Tornado Cash Developers Indicted for Money Laundering and Sanctions Violations
On Wednesday, the US Department of Justice (DOJ), Southern District of New York, charged Tornado Cash (TC) developers Roman Storm and Roman Semenov with conspiracy to commit money laundering, conspiracy to operate an unlicensed money transmitting business, and conspiracy to violate the International Emergency Economic Powers Act (IEEPA).
Among other things, IEEPA grants the President authority to impose economic sanctions in response to “unusual and extraordinary” national security threats. The President first sanctioned North Korea in 2008 related to the “the existence and risk of the proliferation of weapons-usable fissile material on the Korean Peninsula” and on September 13, 2019, the Department of the Treasury’s Office of Foreign Asset Control extended those sanctions to the Lazarus Group, a “North Korean state-sponsored malicious cyber group.”
According to the indictment, the DOJ alleges that between 2019 to 2022, Storm and Semenov “developed, marketed, and operated a cryptocurrency mixing service known as Tornado Cash, a business from which they sought to make, and did make, substantial profits.” The DOJ alleges that Tornado Cash was used by bad actors, including the Lazarus Group, to engage “in large-scale money laundering and sanctions evasion” and Storm and Semenov “knew a substantial portion of the funds the Tornado Cash service processed were criminal proceeds passed through the Tornado Cash service for purposes of concealment.”
The DOJ’s allegations also include assertions that because Storm and Semenov hosted the front end website, held a share of ownership in TORN governance tokens, and “maintained the relayer algorithm” from which they received “profits,” they essentially “conducted, controlled, managed, supervised, directed, and owned all or part of the Tornado Cash service.” According to the DOJ, Tornado Cash was a money transmittal business and was therefore required to implement a Know-Your-Customer (KYC) process and anti-money laundering (AML) program.
What does this mean?
Don’t rush to judgment about the implications of the charges. While the indictment alleges serious crimes, it is important to remember that an indictment is simply unproven allegations. All defendants are entitled to a fair and impartial legal process and it is the government’s burden to prove the defendants are guilty of the charges beyond a reasonable doubt. We expect that the defense teams will explore their options to file motions challenging the indictment and hold the government to their burden if the case goes to trial.
Court Rules “Tornado Cash” Is a Sanctionable Entity What happened?
In a separate case related to last year’s Tornado Cash sanctions, a court ruled that Tornado Cash can be considered a sanctionable entity made up of “its founders, its developers, and its DAO.” Moreover, the judge found that the “entity” has a property interest in the designated smart contracts, noting the fees potentially generated for TORN tokenholders. The district court’s decision is a setback for the six individuals who brought the case to contest the validity of the sanctions designations, arguing that Treasury’s designation of smart contracts in August 2022 was inappropriate because a software program is not an “entity” at all.
What does this mean?
The district court’s ruling is disappointing, and we’re encouraged to see that the plaintiffs intend to appeal this decision. Without doubt, the opinion highlights the often confusing distinctions between software, entity, and organization in crypto, and it is a harbinger of the many internecine yet profound legal and societal questions with which crypto will force us to grapple with.