apply to other parts of the ecosystem, including mixers. The judge found that the Bank Secrecy Act does not require the control of funds, but merely a role in facilitating and transferring them. Essentially, they did not need to exercise total independent control of user funds. She also noted that she was unable to find a meaningful difference between Tornado Cash and the custodial mixers that have been deemed money transmission services. Vaya paid particular attention to the fees being generated on the platform, noting that Tornado Cash was not an altruistic venture. There was some controversy around the immutable

nature of the code and whether that could distance storm from responsibility. The judge acknowledged the factual dispute that could play a lot. a role at trial, but found it was immaterial to the current decision. On the money laundering charge, Fowlery found that full knowledge or direct assistance was not a necessary element. She said, to be guilty of, the defendants need not be guilty of, involved in, or even aware of the specifics of the specified unlawful activity. The government did not have to allege that Mr. Storm was aware of the specific nature of, much less a participant in the underlying criminal activity. Mr. Storm needed to know he was dealing with the proceeds of some crime, even if he did not

precisely know which crime. Storm also failed to compel the release of several categories of government communications regarding the case. Falia was satisfied with representations made by prosecutors that they contained nothing that could exonerate storm. The case will now proceed to trial currently set for the first week in December in the Southern District of New York. The decision is important not only because of the immediate effects, but it will likely form the basis for jury instruction on legal interpretation.

Falia did leave several elements open to the jury as questions of fact, but the opinion still diverged massively from the industry's understanding of the law. The legal division of Crypto-Twitter was up in arms over the decision. Jake Chervinsky, Chief Legal Officer of Variant Fund, tweeted, Judge Falia's ruling denying Roman Storm's motion to dismiss the indictment is an assault on the freedom of software developers everywhere. This will go down in history as a perversion of law and a travesty of justice, and it will go down on appeal if that's what it takes.

Chavinsky drew attention to the fact that Falia declined to provide a written decision, suggesting that she doesn't want it to be cited in other cases. Digging into the point that platform liability is currently a massive legal issue in tech, Trevinsky added, If you think it's only a crypto problem that the government wants to hold software developers liable for third-party abuse of their code, think again. Today it's tornado cash, tomorrow it's AI models, and whatever else challenges state power. Build an AI agent used by bad guys, jail. It's shocking to me that almost none of the non-crypto civil rights groups have engaged here.

Crypto is on the front lines of the battle for free speech, financial privacy, and due process in the USA. But the groups that you'd expect to show up and fight are nowhere to be found. I'm not about to give you the first they came for, Pome, but if you care about individual rights and civil liberties at all, the precedent being set in the DOJ's prosecution of Roman Storm should radicalize you. This is a slippery slope and we're sliding down fast. Pay attention. Cryptotax guy, meanwhile, turned his mind to the huge number of defy platforms that were relying on immutability and non-custodial design to avoid licensing requirements. He tweeted, Building an immutable system doesn't seem to absolve you of liability in the United States.

The proposed broker reporting regs say nothing of immutability. And as Judge Fallia told Roman Storm yesterday, you can be a money transmitter even without control. John Paul Koenig, a critic who has been especially focused on criminality in the crypto industry, agreed with the decision when it came to the question of control. He picked up the point that Storm's argument about control of funds rests on the idea that he could not intervene in transactions. Conan commented, modern finances adopting automated financial platforms, but this automation should not come with a free pass from money laundering law.

Miles Jennings, a lawyer at A16Z, made a broader point about criminality within the space. In response to a separate threat about money laundering at banks contrasted against the crypto industry, he tweeted, I'm all for calling out lawfare, but crying foul about justified and legitimate government actions against criminals doesn't help crypto's cause. Obviously, criminality and tradfi should be rooted out with the same vigor as criminality and crypto. But the ongoing prevalence of criminality and tradfai doesn't mean we should accept the same in crypto, where the transparency of blockchains enables us to build a better future. Downplaying deliberate and widespread criminal

behavior in crypto based on convenient assumptions and false equivalences acts to distort our collective vision of that future. Tuang Wai Li, the General Counsel at Anchorage, responded, I agree with this, but I think the other way to read these folks is that they're not trying to downplay or excuse it, rather they're urging us to keep it in perspective. The early days of any new technology will attract bad actors. There will be a learning curve even for those trying to get it right, but the things are and will continue to improve over time. Jennings got the final word, adding, sure, but good faith missteps while pursuing innovation are not the same as the deliberate facilitation of a legal activity for self-enrichment. We should be careful not to conflate the two.

So, expect this one to have a lot of discourse and discussion in the months to come, especially as that case goes to trial. Hello, friends. Before we get back to the rest of the show, I want to implore you to join me at Permissionless. Permissionless is the conference for Cryptonatives by CryptoNatives, and the reason it's so important this year is that despite regulators' best attempts to push industry founders, devs, and executives out of the U.S.,

the United States remains the beating heart of crypto. Today the tide is turning. Policymakers have pivoted from fighting crypto to embracing it, Literally now, we are in a major political parties platform, which will lead ultimately to the creation of new financial products, new applications, and ultimately new adoption. Permissionless is the conference for those using and building on-chain products. It's home to the power users, the devs, and the builders. And perhaps more importantly, I will be there.

