Tornado Cash: SDNY Abandons "Financial Institution Theory"

New filings in the criminal case against Tornado Cash developer Roman Storm show that the Southern District of New York (SDNY) is no longer pursuing the theory that Tornado Cash was a financial institution, igniting a back and forth between the defense and the prosecution on the sensibility of remaining charges.

Specifically, SDNY is dropping unlicensed money transmission charges against Storm under U.S.C. 18 §1960(b)(1)(B) “in an abundance of caution regarding the definition of ‘financial institution’ in the money laundering statute" consistent with the Blanche memo issued earlier this year, and therefore "no longer intends to call a witness from FinCEN."

But the Government does intend to continue to pursue charges under U.S.C. 18 §1960(b)(1)(C), governing activity that "otherwise involves the transportation or transmission of funds that are known to the defendant to have been derived from a criminal offense or are intended to be used to promote or support unlawful activity."

U.S.C. 18 §1960(b)(1)(C) does not stem from the Bank Secrecy Act, but from the 2001 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act, better known as the PATRIOT Act. As such, U.S.C. 18 §1960(b)(1)(C) is not tied to state or federal regulators like its counterparts, with U.S.C. 18 §1960(b)(1)(A) governing state-level registrations and U.S.C. 18 §1960(b)(1)(B) governing federal registrations under FinCEN authority.

But Storm wasn't charged with state-level licensing violations, and is now no longer charged with federal licensing violations. Then who, exactly, should he have registered with?

By arguing that U.S.C. 18 §1960(b)(1)(C) is not contingent on licensing requirements established in U.S.C. 18 §1960(b)(1), "the government essentially argues that the same statute defines 'money transmitting' to mean two different things depending upon the factual context," the defense argues, calling the Government's argumentation a "contortion."

WhatsApp vs. Tornado Cash

In a former hearing, Judge Failla asked the prosecution whether charging Tornado Cash developers for the transmission of criminal funds was similar to charging the developers of WhatsApp because criminals used it.

In response, the Government argued that this was not an accurate comparison to make, as WhatsApp is distinguishable from “financial institutions that process financial transactions,” which are required to “maintain data.” If this distinction no longer applies, then the money laundering charges against Storm under 18 U.S.C. 1956 should also be dropped, the defense argues.

Making a distinction between "expressive" and "functional" code, such as computer code – thereby effectively overriding Bernstein v. US, a landmark case establishing code as protected speech under the First Amendment – continues to remain at the heart of Storm's prosecution, putting every software developer at risk.

The dispute between the prosecution and the defense arose out of recently revealed FinCEN communications in SDNY's case against Samourai Wallet developers Keonne Rodriguez and William Hill, in which senior FinCEN staff had stated that Samourai Wallet likely did not qualify as a money service business due to its non-custodial design.

Storm's defense is currently petitioning the court to compel SDNY to hand over communications the prosecution had with FinCEN regarding Tornado Cash, while the Government alleges that such conversations would not be Brady material – and therefore summonable by the defense – particularly as it has decided to no longer call a FinCEN witness.

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