The Breakdown - Tornado Cash Developer Convicted

Episode Date: May 16, 2024

Alexey Pertsev has been convicted of money laundering charges in the Netherlands, with the judge explicitly saying that his writing code for Tornado Cash made him culpable. NLW discusses the community's reactions. Today's Show Brought To You By Ledger - 5% to Bitcoin Developers When You Buy https://shop.ledger.com/pages/bitcoin-hardware-wallet 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 Wednesday, May 15th, and today we are talking about a resolution in the tornado cash trial. 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. Well, friends, Tornado Cash developer Alexei Perzav has been convicted on money laundering charges in the Netherlands. Alexi has been sentenced to serve five years and four months in prison, which was the maximum sentence available. The trial was held in front of a panel of three judges without a jury present.

The verdict stated that, quote, The court considers it legally and convincingly proven that the suspect, together with others, was guilty of laundering the ether from a crime included in the indictment and that he has made a habit of this laundering. Elsewhere, the verdict added, 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. This was the central issue of the case. The court determined that Perzav was guilty of money laundering simply by publishing a tool which later enabled it.

The judges didn't find that there was any need for prior criminal intent, just that it was foreseeable that money laundering would take place using tornado cash. The verdict found that tornado cash has no legitimate non-criminal use. It leaned heavily on the idea that Perzev was made aware of money laundering, on the platform and did not take meaningful steps to prevent it. Tornado Cash operates using immutable smart contracts, meaning that any attempt to limit use would have been futile. The judges recognized this fact, but appeared to view it as evidence that money laundering

was the intended purpose of the platform. The court wrote in a statement, with Tornado Cash, the defendant created a shortcut for financing crimes and terrorism. He chose to look away from the abuse and did not take any responsibility. Tornado Cash works as it was conceived. In the court's opinion, the defendant can therefore be classified as a perpetrator of the money laundering acts carried out by Tornado Cash. During the trial, prosecutors pressed on the idea that Perzsev could have built in protections,

but chose not to. The lead prosecutor said, Pertsv made choices writing the code, deploying the code, adding features to the ecosystem. Choice after choice, all the while he knew that criminal money was entering the system. Building and deploying something unstoppable is also a decision. So it's not about code, it's about human behavior. Pritzv will now have two weeks to lodge an appeal. As the case was tried in the Netherlands, it doesn't set any precedent ahead of the U.S. trial of fellow tornado cash developer Roman Storm.

A key legal difference is that the Netherlands, does not have freedom of speech rights in the same way as the U.S., enshrined in the First Amendment of the Constitution. This is a key defense being raised by Storm, that code is protected speech where there is no intent to commit a crime. Storm's case is currently awaiting the court's decision on a motion to dismiss before the trial gets underway. Unsurprisingly, the tornado cash cases have captured the attention of the industry across a number of ankles. They will have a massive impact on the way on-chain apps are designed in the most high-stakes way possible by setting the boundaries for the criminal liability of developers. The central premise in the case is that

developers can be held responsible for the way third parties use their protocols, even if that isn't the initial intention. To some, tornado cash may be an extreme case, with an argument that facilitating unfettered private transactions is inevitably going to attract criminal use. But still, that strikes at the heart of the battle for financial privacy. In other words, these cases deal with the question of whether on-chain privacy is a right that should be respected or treated as inherently suspicious. The predictable outrage was thick across crypto-Twitter. Ryan Sean Adams of Bankless provided one of the most comprehensive takes, tweeting, This is a sad day for the Netherlands. It's a sad day for the founding principles of open societies

in Western liberal democracies. Today, Crypto Privacy developer Alexei Pricev was sentenced to five years in prison by a Netherlands court for developing an open source tool that allows people to keep their crypto transactions private. Today, they made privacy illegal in an EU country. You think I'm overstating this. Then tell me, what is the legal way to keep peer-to-peer crypto transactions private? We have HTTPPS for email and internet messages, what's the equivalent for crypto, and who's building it? It doesn't exist because they're putting our devs in jail. One judge called Tornado Cash a tool intended for criminals. How far we've fallen when our courts assume anyone using privacy tools is a criminal.

