Background
The Digital Chamber (TDC) unequivocally condemns the recent written and oral rulings put forth by the Southern District of New York in the Tornado Cash case. In these rulings, US Attorneys argued that although Tornado Cash did not control user funds, such control is not necessary to be classified as a money transmitter. As a result, the Court agreed that Tornado Cash shall be designated as a money transmitter, making it subject to the strict KYC/AML, data collection, and reporting requirements under the Bank Secrecy Act (BSA). The rulings also declare that code is not protected speech under the First Amendment. TDC will be closely monitoring and assessing the impacts of these rulings and evaluating next steps.
These rulings create a dangerous precedent for the broader digital assets industry. The assertion that money transmitters do not need to control funds to fall under that classification implies that infrastructure providers – such as non-custodial wallet developers, miners, and validators – could be deemed money transmitters. This definition would also extend to the entirety of the Decentralized Finance (DeFi) ecosystem, including liquidity pools, staking service providers, and decentralized exchanges. If enforced, this shift could require each of these entities to register and obtain a money transmitter license in every U.S. state.
Among other obligations of money transmitters, the heart of the issue is the requirement to capture personally identifiable information and submit suspicious activity reports (SARs) under the BSA. For many digital asset entities, collecting this data is unfeasible, and for some, technically impossible. As a result, reporting suspicious activity becomes equally untenable if the necessary data cannot be gathered in the first place.
“These rulings are clear attacks against the digital asset industry, and therefore, attacks against innovation, user control, and consumer financial choice. As many in our industry have argued, creators of open-source software such as Tornado Cash and Samourai Wallet are expressing their constitutional right to freedom of speech and contributing to the growth of an open internet,” says TDC Policy Director Jonathan Rufrano. “We urge lawmakers and courts to recognize that blockchain technology is not used exclusively for financial transactions, and must not be regulated solely through that lens and under existing financial rules. Rather, the technology is more broadly a data transfer and communications network—a decentralized computer system—that happens to have a financial component. Creating legislation and regulation with this scope in mind is necessary to effect well-fitting policy that allows for user expression, innovation, and consumer protection.” or a more holistic, broad-based discussion of the ongoing shifts in market structure and how the U.S. can remain the leader in the capital markets of tomorrow.