During Trump's administration, the "litigation-style regulation" of Crypto Assets did not stop.

Developers of new encryption privacy tools still fear being jailed.

Written by: Project Glitch, Mike Orcutt

Compiled by: Block unicorn

The Trump administration's approach to handling important encryption cases is not much different from that of the Biden administration.

Donald Trump has promised to make the United States the "world encryption capital," and there are many actions that seem to prove he is fulfilling this promise. For example, he has appointed officials in the executive branch who openly "support encryption," such as Treasury Secretary Scott Bensenet and new SEC Chairman Paul Atkins. His party controls both houses of Congress and has drafted legislation that would greatly benefit the encryption industry. Of course, he is also a proud owner of the Trump brand meme coin and stablecoin.

However, the most extreme legal threats faced by cryptocurrencies during Biden's administration — many industry insiders believe this is precisely why they supported Trump in last year's election — remain unchanged.

The most prominent example is the case of Tornado Cash, an Ethereum-based privacy tool. Advocates had hoped that the Trump administration would completely change its stance on Tornado Cash, especially since the Justice Department would drop the indictment against one of the developers, Roman Storm. That hope was reinforced in April when Trump's deputy attorney general, Todd Blanche, released a memo declaring that Trump's Justice Department would terminate his predecessor's "reckless strategy of prosecuting regulation," echoing a common criticism of the Biden administration by crypto advocates.

Nonetheless, last month, the federal prosecutors in the Southern District of New York revealed in a letter to the judge assigned to the case that they still plan to pursue almost all charges against Storm.

Considering some subtle legal maneuvers when the Ministry of Finance removed Tornado Cash software from the sanctions list in March, the new government does not seem to have immediate plans to alleviate the litigation fears that have troubled many encryption developers for nearly three years.

Small Victories

The letter from the prosecutor of the Southern District of New York indeed made a concession that seems minor in the Storm case, but is significant in the broader context of legal conflicts. The letter informs the judge that federal prosecutors will abandon part of the charge against Storm for operating an "unlicensed money transfer business."

Strom and another developer, Roman Semenov, were sued in 2023. The lawsuit claims that North Korean hackers used Tornado Cash to launder money, stealing hundreds of millions of dollars in encryption from the video game Axie Infinity. The lawsuit accuses Strom and Semenov of conspiracy to launder money, conspiracy to violate sanctions against North Korea, and conspiracy to operate an unlicensed remittance business. Strom was arrested in August 2023 and is scheduled to stand trial in July of this year. Semenov, however, remains at large.

The accusation of unlicensed remittance services is one of the most infuriating issues in the encryption policy sphere, leaving many industry insiders feeling betrayed by the government.

According to the U.S. Bank Secrecy Act (BSA), money transfer services must register with the Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury. In 2019, FinCEN issued a guidance that has been widely interpreted to mean that to become a money transmitter, one must have "complete independent control" over user funds.

The way Tornado Cash's smart contracts operate ensures that only users control the funds. Therefore, the 2019 FinCEN guidance implies that Tornado Cash does not need to register.

However, last spring, prosecutors from the Department of Justice presented a contrary view in a brief submitted to the court: even without controlling user funds, one could still be considered a remittance business operator. Shockingly, the case judge agreed with the Department of Justice's viewpoint.

This clearly creates a "rule of law issue," said Peter Van Valkenburgh, executive director of the policy research and advocacy organization Coin Center. "In my view, if regulators initially say that a license is not needed, then no one should be charged with failing to obtain a license," he said at the Washington Privacy Summit for Project Glitch last October.

The Justice Department seems to have changed its mind. Last month, it announced that it was no longer claiming that Storm had broken the law for not registering with FinCEN. Van Walkenberg considers this aspect to be "big news". But on the other hand, this is the only part of the charge that the government decided to back down on after the Blanche memo was issued. Although the Department of Justice acknowledged that registration was not required, Storm was charged with operating an unlicensed money transfer business. Prosecutors cited another provision of the law that even though a licence was not required, the transaction in question "involved the transfer or transmission of funds" that Storm allegedly knew were of criminal origin.