Your courtroom should be celebrating cryptographers as the stewards of the hard-fought democratic freedoms passed down to us from the Enlightenment. Instead, you jail these patriots and strip the people of the only tools powerful enough to hold back a dystopic, feudal-aged digital penopticon. If your free society bans privacy in jails developers, then you no longer live in a free society. The Netherlands has fallen, the EU is slipping. will America hold all eyes on Roman Storm's case here in the U.S.

Kasa co-founder Jameson Lopp had a similar take, tweeting, The message could not be any clearer. Software developers are not safe while practicing their craft in the Netherlands. Move to a jurisdiction that respects your rights to build tools without being responsible for anyone who abuses them. There are also a significant number of illegal focus takes. Coincender Director of Research Peter Van Valkenberg provided his reaction to the verdict tweeting,

some of this would be highly questionable under U.S. constitutional law. Unlike in the U.S. case that focuses primarily on ongoing activities of the defendants, the Dutch ruling seems to come straight out and say that you can be criminally responsible merely for inventing a crypto system. Additionally, the standard of intent for criminal culpability is much lower here, although it may be lost in translation. This looks like mere knowledge of a significant chance that one's actions could facilitate crime. In essence, that's the negligence standard. In the U.S., conspiracy to launder money is a specific intent crime, and the prosecution must prove that the defendant intended to launder money, not merely knew that they might have

made it easier for a stranger to do it. Summarizing his thoughts, he added, I'm sad for Alexi and angry that the money laundering laws in the Netherlands have such a low threshold for intent, essentially mere negligence. Without a clear ruling until now, it wasn't exactly certain how broad that standard could be stretched and how much risk there was for developers in the EU or the Netherlands specifically. I think this verdict confirms that it actually can be stretched very far, at least in the Dutch criminal system. Nothing in this ruling should prejudice or carry weight in Roman Storm's case in the Southern District of New York.

In America, we have stricter intent standards for money laundering and stronger First Amendment and due process protections. I hope Alexi can fight this on appeal. Privacy is normal, and inventing tools to help people protect their privacy is a basic right. Hello, breakers. Today's episode is sponsored by Ledger. As another cycle ramps up, it's another chance to think about your Bitcoin custody best practices, and of course, to help all the new folks do the same. Ledger is the global platform for securing Bitcoin and other crypto. ledger combines both hardware wallets and the ledger live app to offer the best way to buy,

sell, swap, and stake without sacrificing on security or self-custody. Ledger features cutting-edge technology in the form of a certified secure chip and a proprietary operating system, but also brings ease of use. This makes Ledger a safe and secure way to manage your digital assets without all the stress. Check out the link to the Bitcoin Ledger Nano in the show notes. 5% of all sales of the Bitcoin Ledger Nano go to support Bitcoin development. once again to Ledger for supporting the breakdown. The Blockchain Association backed the right to code, with head of legal Marissa Coppel stating,

the right to code should be afforded to all software developers. At Blockchain Association, we will continue to defend and advocate for the rights of developers here in the United States and around the world. The Defi Education Fund said they were disappointed in the verdict, but emphasized that it should have no impact on the U.S. Tornado Cash case. A spokesperson for the organization said, as we argued in our previously submitted amicus brief in the case against Roman Storm, the government's theory of liability in the indictment is unprecedented. According to the allegations

in the indictment, software developers who create open-source general use software would be held criminally liable when third-party bad actors use that software years after it was created and with no direct or active engagement between the developers and those bad actors. This is simply not the law as it stands in the U.S. Lawyer Jason Gottlieb took a more philosophical view, putting this case in a broader perspective. He wrote, We have a long, sad history of national security being abused to deprive us of so many liberties. There's a straight and terrible line from the Alien and Sedition Acts, to the Japanese internment camps, to the Patriot Act, to the prosecutions of coders of neutral software. Once the government proclaims we have an enemy, France in 1798, Japan and 1941, Al-Qaeda in

