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Roman Storm Motion to Dismiss Denied
What happened?
On September 26th, a Southern District of New York court denied Tornado Cash co-founder Roman Storm’s motion to compel and motion to dismiss the indictment, which charges him with (1) conspiracy to commit money laundering, (2) conspiracy to operate an unlawful money transmittal business, and (3) conspiracy to violate the International Emergency Economic Powers Act (IEEPA). For our previous post on Storm’s motion to dismiss, see this blog post.
Judge Katherine Failla first denied Storm’s motion to compel—which is a request for the opposing party to share certain information that they have obtained during discovery —on the belief that Storm did not meet his burden in showing a material need for the requested information.
Concerning Storm’s motion to dismiss, Judge Failla began by denying Storm’s argument on count two, conspiracy to operate an unlawful money transmitting business (MTB). Storm argued that Tornado Cash was not a “money transmitting business” because the statute relied upon for count two, 18 U.S. Code § 1960, requires that the defendant have control over funds in order to qualify as an MTB. The court denied Storm’s argument by stating that control is not a necessary requirement of the offense and that the fees charged and received by the relayers were sufficient to prove that Tornado Cash was an MTB.
The court then examined Storm’s argument on count one, conspiracy to commit money laundering. Storm argued that the government’s indictment failed to allege that a “financial transaction” occurred; that Storm entered into an unlawful agreement with illicit users of Tornado Cash; and that the indictment failed to allege the necessary mens rea—the intention or knowledge of wrongdoing. However, Judge Failla rejected these arguments and stated that to be guilty of money laundering, one does not need to be “guilty of, involved in, or even aware of the specifics of, the specified unlawful activity,” and that the government only needs to prove that Storm knew he was “dealing with the proceeds of some crime, even if he [did] not know precisely which crime.” Furthermore, Judge Failla rejected Storm’s “timeline argument”—”that the development of Tornado Cash preceded the charged dates of the money laundering conspiracy.” Concerning Storm’s mens rea, Judge Failla declared that this was a question of fact and she does not “get to make determination… at this stage,” leaving it to the jury to decide at trial.
Finally, the court examined Storm’s argument on count three, conspiracy to violate IEEPA. Storm argued that Tornado Cash would fall under the “informational materials” exemption in IEEPA—which allows for the free exchange of certain types of information. Storm argued that software is speech, and therefore, protected under the First Amendment. Judge Failla rejected this notion and declared that Storm “is not being charged with exporting Tornado Cash software, but with laundering funds using the Tornado Cash service, which definitionally extends beyond the software.”
What does this mean?
Given Judge Failla’s decision, the case will now proceed to trial in December. The outcome has serious implications not only for DeFi, but for software development more broadly and could set a precedent for all software developers to be held criminally liable for how a third-party uses their software.
Concerning DeFi specifically, under the court’s reasoning, protocols would be deemed “money transmitters” and be required to comply with collecting customer information and reporting suspicious activity to the government under the Bank Secrecy Act—a requirement that is impractical and would serve as a de facto ban on DeFi within the United States.
SEC Settles Lawsuit with Mango Markets
What happened?
Late last month, the Securities and Exchange Commission (“SEC”) settled charges with Blockworks Foundation, Mango DAO, and Mango Labs in relation to the Mango Markets trading platform. Mango DAO was described as an unincorporated organization made up of the holders of the governance token: MNGO. Without admitting to or denying the allegations, the parties consented to injunctions and agreed to pay close to $700,000 in civil penalties, to destroy any MNGO tokens in their possession, and to request the removal of MNGO tokens from trading platforms.
The SEC’s complaint alleged that Mango DAO and Blockworks Foundation engaged in the offer and sale of unregistered securities in violation of section 5 of the Securities Act of 1933 through the sale of MNGO. These allegations stemmed from when Mango DAO and Blockworks Foundations purportedly raised more than $70 million in 2021 for the Mango DAO treasury by issuing MNGO governance tokens. Specifically, the SEC claimed that the MNGO governance tokens were offered as investment contracts, which require an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. Here, the SEC claimed that Mango DAO and Blockworks Foundation’s involvement in developing the Mango Markets platform, and public communications relating to it, led investors to reasonably expect that their investments in MNGO tokens would increase in value as a result of their ongoing efforts.
Additionally, the SEC alleged that Blockworks Foundation and Mango Labs acted as unregistered brokers in violation of section 15(a) of the Securities Exchange Act of 1934 by operating the Mango Markets platform.
What does this mean?
The Mango Markets settlement is the result of negotiations between the SEC and the parties involved with no admission to or denial of the charges in the complaint. The settlement and accompanying complaint do, however, make clear that the SEC continues to pursue actions against DAOs and other digital asset industry participants without providing any proactive guidance. We look forward to a day when the SEC collaborates with the industry to develop thoughtful regulations that foster innovation while protecting investors in emerging technologies. Unfortunately, that day is still to come.
New Privacy-Focused Legislation Proposed
What happened?
Last week, Senator Mike Lee (R-UT) introduced the Saving Privacy Act, which is aimed at protecting American financial privacy and data security by preserving the confidentiality of certain financial transaction records. The bill would strengthen Fourth Amendment protections, prohibit the creation of a Central Bank Digital Currency (CBDC), institute penalties for federal employees who illegally seek constitutionally protected financial information, and establish a private right of action for American and financial institutions harmed by illicit government activity.
The bill also repeals:
the Bank Secrecy Act (BSA) Suspicious Activity (SAR) and Currency Transaction (CTR) reporting requirements;
the Corporate Transparency Act; and
the SEC’s Consolidated Audit Trail (CAT) database.
And requires:
adherence to warrant requirements in the Right to Financial Privacy Act of 1978;
congressional approval for any new databases that collect personally identifiable information of U.S. citizens; and
congressional authorization for financial regulations deemed as major rules.
The bill has now been referred to the Senate Committee on Homeland Security and Government Affairs.
What does this mean?
As many expert panelists noted in a recent conference, Americans’ financial privacy has been diminished over the last 50 years largely due to the outdated and overly broad provisions of the Bank Secrecy Act of 1970 (and its many amendments). It is encouraging that members of Congress are paying attention to these critical issues and protecting Americans’ right to financial privacy.
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