DeFi Debrief

Week of 7/28/25: Senate Market Structure Draft; GENIUS Blog from DEF; Storm Trial Updates

Senate Banking Committee Releases Draft Market Structure Legislation 

On July 22, 2025, the Senate Banking Committee — led by Chairman Tim Scott (R-SC) and Senators Cynthia Lummis (R-WY), Bill Hagerty (R-TN), and Bernie Moreno (R-OH) — released draft legislation to establish a regulatory framework for digital assets in the United States, titled the Responsible Financial Innovation Act (RFIA) of 2025. The discussion draft follows the passage of the Digital Asset Market Clarity Act, the House’s proposed framework for digital asset market structure, which passed the House of Representatives last week with a strong bipartisan support of 294-134. Alongside the discussion draft, a Request for Information (RFI) asks for feedback on a wide range of questions focused on establishing a regulatory framework for digital assets in the United States.

The legislation is not yet formally introduced for consideration and is a preliminary draft. The draft bill aims to establish a regulatory framework for the classification of digital assets, taking the “ancillary assets” approach, which pertains to when a digital asset is offered pursuant to an investment contract. The press release accompanying the discussion draft states that the objective for this classification is to “clarify which digital assets are not securities.” The draft also includes select provisions aimed at preventing illicit finance, modernizing securities regulations, and creating disclosure requirements for ancillary assets.

As a reminder, the Senate Banking Committee previously released principles for market structure legislation, which provide that:

1. “Legislation should not apply principles designed for centralized firms to decentralized protocols” and; 

2. “Legislation should recognize the different risks and benefits between centralized firms, decentralized finance protocols, and non-custodial software platforms […] For similar reasons, self-custody of digital assets should be explicitly preserved.”

The Senate Banking Committee’s Request for Information invites feedback on a few critical questions related to DeFi and its treatment under market structure, including questions on the definitions of key registrants, self-custody protections, the definition of common control, developer protections, and federal preemption.

DEF will submit a response to the Senate Banking Committee’s RFI to explain that DeFi must be adequately protected and considered under the market structure legislation. 

How Does GENIUS Impact DeFi? DEF’s Take in New Blog

On Friday, July 18, 2025, President Trump signed the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act into law, marking the first time the United States has enacted a federal regulatory framework for digital assets. 

Our latest blog post dives into what the GENIUS Act does, and explains how the law recognizes peer-to-peer transactions in stablecoins and explicitly treats DeFi differently than centralized intermediaries. Read the full post to dive into GENIUS’s key provisions, implementation timeline, and what it means for the future of DeFi. 

Financial Technology Protection Act Passes House of Representatives

On July 21, 2025, the bipartisan Financial Technology Protection Act (FTPA) of 2025 (H.R. 2384), sponsored by Representatives Zachary Nunn (R-IA) and Jim Himes (D-CT), successfully passed the House by voice vote. 

The proposed bill establishes the Independent Financial Technology Working Group to Combat Terrorism and Illicit Financing (Working Group) to study and report on terrorist and illicit use of digital assets and other related emerging technologies, and develop legislative and regulatory proposals to improve anti-money laundering, counter-terrorist, and other counter-illicit financing efforts. The task force would include key federal agencies and private sector leaders, and would be chaired by the Secretary of the Treasury. The FTPA has now been received by the Senate, read twice, and referred to the Senate Banking Committee, and it now ultimately awaits Senate consideration.

Notably, adjacent provisions of the FTPA were included in the Senate Banking Committee’s digital asset market structure discussion draft titled “Financial Technology Protection,” in the Responsible Financial Innovation Act of 2025. 

United States v. Storm Trial Week 2 Update 

Roman Storm’s trial continued for the second week in the U.S. District Court for the Southern District of New York. For an in-depth background on the case, read DEF’s blog here. 

Below is the week 2 recap.

This week: 

• The prosecution continued with its case-in-chief by presenting several witnesses, before resting its case at the end of the week.

• The defense called its first witness, Preston Van Loon, who brought his own lawsuit challenging the OFAC sanctions on Tornado Cash. The defense’s presentation of evidence will continue this week. 

• There was substantial back-and-forth about the government’s first witness, Katie Lin, and her relevance to the case, as well as their expert witnesses, and potential defense witnesses from Dragonfly Capital. (More below.) 

Blockchain Tracing Questions 

Scrutiny intensified around the government’s first witness, Katie Lin, who testified that she believed her stolen funds were sent by a hacker to Tornado Cash. However, outside of the courtroom, claims about any potential connection to Tornado Cash were called into question by respected blockchain tracing expert, Taylor Monahan, in a detailed X thread — and supported by other industry-leading experts, including ZachXBT. These concerns were echoed by the defense in court this week, including considerations to move for a mistrial.

