What You Need To Know
- The SDNY rejected arguments by Tornado Cash developer Roman Storm that his actions in developing the privacy protocol amounted to protected speech.
- The Tornado Cash court also interpreted the unlicensed money transmitting statute not to require "control" over transmitted funds.
- There is a growing consensus among courts that crypto assets are not inherently securities.
- Courts continue to disagree about whether secondary sales of crypto assets on exchanges can constitute securities transactions.
Civil and criminal litigation heated up this summer in high-profile crypto matters that will affect crypto projects moving forward.
For their quarterly crypto lit update, partner David Feder and associates Rebecca Matsumura and Christopher Crawford unpacked the latest twists and turns and explained what they mean for the shifting enforcement and litigation landscape.
Key Criminal Crypto Cases
USA v. Storm (Tornado Cash)
The co-founder of Ethereum-mixing service Tornado Cash will stand trial later this year after a New York federal judge denied his request last month to toss the case in an opinion read from the bench on September 26. The Tornado Cash case is another in a series of criminal cases where the government seeks to hold a founder, developer, or operator accountable for a platform's users.
Roman Storm faces three conspiracy counts—money laundering, operating an unlicensed money transmitting business, and violating sanctions laws—for allegedly allowing bad actors, including North Korean hackers, to launder more than $1 billion in illicit funds through the Tornado Cash service.
Judge Failla rejected Storm's argument that he is merely a coder who exercised his First Amendment rights by programming the Tornado Cash platform, finding that computer code's functional capabilities are not protected under the First Amendment.
On the unlicensed money transmitting business count, Judge Failla rejected Storm's assertion that the government failed to state a claim because it did not allege that the Tornado Cash service controlled user funds. According to the Court, the criminal statute requires only that the defendant played some role in facilitating and transferring funds, but not control. This aspect of the ruling could have far-reaching implications for noncustodial DeFi.
USA v. Peraire-Bueno
The federal government charged two brothers with stealing $25 million in an Ethereum hacking scheme. MIT-educated Anton and James Peraire-Bueno are accused of manipulating the Ethereum blockchain's validation process to access and alter pending private transactions in their favor.
The alleged scheme leveraged MEV trading bots known for high-frequency arbitrage trades and front-running transactions that some in the space consider ethically dubious. It will be interesting to see whether the victims' engaging in bot-trading activity becomes an issue.
Civil Crypto Cases to Watch
SEC v. Binance
The District of Colombia federal district court expressed skepticism this summer over the SEC's application of law in its wide-ranging securities case against Binance.
While allowing most claims to proceed, the court rejected the SEC's position that crypto assets are inherently securities—instead, courts must look at the contract being transacted—and rejected the notion that a token can be the embodiment of an investment contract.
Perhaps most significantly, the Binance court found that the SEC had not stated a claim against Binance for sales of third-party assets on its platform, expressing discomfort with the SEC's position that specified assets are securities in cases that do not involve the developers of those assets.
The court also found that stablecoins like Binance's BUSD are not inherently securities because no one anticipates profiting off them—indeed, they expect the value to remain stable.
The court did, however, reject Binance's argument that an investment contract requires a contract—instead, holding that the way a seller markets a coin and creates expectations around it can bring it under the SEC's purview.
SEC v. Payward Ventures(Kraken)
The Northern District of California recently denied a motion to dismiss an SEC enforcement action brought against the U.S.'s second-largest crypto exchange. This court agreed with other courts that crypto assets are not inherently securities, but unlike Binance, found plausible allegations that secondary sales of assets on exchanges could constitute investment contracts.
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