In Congress, crypto mixing and its privacy-enhancing use of blockchain technology has been a troubling innovation for some Members. Case and point: crypto mixer Tornado Cash has been front-and-center in illicit finance deliberations within the U.S. government and was sanctioned in 2022 by U.S. Treasury.
Last Friday, blockchain tipsheet sat down with Amanda Tuminelli, Chief Legal Officer of decentralized finance advocacy firm DeFi Education Fund (DEF). We discussed both the latest and the “basics” in crypto mixing as well as the Department of Justice’s indictment in August 2023 of Tornado Cash software developers Roman Storm and Roman Seminov.
Roman Storm is currently in custody and his case has been delayed until later in the year in the Southern District of New York. Roman Seminov remains at large.
Also, last October, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) announced a Notice of Proposed Rule Making (NPRM) – see it – that identified crypto mixer transactions as a source of money laundering. DeFi Education responded with a formal comment (PDF).
With lawmakers and their staffs in mind, blockchain tipsheet’s interview with Ms. Tuminelli covered:
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- why crypto mixers are controversial
- the lawful purpose of mixers
- balancing AML regimes and mixers
- crypto wallets and identifiers
- overview on indictment of Storm and Seminov
- Dutch court convicts Tornado Cash developer Alexei Pertsez
- scenarios pending U.S. court decisions
- unlicensed money transmitting
- crypto mixing 5-10 years from now
The transcript has been lightly edited for clarity.
blockchain tipsheet: Why have crypto mixers become controversial?
Amanda Tuminelli: I think that many lawmakers are concerned that “mixing” automatically means unlawful conduct or a national security concern. And it has become fraught with national security issues because of the DPRK (North Korea) using Tornado Cash or the allegations that various terrorist groups are using mixing services in order to fund their activities. I think that is happening. And we absolutely are not here to support that in any way.
But, there is a disproportionate focus on those groups using mixers. And I think their focus should be more properly on the technology: what is mixing and what is it really going on under the hood, and who in the mixing tech stack is the appropriate person to regulate.
blockchain tipsheet: Does mixing have a lawful purpose?
Amanda Tuminelli: Yes, it does. There are many lawful purposes, but the primary one that comes to mind is privacy.
I have the right to have a private financial transaction that should stay private unless and until I am suspected of some crime and there’s actually a proper investigation. But up until that moment, I should enjoy privacy in my financial transactions -that’s the primary legal purpose.
There’s also good reasons to not want your employer to know how much money you have, to not have a full financial picture of all of your wallets and how much they hold to anybody looking at a blockchain explorer. There’s the famous example of people using a mixer to donate to Ukraine because they didn’t want the Russian government to be able to trace donations back to the donors.
I think, there, it’s all under the umbrella of financial privacy, but I think that there are many lawful purposes.
blockchain tipsheet: How do you balance that with the needs of an anti-money laundering (AML) regime?
Amanda Tuminelli: The focus should be on regulating the actual people who are using the technology and not the technology itself.
The more appropriate focus in any compliance regime is the actual users who are doing the conduct that you’re trying to regulate. So, even if you’re using a mixer, you still have on- and off-ramps… the digital assets have to come from somewhere. It’s much better and easier, practically, for a regulator to put AML requirements on the on- and off-ramps versus the actual mixing protocol. And those compliance requirements will give regulators enough insight into the users of the technology [such that] they can do an investigation from that point – if they need to – with that information.
So, I think that’s the more appropriate focus and how you balance it: looking at on- and off-ramps.
blockchain tipsheet: Along those lines of an AML regime, some have proposed we need a “license plate” for digital wallets, in other words, an identifier. What are your thoughts?
Amanda Tuminelli: I think that that is the ultimate surveillance tool and is even more information than you get even at a bank. It’s the antithesis of what blockchain technology and cryptocurrency is about.
There are ways to balance regulation and concern and rulemaking with the need for financial privacy without going to that level.
blockchain tipsheet: Can you provide a high-level overview of the Department of Justice’s indictment against the software developers Roman Storm and Roman Seminov?
Amanda Tuminelli: Roman Storm and Roman Seminov were indicted together in the Southern District of New York for three different conspiracies.
The first conspiracy is allegedly a conspiracy to launder money.
The second is a conspiracy to run an unlicensed money transmitting business.
And the third is a conspiracy to violate IEEPA, which is the International Economic Emergency Powers Act, the sanctions statute that gives the President authority to issue sanctions -and specifically [in this case], North Korean sanctions.
And underlying all those charges is the government’s allegation that by developing the Tornado Cash software, publishing it and maintaining the front end to the protocol, both Roman Storm and Roman Seminov are responsible for the users of that protocol laundering money, allegedly, or violating sanctions, or sanctioned people using the protocol.
I think what’s really happening is the government is trying to hold software developers liable for third-party misconduct, reported misconduct and I think that’s where it’s a really, slippery slope.
blockchain tipsheet: A Dutch court recently sentenced Tornado Cash developer Alexei Pertsez to 64 months in jail. Do any of those actions inform what’s happening here in the United States?
Amanda Tuminelli: I think the prison sentence reflects that – in the Dutch court – they were very focused on the loss amount which they made sky high.
They accused Pertsev of a $2.2 billion loss amount, which was not really a loss amount. In fact, it was the their calculation of how much money flowed through the Tornado Cash protocol.
If you were to use that loss amount here in the United States, under the sentencing guidelines, it would be an even higher sentence because in the sentencing guidelines – i.e. the loss amount table – you were talking about 10s of years-to-life sentences.
