Nikhil Prasad Singh & Pulkit Yadav are students at National University of Study and Research in Law, Ranchi<\/p>\n\n\n\n
In August 2022, the US Department of Treasury Office of Foreign Asset Control (\u201cOFAC<\/a>\u201d) imposed sanctions on Tornado Cash allegedly for its use in laundering over $455 million of stolen crypto by the North Korean based \u2018Lazarus Group\u2019. Tornado Cash was the most popular<\/a> privacy-protecting tool on Ethereum Blockchain, which is the world\u2019s second-largest blockchain<\/a> in terms of users after Bitcoin. The founders (\u201cDefendants\u201d) of Tornado Cash were charged with money laundering<\/a> and, accused of hampering National Security of the US.. Tornado Cash has been in the headlines again as on April 5, 2025, many blockchain NGOs such as DeFi Education Fund<\/a> , Blockchain Association<\/a> & Coin Center<\/a> have filed an Amicus Curiae brief in defense of Tornado Cash developer in the United States District Court Southern District Of New York. They challenged the US Department of Justice\u2019s (\u201cDOJ\u201d) broad interpretation of the Criminal Code, which has made the Defendants and software developers liable for the actions of their users under the operations of \u201cunlicensed money transmitting business\u201d<\/em>.<\/p>\n\n\n\n Tornado is a cryptocurrency protocol<\/a> that operates in the Ethereum blockchain<\/a> and is widely used for its non-custodial and smart contract mixing features. Increase privacy has reduced the government control on the Tornado Cash, which has lead to scrutiny and sanctions on the Defendants. But without having the effective control over the execution of the smart contract, the OFAC has set up a wrong precedent in sanctioning the Defendants.<\/p>\n\n\n\n The charges of money transmission against the Defendants are based on a misunderstanding of how the relevant distributed ledger technology works and what the law requires. The statute and regulation pertaining to \u201cunlicensed money transmitting business<\/em>\u201d in the US is the Bank Secrecy Act<\/a>. The 18 U.S.C. \u00a7 1960(b)<\/a> defines an unlicensed \u201cmoney transmitting business<\/em>\u201d that either: (1) fails to get registered with the FinCEN as per the Bank Secrecy Act or fails to comply with related regulation or (2) the Defendant knows the transmitting funds are derived from criminal offense or used to promote or support unlawful activity. The regulation<\/a> under the Bank Secrecy Act by FinCEN requires the money transmitter to be registered with FinCEN and defines \u201cmoney transmitter<\/em>\u201d to be either: (1) a person providing money transmitting service or (2) a person engaged in the transfer of funds. But the FinCEN regulation no. 31 C.F.R. \u00a7 1010.100(ff)(5)(i), exempts from the \u201cmoney transmitter<\/em>\u201d definition if the person is merely engaged in providing \u201cthe delivery, communication, or network access service used by a money transmitter to support money transmission services<\/em>\u201d.<\/p>\n\n\n\n The regulations are made for the old financial institutions and legacy financial transactions. The public nature of the blockchain<\/a> makes it different and much more efficient, transparent, and secure than legacy financial technology. However, the public nature of blockchain, in which all the history of transactions by any particular user can be seen, is an issue with many individuals, as they generally do not want their transaction history to be made public. Tornado Cash solves this issue by deploying a series of smart contracts and off-chain software tools that allow Ethereum users to protect their privacy despite the inherent nature of the public visibility feature of Ethereum\u2019s blockchain. The pool address of Tornado Cash is deployed on Ethereum\u2019s blockchain in such a way that all the user assets which the smart contracts receive are both non-custodial<\/a> and immutable<\/a>. Therefore, the user alone controls the asset, and no third party, including the Defendants in the present case, has control or ability to redirect or change smart contract rules that alter their transaction. As far as data is concerned,<\/a> money laundering only accounts<\/a> for 0.05% of global digital asset transactions in 2021. <\/p>\n\n\n\n The government\u2019s sanction of Tornado Cash and the conviction of the Defendants will harm the adoption of the digital assets industry. For several years, the members of the digital asset industry have relied on the FinCEN regulations<\/a> and 2019 guidance<\/a> in investing and developing these services. The regulation specifically states<\/a> that total independent control in transmitting the funds is required to be called rendering money transmitting services, and mere delivery and networking are excluded from the definition. The DOJ\u2019s effort to impose criminal liability on the Defendants for the conduct of Tornado Cash is not in compliance with the long-standing FinCEN\u2019s regulation and guidance. This has set a serious precedent and deprives the entire digital asset industry of a fair share of development and progress. <\/p>\n\n\n\n The expansive interpretation of Section 1960<\/a> jeopardizes developers of anonymizing protocols at risk of criminal liability under the Bank Secrecy Act, despite not being in control of the funds that are transmitted on the protocol. In simple words, a blacksmith is being imposed criminal liability for making a knife used in a murder. This can be worse in compliance with the Bank Secrecy Act, and it is impossible to be compliant for the developers. The lack of valid justification for the government\u2019s overreach makes it worse. The government\u2019s concern with digital assets being used to launder money can be easily handled by other laws including Digital Assets Anti-Money Laundering Act, 2023 and Money Laundering Control Act, 1986, or by targeting illicit actors directly. Sanctioning digital asset wallets would have been enough to handle these, but the adoption of the new elaborate conduct will have unintended consequences. It may have a chilling effect on the entire development of decentralized protocols, such as peer-to-peer protocols<\/a> or protocols which allow users to deposit funds in the smart contract, as they might fear that an over-expansive definition may affect them as a money transmitter.