Tornado Cash Developer Convicted Under Money Transmission Law Amid DeFi Legal Uncertainty

The recent partial conviction of Roman Storm, a developer behind the Tornado Cash protocol, has sparked widespread concern among open-source software developers in the decentralized finance (DeFi) space. The U.S. Department of Justice (DOJ) found Storm guilty under 18 U.S.C. § 1960(b)(1)(C), which classifies non-custodial code used for illicit purposes as a criminal offense under the "money transmission" law [1]. This legal interpretation has raised alarms about how open-source protocols might be treated under U.S. regulatory frameworks, especially when they are designed to be permissionless and privacy-focused.

The core issue lies in how the law defines "money transmission." Traditionally, this term has referred to custodial services where a third party holds and moves funds on behalf of others. However, the Southern District of New York (SDNY) prosecutors argued that deploying immutable smart contracts—such as those in Tornado Cash—also qualifies as money transmission, even when the developer does not custody or control the funds [1]. Peter Van Valkenburgh of Coin Center highlighted the flawed logic behind this interpretation, stating that the law cannot apply to code that does not involve custody [1].

The DOJ’s approach appears to disregard existing regulatory clarity. In 2019, the Financial Crimes Enforcement Network (FinCEN) issued guidance explicitly excluding non-custodial software providers from Money Service Business (MSB) liability. However, prosecutors in the Storm case ignored this guidance and instead applied their own interpretation of the law [1]. This inconsistency undermines legal clarity and due process, creating uncertainty for developers who build tools designed to enhance financial privacy and autonomy.

The implications for the broader DeFi community are significant. If a developer can be criminally liable simply for publishing open-source code that is later used for illicit purposes, it raises the stakes for innovation in the space. Developers may become hesitant to create or deploy tools that offer privacy protections, fearing unintended legal consequences. As Storm's case demonstrates, even a partial conviction can embolden prosecutors and set a precedent for future actions against other DeFi developers.

This case also highlights the disparity in how financial misconduct is addressed. In contrast to the Storm prosecution, major financial institutions involved in large-scale money laundering scandals—such as the $4.5 billion siphoned from Malaysia’s 1MDB sovereign wealth fund—often avoid criminal charges and instead settle through deferred prosecution agreements. For example, Goldman Sachs, which helped underwrite 1MDB bond sales, reached a settlement with the DOJ in 2020 and paid $2.9 billion in fines without facing a criminal conviction [1]. No senior executives were charged, and the matter was closed without further indictment.

Legal experts have criticized this double standard, arguing that individuals who do not handle other people’s money should not face the same level of scrutiny as traditional financial institutions. Van Valkenburgh noted that developers should not be held to the same regulatory expectations as banks like Goldman Sachs or Credit Suisse [1]. This enforcement imbalance not only discourages innovation but also diverts resources away from addressing systemic risks in the traditional financial system.

To address these concerns, lawmakers have proposed the Blockchain Regulatory Certainty Act (BRCA), which is currently attached to the CLARITY market-structure legislation. The BRCA aims to clarify that non-custodial developers are not money transmitters under current law, aligning with FinCEN's 2019 guidance. While this legislation could provide legal certainty for future developers, it is not retroactive and will not affect Storm’s case [1].

Another voice in the debate is SEC Commissioner Hester Peirce, who has emphasized the importance of financial privacy as a constitutional right. In a recent speech, she warned against treating privacy-protecting technologies as inherently criminal and argued that deputizing private actors to surveil each other is "antithetical to a free society" [1]. Her vision contrasts sharply with the SDNY’s approach, which seeks to criminalize tools that enhance financial privacy.

Storm’s legal team is expected to appeal the conviction in the Second Circuit Court of Appeals, challenging the interpretation of federal law that was used to secure the guilty verdict. According to Amanda Tuminelli of Fund DeFi, key legal questions were foreclosed during pretrial motions, limiting the jury’s ability to evaluate the most relevant aspects of the case [1]. The outcome of this appeal could set an important precedent for how smart contract developers are treated under U.S. law.

The broader crypto ecosystem is now at a crossroads. The legal and political battles over how non-custodial code is regulated will shape the future of DeFi development—not only in the U.S. but globally. As the case moves forward, the DeFi community is being urged to remain vigilant and advocate for legal reforms that protect innovation and privacy.

Sources:

[1] https://blockworks.co/news/opinion-tornado-cash-conviction-raises-alarm