FederalRuling

The government’s case against a key piece of privacy tech is reaching a critical stage. The future of the $90 billion DeFi industry could hang in the balance.

The federal government made an about-face when it comes to crypto under President Trump. The Securities and Exchange Commission (SEC) is dismissing lawsuits against crypto companies left and right, while Trump’s Secretary of the Treasury Scott Bessent said he would “end the regulatory weaponization against digital assets” at the White House’s crypto summit earlier this month. 

But the Department of Justice (DOJ) is not following the same path. 

Instead, its investigations and enforcement actions against the industry continue apace. A likely reason for this steadfastness is that whereas the crypto issues that SEC and CFTC enforce are civil in nature, the DOJ’s crypto dealings focus on criminal matters. They deal with issues in crypto that impact national security like drug trafficking, sanctions violations and war. Criminal litigation, which is the DOJ’s responsibility, has inherently higher stakes. 

But those higher stakes also boomerang back to crypto. While hardly anyone argues that bad actors should be allowed to use crypto without recourse, many advocates claim that the DOJ’s posture threatens the very existence of DeFi in the United States, which is now a $90 billion industry. The most pre-eminent case on the minds of the industry is against U.S. citizen Roman Storm, co-founder of the blockchain privacy tool Tornado Cash, in which the developer is accused of money laundering, unlicensed money transmission, and violations of the International Emergency Economic Powers Act (IEEPA) — effectively violating sanctions. 

Storm’s advocates say that if he is found guilty, developers could be scared away from developing privacy technology essential for DeFi to thrive. Advocacy groups like Coin Center, the DeFi Education Fund, and the Blockchain Association in particular have leapt to Storm’s defense. 

“Without privacy, Bitcoin and Ethereum don’t have a future as payments,” warned J.W. Verret, associate professor of law at George Mason University’s Antonin Scalia Law School. “Of all the things I’m worried about that could kill crypto, everything is on a path to be solved except for this.” 

Breaking Down Privacy Finance 

Tornado Cash is an autonomous cryptocurrency mixer — i.e., a service that scrambles transactions in order to obscure the identity of the sender and receiver. It runs on the Ethereum blockchain and is open source, making it so that people can use it without anyone’s consent. In fact, the North Korean hacking group Lazarus continues to use it while Storm awaits trial. 

When the Treasury department sanctioned Tornado Cash in 2022, it said that $7 billion worth of virtual currency had been laundered through the protocol, including $455 million stolen by the Lazarus Group. 

Still, DeFi advocates say tools like this are essential if the industry is ever to facilitate critical and legitimate financial transactions at scale, due to the fact that cryptocurrency is not anonymous. While blockchain transactions do not publish personally identifiable information, like the names of the people facilitating the transactions, they disclose the amount of money that was exchanged between wallet addresses. It is impossible to delete or edit this paper trail after the fact, and with a little bit of research it’s possible to deduce most wallets’ owners. 

Storm and his defenders say that providing reasonable privacy is the purpose of the tool. 

Tornado Cash’s Legal History

Roman Storm and Tornado Cash have a complex backstory with the U.S. government, because separate charges have been filed against the individual and platform in recent years.

The United States Office of Foreign Assets Control (OFAC) sanctioned the Tornado Cash protocol in August 2022 for laundering over $7 billion cryptocurrency, including that stolen by the Lazarus Group. These sanctions were unprecedented because they targeted an immutable smart contract, raising questions about potential free speech violations (code had previously been declared a form of speech in federal court), as well as whether sanctions on a line of code (such as a cryptographic wallet address), rather than an organization of people, could be enforced. 

The sanctions were thrown out by a fifth circuit appeals court in November 2024 when a judge decided the Treasury Department, of which OFAC is part, exceeded its statutory authority by incorrectly trying to call immutable platforms like Tornado Cash property and thus subject to its oversight. However, the Treasury is still fighting to retain the sanctions in a lower court, arguing that the appellate court’s decision did not cover more controlled applications that the Tornado Cash developers had built on top of the underlying protocol. It is now up to the court to decide whether to annul the sanctions nationwide, or only in the case of parties to the lawsuit.

One year later, Storm, a naturalized American citizen, was personally indicted by the Department of Justice, while his Russian co-founder, Roman Semenov, was simultaneously sanctioned by OFAC. In May of 2024, a third co-founder, Alexey Pertsev, was found guilty of money laundering in the Netherlands, though he is appealing the charges. Storm, Semenov, and Pertsev’s legal proceedings are each separate from the case over the sanctions on the Tornado Cash protocol itself, due to the distinct legal questions in each. 