<\/p>\n\n\n\n It could also risk criminal liability<\/a> being imposed upon digital assets exchanges like Binance and Coinbase which only provide a platform for buying and selling digital assets. The overbroad definition and erosion of the \u201ccontrol\u201d requirement will result in narrow or no differentiation between the anonymous protocols or the other entities the government is trying to regulate as \u201cmoney transmitters\u201d<\/em>. It may result in setting a wrong precedent in the virtual digital assets industry in the nations where it is not regularised, such as China, India and the African Sub-Continent With adoption and development ongoing, the industry developers may subject to vulnerability due go irregular state directions , and precedents such as these will hamper innovation and may drive it offshore to countries like UAE and Europe<\/a> where it is more regularised.<\/p>\n\n\n\n Blockchain and cryptocurrency introduce a significant shift to how financial transaction as well as data are recorded by maintaining privacy and transparency<\/a> due to the decentralisation of data handling. The concept of decentralisation and centralization has been a prime topic among the technicians, economists, and politicians in the context of cryptocurrency exchanges. Specifically in this context, centralisation means<\/a> a system where the entire network of transactions is controlled by a single server having decision-making power and enforcing rules, while in the decentralised system, the control of the network is distributed among several nodes , which is difficult to control by any single entity. However, this design escalates the conflict between regulation and individual privacy. Blockchain\u2019s distributive nature has created a barrier for the traditional regulatory tools, which mostly apply to a centralized framework to enforce Anti-money Laundering and block financing of terrorism. The government wants traceability and transparency to ensure that any digital activity is lawfully done. But existing legal dynamics become somewhat complex as regulators attempt to apply those laws to such decentralised platforms which often lack clarity<\/a> as to whom shall be held accountable.<\/p>\n\n\n\n Till now there is no defined legislation for regulating the crypto market. However, the US passed the Financial Innovation and Technology<\/a> for the 21st Century Act (or FIT21) in 2014, but it remains unimplemented. When it comes to writing, coding languages like JavaScript, HTML, Python, and Perl, or spoken or visibly signed discourse, the First Amendment<\/a> acts as a check on government interference with the right to free speech in the digital arena. The privacy-oriented cryptocurrencies like Zcash and Monero have exploited this regulatory conflict by knowingly obscuring transactional details which highlighted the debate over misuse versus maintaining privacy<\/a>. There is no established blockchain law, which is why we are interpreting traditional regulations for these technologies. With time, the scope is widening, and in parallel new regulations<\/a> will be enacted, but to broaden the existing scope has made the market more worse than earlier.<\/p>\n\n\n\n The Tornado Cash case represents a critical juncture in cryptocurrency regulation, highlighting the fundamental tension between government oversight and the decentralized ethos of blockchain technology. By prosecuting software developers for user actions on their protocol, authorities have established a concerning precedent that threatens innovation throughout the digital asset ecosystem. This expansive interpretation of money transmission laws, where developers with no control over funds face liability for building privacy tools, could chill development across the industry and drive talent offshore to more favourable jurisdictions. The case exposes the inadequacy of applying traditional financial frameworks to decentralized systems and underscores the urgent need for tailored regulations that balance security concerns with technological advancement. As the industry awaits resolution of the ongoing legal challenges, the outcome will likely shape the regulatory landscape for years to come, determining whether privacy and innovation can coexist with effective oversight in the crypto space.<\/p>\n","protected":false},"excerpt":{"rendered":" Nikhil Prasad Singh & Pulkit Yadav are students at National University of Study and Research in Law, Ranchi Introduction In August 2022, […]<\/p>\n","protected":false},"author":2,"featured_media":1213,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1195","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blog-series","col-md-6 col-sm-6"],"_links":{"self":[{"href":"https:\/\/clt.nliu.ac.in\/index.php?rest_route=\/wp\/v2\/posts\/1195","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/clt.nliu.ac.in\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/clt.nliu.ac.in\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/clt.nliu.ac.in\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/clt.nliu.ac.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1195"}],"version-history":[{"count":1,"href":"https:\/\/clt.nliu.ac.in\/index.php?rest_route=\/wp\/v2\/posts\/1195\/revisions"}],"predecessor-version":[{"id":1196,"href":"https:\/\/clt.nliu.ac.in\/index.php?rest_route=\/wp\/v2\/posts\/1195\/revisions\/1196"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/clt.nliu.ac.in\/index.php?rest_route=\/wp\/v2\/media\/1213"}],"wp:attachment":[{"href":"https:\/\/clt.nliu.ac.in\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1195"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/clt.nliu.ac.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1195"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/clt.nliu.ac.in\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1195"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}} The Legal Landscape: Unlicensed Money Transmission in the US<\/strong><\/h4>\n\n\n\n
Implications for the Crypto Industry<\/strong><\/h4>\n\n\n\n
The Core Debate in Crypto Regulation<\/strong><\/h4>\n\n\n\n
Conclusion<\/strong><\/h4>\n\n\n\n