So, in terms of there being a connection, obviously, the Southern District of New York, which is where Tornado Cash developer Roman Storm’s case is currently pending, they could in theory look at the Dutch court and compare when they get to the sentencing part -if they get to the sentencing part of the trial.
Right now, Storm’s case is currently awaiting a motion-to-dismiss the indictment decision. Judge Failla just heard oral arguments last Friday. And DeFi Education Fund put an amicus (see the brief) in supporting Storm’s motion-to-dismiss the indictment, because we think the charges there don’t make any sense.
But when she makes these decisions, she can look at what the Dutch court has said and done, but it’s not binding on her in any way. She is totally free to disregard it if she wants to.
blockchain tipsheet: Some in Government believe crypto mixers are much like gun manufacturers. Gun manufacturers are creating weapons that kill people -to put it in the extreme. And then crypto mixers are creating a product which facilitates the funding of terrorism. How do you see this analogy?
Amanda Tuminelli: I get the desire to use that analogy because a gun is a dangerous weapon. I would make an analogy to any tool rather than a gun because I think a tool like a hammer has the ability to just be a plain old hammer that is used for totally legal construction. It also can be used as a dangerous weapon.
How a person chooses to use the hammer when they pick it up. That is the person whose conduct the government should be focused on -not the person who made the hammer.
With the gun example, there is an assumption baked-in that guns only have a violent purpose. And, they don’t have any other purpose. The Tornado Cash protocol has lawful purposes as we talked about and sure, some people can use it to commit crimes. But then it’s those people’s conduct that should be the focus of the government -not the developers.
blockchain tipsheet: Back to the Roman Storm and Roman Seminov case. What do you see as the as the rightful outcome of this case?
I would love to see the allegations and charges from the indictment dismissed if that was possible. I really don’t want to predict an outcome. But I think it is very difficult to win motions-to-dismiss of the indictment because the bar is so low… the government only has to plausibly state the elements of the criminal statute that they want to prove at trial.
So, it’s very easy for government to do that. But, the government’s theory in the Tornado Cash case is novel. It is not a theory that we have seen before. We did a review of over 100 different federal cases and didn’t find any cases with a similar sanctions theory where the person accused of violating sanctions actually has no connection whatsoever to the sanctioned entity.
In this case, there’s no allegation in the indictment that Roman Storm or Roman Seminov directly spoke to, engaged with, solicited a sanctioned entity. It’s like there was a wall: the DPRK used the protocol and the two developers never knew about it.
The government would say, “At some point, it came to their attention that the DPRK was using the protocol,” but at that point, there was nothing the “Romans” could have done to stop the DPRK from using the protocol.
But, I digress…
So, I would love to see the novel theories from the government not be given weight by the Court when she writes the motion-to-dismiss opinion. If this does go to trial, which is currently scheduled for December, I really hope that there will be a large focus on understanding what the technology does and doesn’t do, and a real focus on what a developer should be held responsible for versus users of the conduct themselves. That’s what I hope happens.
blockchain tipsheet: If they are found “not guilty,” or if the case is dismissed, what does that say about crypto mixers?
Amanda Tuminelli: I don’t think it has to say anything about crypto mixers as a broad brushstroke. I think it can say that software developers are not going to be held responsible for the third-party conduct.
blockchain tipsheet: And if they are found guilty, what happens?
Amanda Tuminelli: I think that’s a really scary precedent to set for software developers, in general, because right now the subject is mixers where the facts look bad. But, this ruling could then be applied to software developers of other kinds of protocols and that’s where I get really nervous.
blockchain tipsheet: You previously suggested to me that you have concerns about the unlicensed money transmitting element held by the government in this case and the Samourai wallet case filed this past April. Why the concerns?
Amanda Tuminelli: In Count 2 of the indictment, the government has accused the Tornado Cash developers of a conspiracy to run an unlicensed money transmitting business. That’s a charge that we also saw pop-up in the Samurai wallet case also filed in the Southern District of New York. I think this charge is really concerning because the statute defining what a money transmitting businesses is is so broad – as is the government’s definition – such that they would capture people like developers who have no connection, control or custody over user funds, and have just written software that enables peer-to-peer transactions where there is no custody of the customer’s funds.
Right now, it’s applied to mixers. But, I think this could applied to many other protocols by the government.
And, in their opposition to the motion to dismiss, they specifically disregarded FinCEN guidance from 2019 over what should count as a money service business – FinCEN wrote very helpful guidance in 2019 about what an anonymous services provider is, what an anonymous services protocol is, and exempted certain parts of that from the money services businesses definition. And the DOJ was basically like, “We don’t really need to listen to the 2019 guidance,” -which is very concerning because it’s what the industry has been using since 2019. If you’re trying to follow the rules in good faith, it should not come as a surprise five years later that the DOJ has decided that that guidance is actually not binding on them
Assuming things fall in the favor of the use of crypto mixers, what’s the importance of crypto mixers 5-10 years from now?
In that very optimistic outcome, I think that we won’t even think of mixing technology the way that we think of it right now.
I think that there will be many ways to maintain privacy over financial transactions and you won’t even say, “Oh, I’m using a mixer.” There will be a protocol that makes it very easy for you to keep a financial transaction private. And with continued research into zero-knowledge proofs and things like that, there may even be a technological solution to being able to maintain financial privacy and also assuage some of the concerns by the government.
I think that mixing technology will look different, but the aims and goals of it will still be present in new technology.
DeFi Education Fund describes itself as a nonpartisan research and advocacy group working to explain the benefits of DeFi (blockchain-based decentralized finance) and is based in Washington, D.C.
“For Staff” is an opinion and interview series intended to inform Congressional staff about key, blockchain industry topics.