2001, North Korea now, courts bend over backwards to allow the government to trample free speech and other rights, again in the name of national security. Today, one coder of Tornado cash was convicted in the Netherlands. Another faces trial here in the U.S. Both governments invoke the boogeyman of North Korea to prosecute people who wrote and released software, with undeniably legal uses because someone else misused it. We don't hold Microsoft responsible when drug gangs use Excel to keep track of their profits. We don't arrest Apple executives when criminals plot crimes using FaceTime. We don't prosecute the NYSC because people can use it for insider trading. Code is not illegal. Misusing that code may be, but the code itself is not illegal. Regulators and courts

alike should be careful not to get played and swayed. Prosecutors will always claim we need these restrictions to protect national security. What if it's abused by North Korea or whoever the next bogeyman is. We need to remember what we are trying to keep secure in our nation, our freedoms to write, to speak, to express ourselves, even when that expression is in code, to create, even when that creation is misused. Restricting the dissemination of code, such that the only permissible use cases are those that cannot be abused by wrongdoers, criminalizes the dissemination of code, a recognized First Amendment right. Clearly, there are real bad folks out there. North Korea, drug gang, sex traffickers, and yes, often the easiest way to bust them is to follow the money,

but we should not abuse fundamental rights to pursue even terrible criminals. It's unconstitutional and un-American. Every single time we do it in history, we look back and regret it, and then we do it again. What if we decided not to do it again and instead use the Constitution as our guiding light, and made no law abridging the freedom of speech? Worth a try. So, as all of these tweets make clear, this feels very much to people like a highly consequential decision, even if it shouldn't prejudice the similar case going on in the U.S. Of course, as that case goes further, we will keep you informed about all of the developments. Now, switching gears to round out the day, I want to actually turn over to the macro.

There's been a lot of chatter about the potential for returning inflation, and we've had a little bit of news on that front. Tuesday saw the release of the producer prices index for April. PPI is a measure of wholesale inflation, which is typically viewed as a leading indicator for consumer price inflation. The numbers came in far above expectations across the board. Annualized wholesale inflation came in at 2.2%. The highest mark in over a year. Core PPI, which excludes food and energy, was 2.4% over 12 months. The highest that measure has been since last August.

Although the April figures were hotter than expected, March numbers were. revised down significantly. The original March release had PPI increasing at 0.2% for the month, which was revised to a decrease of 0.1%. Chris Larkin, managing director of trading and investing for E-trade at Morgan Stanley, said, sticky inflation looked downright stuck this morning after a much hotter than expected inflation reading. But with last month's numbers revised lower, this report may not have been as much of an upside shock as it first appeared. Jeff Snyder said, the BLS is just screwing with us, right? They know everyone is watching for clues on inflation, so the day before the CPI they put out a mess of a PPI. They make April hot, but only after

revising March to outright negatives. It's like some far side cartoon. Now, later on Tuesday, Fed Chair Jerome Powell urged patience as the inflation fight appears to some to be stalling out. Referring to recent inflation figures, he said, we did not expect this to be a smooth road, but these were higher than I think anyone expected. What that has told us is that we'll need to be patient and let restrictive policy do its work. Discouraged but not defeated, Powell added, it looks like it will take longer for us to become confident that inflation is coming down to 2% over time. Speaking directly to April PPI data, Powell said,

I wouldn't call it hot, I would call it sort of mixed. The headline numbers were higher, but there were backward revisions. We were disassembling it and taking it apart. Speaking to a few hot-button issues, Powell said that there had been a, quote, fairly large influx of immigration into the country over the last couple of years. Those people are joining the labor force were still experiencing a labor shortage in many industries. They're going to work and consuming, so that's also boosting growth. He also noted that, quote, housing inflation has been a bit of a puzzle.

During the rest of his speech, Powell reiterated his belief that monetary policy is currently restrictive and that rate hikes are not on the table. He added, we think that it's probably a matter of just staying at that stance for longer. Giving some fodder to Fed critics, Powell said that when it comes to the inflation fight, quote, credibility is everything for central banks. Overall, this is the same position Powell put forward at this month's FOMC meeting. We're now at the stage where Powell is downplaying hot inflation prints and assuring markets that rate hikes are not being considered.

That's a complete reversal from forward guidance in January when Powell was talking down the chances of deep rate cuts later this year. Luke Tilley, chief economist at Wilmington Trust said, today was a big exercise in reiterating the previous stance that they don't expect to be hiking rates, and if they need to stay at this level for longer, they will. Now, as I was preparing this episode today, CPI data came in less than expected, in something that Bloomberg called a small step in the right direction for Federal Reserve officials looking to start cutting interest rates this year. We will do a full analysis of that in our episode tomorrow. For now, I want to say, a big thank you to the sponsor of today's show. Check out the Ledger Bitcoin Orange Nano. 5% of

sales will go to support Bitcoin development. Until next time, be safe and take care of each other. Peace.