Confused? You're not the only one. "This just doesn't make sense," Van Valkenburg said at the PGP* for Crypto panel discussion during this week's monthly gathering of cryptocurrency policy insiders in Washington, D.C. "If you're going to charge them with unlicensed remittance, but no one is requiring them to obtain a license—how crazy is that?"

The Justice Department used the same argument in another criminal case against Keonne Rodriguez and William Lonergan Hill, developers of the Bitcoin privacy tool Samourai Wallet, dropping their charges of not obtaining a license but continuing to charge them with conspiracy to run an unlicensed money transfer business. This case has recently highlighted the divergence of views between FinCEN and the Department of Justice on what constitutes a remittance business. The defense team released a summary of a phone call between federal prosecutors and two FinCEN employees, and FinCEN representatives argued that because Samourai does not control user funds, it "strongly suggests" that it is not a money transfer business.

The continued existence of these accusations has shattered the hope that Blanche's memorandum could mark a complete shift in the Justice Department's policy. Amanda Tuminelli, Executive Director and Chief Legal Officer of the DC-based policy advocacy organization DeFi Education Fund, stated at the PGP* for Crypto panel discussion that some parts of the memorandum are beneficial to the industry. "I think the spirit of the memorandum is good," she said. "But it hasn't resolved anything in the high-risk conflicts surrounding what constitutes a remittance business."

Tuminelli believes that Congress should amend the criminal law to "thoroughly eliminate the possibility of further misunderstanding" and clearly stipulate that the criminal law provisions do not apply to software developers who do not control or hold client funds.

North Korean Factors

In addition, there is the issue of the US Treasury Department's Office of Foreign Assets Control (OFAC) imposing sanctions on Tornado Cash in 2022. The Coin Center and others filed a lawsuit against OFAC, saying it does not have the authority to sanction decentralized software. Last November, the cryptocurrency industry launched a fierce lawsuit against the government in one of these cases. The Fifth Circuit Court of Appeals ruled that OFAC does not have the authority to sanction Tornado Cash's "tamper-proof" smart contracts because they are not "property." In March of this year, the Ministry of Finance removed the smart contracts from the sanctions list.

But some important signals indicate that the government is not yet ready to make concessions on this issue.

First, Michael Mosier, co-founder of Arktouros Law Firm and former OFAC official and FinCEN director, pointed out that the Treasury did not characterize this action as an admission of error. Instead, the agency stated that it "decided on its own to lift the economic sanctions." Mosier noted in a recent speech in Washington, D.C. that this is an "extremely cautious response" to the Fifth Circuit Court's ruling. The agency may be preparing for further action.

The second important signal is how the government deals with the sanctioned Tornado Cash developer, Russian citizen Roman Semenov.

Some background story: OFAC initially sanctioned Tornado Cash software based on President Obama's 2015 executive order targeting cybercrime. In November 2022, OFAC reinstated the sanctions, adding designations based on another executive order from the Obama era aimed at preventing North Korea from funding its nuclear weapons program. In August 2023, OFAC included developer Roman Semenov on the sanctions list of two executive orders.

In March, OFAC lifted the cybercrime and North Korea-related sanctions on Tornado Cash, but kept Semenov on the sanctions list under the North Korea executive order.

"Enforcement powers against North Korean projects are much broader than the more general cybersecurity order," Mosier explained. This means that it will be easier for the government to defend such actions in court. Mosier believes that the Treasury Department's removal of Semenov's online sanctions label while keeping him on the North Korea-related sanctions list sends a message. "Removing the cyber sanctions label and keeping the North Korea sanctions label led to his sanctions being publicly released in the same press release announcing that they were removing the [Tornado Cash] address sanctions," he said. "It's a strong signal to Congress and developers around the world, 'We're not leaving this space.'" 」

Although Trump loves encryption, his administration seems to oppose certain types of encryption just like the Biden administration.