Storm petitioned the court to dismiss his case both last fall and again in January, most recently on the grounds that the charges in the indictment went beyond the intended scope of the law, though they have been unsuccessful so far. Storm is scheduled to stand trial in April in New York City, where he will face US attorneys for the Southern District of New York. 

What it Would Take to Dismiss the Charges

David Miller, a partner at Greenberg Traurig who was formerly an assistant U.S. attorney in the Southern District of New York, said that Storm’s failure to get the case dismissed in January does not mean that he will ultimately lose in court. It is only “under very narrow circumstances that charges are dismissed against an indictment,” he said. For example, there are exceptional dynamics surrounding the potential dropping of charges against New York Mayor Eric Adams, in which a lawyer for the Southern District of New York says that they were pressured to facilitate a quid pro quo. Even in that example, the court has not yet dismissed the case.

One possible argument for eliminating at least one of the charges (that which accuses the Tornado Cash co-founder of violating sanctions) is that the sanctions against the Tornado Cash protocol itself have been thrown out. Separately, the Trump administration itself has been reevaluating numerous sanctions on foreign governments with which the Biden administration had a more hostile stance, like Storm’s birth country of Russia, according to news reports. 

Though Trump’s foreign policy approach is technically unrelated to Storm’s case, Verret explained, it’s a hopeful sign. “I hope that as the administration rethinks Biden’s sanctions policy, and given that the Tornado Cash sanction itself was thrown out by the court as unlawful, I would hope that they look at this criminal case against the Tornado Cash founders,” he said. 

The ruling in the 2023 Risley v. Uniswap case, in which Uniswap and some of its investors were accused of facilitating the trades of “scam tokens” on its decentralized exchange, could also be helpful in Storm’s case. In its decision, the court said that Uniswap developers were not liable for how third parties used the software. “This is an important principle for developers of all software, including DeFi technology and infrastructure: software is a neutral tool, and it is very important for developers to have clarity on their legal liabilities,” explained Amanda Tuminelli, Executive Director and Chief Legal Officer of the DeFi Education Fund in an email to Unchained. “This same principle is at issue in the case against Roman Storm, and it will certainly be at issue for the jury at his trial next month.”

Trump’s DOJ Stays The Course On Crime, For Now

But if Storm and his supporters are hoping for a radical change in outlook from Trump’s new DOJ, at least without a specific directive from the White House, it appears that they will be left wanting. Trump’s Executive Order on Digital Assets, signed in his first week of office, instructed the Department of Justice, alongside other “relevant agencies,” to rethink its approach to the digital sector within 30 days. However, 30 days have passed, and the Department of Justice does not appear to have made any changes to its position on the Tornado Cash case or, for that matter, any other criminal case involving crypto since the order was signed. 

Instead, Attorney General Pam Bondi signed fourteen memos on February 5th to refocus the priorities of the DOJ on pursuing transnational criminal organizations while deprioritizing issues where she feels the Department of Justice was “weaponized” to political ends. It is unclear where the case of Tornado Cash falls under these new priorities. “There’s a national security component to this case, or at least with respect to the allegations in this case,” Miller explained.

The Stakes For DeFi 

Despite being a $90 billion industry, DeFi remains in its prepubescent stages. Lending and trading platforms move money around the world 24/7/365, but a lot of this activity is still centered around trading and speculation. The industry has much grander ambitions.

But these greater heights will not be reached without trustworthy and verifiable privacy, which is why the industry sees the Roman Storm case as a major inflection point. Tornado Cash is just one tool in a cottage industry of mixers. Others include Blender.io, Sinbad.io, and Samourai Wallet – each of which are in their own legal battles with the DOJ on similar charges. 

It’s unclear how many mixers exist or the total volume of transactions moved through mixers, though Chainalysis estimates that $504.3 million illicit transactions were laundered through mixing services in 2023. Funds from the Bybit hack last month are already starting to move through mixers, according to Elliptic.   

But the Tornado Cash case is uniquely important because unlike these other protocols it is autonomous, Van Valkenburgh explains. “FinCEN has been clear from the beginning that custodial services are subject to the [Bank Secrecy Act]. We don’t take issue with that interpretation,” he says, referring to the legitimacy of the charges against Sinbad.io and Blender.io. The Bank Secrecy Act is a law which requires banks and other financial companies to share with the government information on their users in order to detect and prevent financial crime. “Tornado Cash, however, is the first and to-date only autonomous, unowned, smart contract to be sanctioned,” he says. 

“No one is taking custody of any funds. That is the key difference that raises our concerns.” 

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