The location is Salt Lake City, the dates are October 9th to the 11th, and tickets are just $499. If you want to get 10% off, use code breakdown 10. Go to the Blockworks website, blockworks.co. there will be links to register for the conference, and again, you can use code Breakdown 10 to get 10% off. Now, speaking of the government in crypto, Senator Cynthia Lummis thinks that the race for the Senate, rather than the White House, could be the most impactful outcome of the election for

crypto policy. During an interview on CNBC, her comments focused on the gatekeeping power of the Senate Banking Committee. She said that if Republicans win the Senate, Tim Scott is the leading candidate to take over as head of that committee. Scott has been friendly towards the industry and went so far as to recommend a establishing a digital asset subcommittee to deal with crypto legislation and emerging issues. Scott contrasts with the current head of Senate banking, Sherrod Brown. By all accounts,

Brown has been unwilling to move crypto legislation through the committee process. He has been outspokenly critical of the industry, particularly around compliance, which he considers common sense protections. Lomas told CNBC, I think what's going to be better for digital assets is if the Senate is Republican. That's definitely true because Tim Scott will chair the banking committee and he's much more interested in seeing a statutory framework for digital assets than is the current chairman. For those not following, the election politics closely, while the presidential election seems extremely close, right now, models have the Senate likely flipping. The Hill's forecast model is currently projecting a 70%

chance that Republicans win the Senate. Heading into this election, the Senate was evenly split, with the vice president casting the tie-breaking boat. The GOP is expected to pick up seats in West Virginia and Montana, but clear control of the Senate could ultimately come down to Brown's seat in Ohio. That election is the closest in the nation after GOP nominee Bernie Marino closed the gap over the past month. Crypto is not the leading election issue in Ohio, with candidates focusing on the national flashpoints of abortion and immigration. Still, crypto money is flooding into that race to support Moreno, or perhaps more accurately, to fight against Brown. Crypto-Pack Fairshake has so far spent almost $40 million on advertising in Ohio. The election will be one of the most expensive Senate campaigns in

history, with committed ad spend already above $200 million. The GOP probably doesn't need to win Ohio to secure the Senate, but losing that seat would be a huge blow for Democrats. That's particularly true for the progressive wing of the party, with Brown serving as a bridge between the far left and the centrists. However, this race turns out, it may be that the crypto industry has been slightly over-indexing exclusively paying attention to the result of the presidential ballot. Over in 2022 cleanup news, after spending four months in prison, Binance founder CZ walked out as a free man on Friday. CZ served his time for failing to maintain adequate money laundering measures at Binance, but he will not return to the helm at the world's largest crypto exchange.

As part of his settlement with U.S. authorities, CZ agreed not to have any future involvement in managing or operating the exchange. Binance has already been handed over to new CEO, Richard Tang, and a major compliance reform is already underway. In a Twitter post announcing his resignation as CEO, CZ had said, Admittedly, it was not easy to let go emotionally, but I know it is the right thing to do. Binance is no longer a baby. It's time for me to let it walk and run. Throughout the year, Binance has transitioned to a new governance structure that includes an independent board of directors. CZ retains his shares representing an estimated 90% of the company, along with his rights as a shareholder, but won't have day-to-day involvement in decision-making.

So what does the next chapter of CZ's life look like now that he's back on the outside? Before he went in, CZ made a reference to the idea of launching an education platform, as well as investing in AI in biotech startups. He also mentioned a desire to write something using his period of enforced downtime. On Friday night, all we got from CZ was a brief GM before he went for a nice meal, a private shower, and a good night's rest. On Saturday morning, he elaborated, tweeting, GM, the food tastes so good, and what a luxury to be able to have more than one piece of fruit per day.

I know some of you have a lot of questions. I won't have all the answers. Let me chill for a bit, then figure out the next steps. There are always more opportunities in the future than there were in the past. He then went on to give updates around Giggle Academy, that education project, investing, charity, and he said he's about two-thirds done working on his book. Over in FTX land, last week, CT was awash with rumors that the FTX distribution would begin today. traders were chomping at the bit to see $16 billion return to creditors and presumably put straight

back into the crypto market, or perhaps at least optimistically. The rumors spread like wildfire through various large influencers, but they seemed to have had zero basis in fact. What's actually going on is continued slow progress in bankruptcy court. At this stage, a bankruptcy plan has been voted on and will be formally approved or projected at a hearing next Monday. From there, the estate will set up the necessary infrastructure to return money to creditors. Small creditors who have claims of up to $50,000 could see their distributions by the

end of the year. That would still be a record speed for a bankruptcy of this size. Keep in mind, the Celsius bankruptcy plan was approved in November, but it took several months for payments to be made. As of August, the Celsius estate said that around 93% of claims had been paid. For larger creditors, however, the weight could be even longer. Sometime in the first half of next year might be a realistic timeline. As for whether the $16 billion in repayments go straight back to the order books, that remains to be seen. We know that the FTCS bankruptcy featured extremely active claims buying from specialist firms. These bankruptcy investors generally don't care about crypto. They just care about the likelihood of a full recovery. Zahir of split capital estimated that

over $5 billion in claims were sold to these firms and are unlikely to find their way back into crypto markets. He also believes that around half of claims will be tainted and never received by the creditor. This would be the creditors who used questionable KYC or who were otherwise unable to prove their claims. For the remaining $4 to $6 billion, Zahir believes that any more than 25% being reinvested into crypto would be, in his words, very successful. In essence, his back of the napkin math puts the cash injection closer to $1.5 billion, then $16 billion. Of course, ultimately, for that, we will have to wait and see. Unfortunately, it is a wait that will not come to a head this week.

That, however, is going to do it for today's breakdown. Appreciate you guys listening as always. And until next time, be safe and take care of each other. Peace.