Specifically, under cross-examination, FBI Special Agent Joseph DeCapua, one of the prosecution’s expert witnesses, acknowledged that he had not been instructed to analyze the transactions made by the hacker who took Lin’s funds. The prosecution, however, claimed that their witness on blockchain tracing was actually IRS Special Agent Stephan George, who was noticed as an expert in blockchain tracing very recently. The defense made it clear that it was “a little unusual” that the prosecution did not use their blockchain expert – who had already testified – for this matter, but the Court went ahead and ruled that Agent George would be able to testify about Lin’s funds. 

The government then called Agent George, who was brought forward in an attempt to link Lin’s losses to Tornado Cash using the Last In, First Out (LIFO) accounting method. During cross-examination by the defense, however, Special Agent George reportedly said that his analysis does not establish the ownership of the funds at each point in his tracing, and he could not prove that it was in fact the hacker who completed each transaction in the chain he was testifying about. He ultimately admitted he could not conclude that Lin’s funds were actually sent to Tornado Cash. Furthermore, Agent George testified he did not provide comprehensive disclosures to the defense team about Lin’s funds and the summary disclosures he did provide were not sent until Sunday, July 20 – two days after Monahan’s thread was posted. He also admitted that when he used another IRS accepted accounting method – such as First In, First Out (FIFO) – it was possible to reach a completely different result.   

It appears likely that the government did not conduct or is not capable of nuanced, accurate blockchain tracing, a core factual allegation in the case. The defense argued that, without any evidence connecting Lin’s funds to Tornado Cash, her testimony was irrelevant and should be stricken from the record. The defense team also floated the possibility of moving for a mistrial. Judge Katherine Polk Failia has not appeared persuaded. 

Code Audit and Tornado Cash Usage

The government also called Philip Werlau, Senior Smart Contract Security Research from AnChain (a blockchain analytics firm) and a contractor for Blocktrace (a blockchain investigation firm). Werlau testified about the Tornado Cash protocol and the monetization of TORN tokens. Importantly, Werlau testified on a specific analysis of the usage of the Tornado Cash user interface (UI) versus the command-line interface (CLI), and showed the jury a demonstration allegedly explaining how the UI and CLI were used for specific hacked funds. Werlau also claimed to have a solution for mitigating risks of illicit activity at the Tornado Cash protocol level. 

On cross-examination, Werlau testified that he did not know when the Tornado Cash pools were immutable. He also said that he had only reviewed the Github repositories for the UI and CLI, and did not review open-source code for the protocol or the governance contracts. He also said he had no knowledge that the DAO had paid other community members to contribute to the protocol’s code, that he was unaware that the Tornado Cash UI had instituted geoblocking in June 2020, and that he did not know if other UIs for the protocol existed.

Most importantly, upon cross-examination about his usage-analysis, Werlau testified that he could not speak to the history of the methodology, as he did not know where his research partner got it from. The defense then asked if he had properly scrutinized the methodology, checking for error rates, and Werlau testified that he did not. We learned that Werlau also never tested the methodology with his own transactions, and was unaware whether or not it had been used in a peer-reviewed journal.

The defense subsequently moved to strike the testimony of Werlau. The Court denied their motion.

Immunity Considerations for Defense Witnesses

During their case-in-chief, the government introduced messages between Storm and Tom Schmidt, a partner at Dragonfly Capital, an early venture capital investor in Tornado Cash. However, when Storm’s attorneys mentioned the possibility of having Schmidt testify, prosecutors declined to grant Schmidt and another potential defense witness immunity. 

On Friday, July 25, 2025, Dragonfly Managing Partner Haseeb Qureshi took to X to address the situation, noting: “We believe the government’s statement in court today was primarily to undermine a defense of Tornado Cash—to make it more difficult for the defense to call Tom to testify on the stand.”

Team DEF has been in the courtroom for the proceedings, and we will continue to share trial updates on X and each week here in the DeFi Debrief. 

DeFi Education Fund Participates in PubKey Panel on Roman Storm Trial

On July 24, 2025, DEF’s Chief Communications Officer Jennifer Rosenthal moderated a panel discussion at PubKey in NYC called “Crypto Privacy on Trial” for a deep dive into the Tornado Cash case. Jenn, along with Eleanor Terrett of Crypto in America, Frank Corva of Bitcoin Magazine, and David Morris with The Rage, discussed the most recent updates in the trial, its implications, and what could happen next. 

Jenn asked about the value of financial privacy, dug into the vibes of the courtroom, and solicited reporters’ predictions on the trial outcome — all while underscoring that this case has broader implications for software developers in the United States and the future of decentralized tech.