Tornado Cash: Code Not Speech, Non-Custodial MSBs, Knowledge Not Required

In an oral statement made on Thursday on the dismissal of the case against Tornado Cash developers Roman Storm and Roman Semenev, appointed Judge Failla ruled that the case would proceed to jury trial. Failla addressed the defense's argumentation on first amendment protections, definitions of money transmission licensing requirements, and the requirement of knowledge of criminal activity to commit conspiracy to money laundering and sanctions violations.

Code Is Not Speech

Storm's defense partially relied on protections under the First Amendment, in which it was argued that writing computer code is an expression of free speech. Failla disagreed. "The functional capability of code is not speech within the meaning of the First Amendment,” Failla said, according to CoinDesk – argumentation that appears contrary to previous legal opinion.

As the courts found in Bernstein vs. United States in 1996, the court could find "no meaningful difference between computer language [...] and German or French... Like music and mathematical equations, computer language is just that, language, and it communicates information either to a computer or to those who can read it."

As similarly found in Universal City Studios v. Corley in 2001, "communication does not lose constitutional protection as “speech” simply because it is expressed in the language of computer code."

"Mathematical formulae and musical scores are written in “code,” i.e.,symbolic notations not comprehensible to the uninitiated, and yet both are covered by the First Amendment. If someone chose to write a novel entirely in computer object code by using strings of 1’s and 0’s for each letter of each word, the resulting work would be no different for constitutional purposes than if it had been written in English."

"Computer programs are not exempted from the category of First Amendment speech simply because their instructions require use of a computer. A recipe is no less “speech” because it calls for the use of an oven, and a musical score is no less “speech” because it specifies performance on an electric guitar."

However, the court in Universal City Studios v. Corley found that the "capacity to instruct a computer [...] is not speech within the meaning of the First Amendment."

As the research center and advocacy group CoinCenter points out in a legal analysis of Judge Failla's oral statement, the "distinction between functional and expressive code" as found in Corley "is no longer good case law in the Second Circuit and the Supreme Court. The court, in the transcript of the oral ruling, seems unaware of that change in First Amendment jurisprudence."

CoinCenter argues that "the court invented this functional vs expressive code distinction in the Corley case and in an earlier ruling, CFTC v. Vartuli. This distinction was never before a part of the First Amendment analysis. In the intervening 23 years, the Supreme Court has never adopted that distinction as a threshold to doing First Amendment analysis in software cases."

CoinCenter further argues that "nine years after Corley, the Second Circuit was presented once again with a First Amendment claim by a party seeking to transact in computer data that was prohibited by law. [...] The court had a clear opportunity to follow and indeed extend Corley’s functional vs expressive approach to the threshold question of First Amendment protection for computer data. It did not."

According to CoinCenter, "of all of the types of speech to consider in these various cases, Storm’s Tornado Cash software actually seems the most likely to advance the values served by the First Amendment."

"There is no longer any functional vs expressive analysis to be done in a First Amendment case about software," CoinCenter concludes.

In April, CoinCenter argued that "at root, the prosecution is attempting to hold the Defendants liable for the content and viewpoint of their speech. The software published and released by the Defendants carries a deep political and cultural message, concerning both (a) whether people should be able to make private peer-to-peer financial transactions online and (b) exactly how and by using which scientific and cryptographic principles they can make those transactions."

"Defendants’ choice regarding how to write and publish the software is the expression of a powerful political and scientific viewpoint in and of itself," CoinCenter added.

Non-Custodial Software Providers Can Be Classified As Money Service Businesses

Another part of Storm's defense encompassed the argument that Tornado Cash never took custody of user funds according to FinCEN's 2019 guideline on 'Convertible Virtual Currencies' – as understood by the defendants – to counter conspiracy to operate an unlicensed money service business allegations.

In an amicus brief submitted in April, Blockchain Association argued that "Control is implicit in an individual’s receipt of something that the individual then transfers to someone else—for example, a delivery driver takes food from a restaurant, has complete control over it, and then transfers it to a consumer’s house."

"In contrast," Blockchain Association argues, "a person who gives her hungry
friend a ride to the restaurant and back is providing transportation, not transferring food from the restaurant to her friend."

In pretrial proceedings, the government argued to the contrary that "the definition of “money transmitting” in Section 1960 does not require the money transmitter to have “control” of the funds being transferred. The definition exends to “transferring funds on behalf of the public by any and all means.” [...] Under the ordinary meaning of the word “transfer,” there is no requirement that the transferer exercise control over the funds being transferred."

"For instance," the government argued, "a USB cable transfers data from one device to another, and a frying pan transfers heat from a stove to the contents of the pan, although neither situation involves exercising “control” over what is being transferred."

Judge Failla ultimately sided with the government, finding that control is not a necessary requirement to charge a violation of Section 1960 US Criminal Code prohibiting the operation of unlicensed money transmitters, according to Law360. "A control requirement is not in the statute and this court is not going to read it in," judge Failla said, according to DeFi Education Fund Chief Legal Officer Amanda Tuminelli.

According to Failla's statements, FinCEN's 2019 guidance "doesn't have broad control requirement for money transmission, and "total independent control" is merely one part of a four-factor test specific to the wallet section of the guidance, that specifically does not apply to mixers," writes Bitcoin Policy Institute legal fellow Zack Shapiro. The Bank Secrecy Act "doesn't require control for money transmission," Shapiro added.

"The ruling is unfortunate and sets a dangerous precedent," attorney Joe Carlasare tells The Rage. "However, I understand why the Court came down in determining that Section 1960 doesn’t impose a requirement of control over assets to operate as an unlicensed money transmitter."

"You can hate the broad interpretation of the DOJ that control of funds is not necessary to engage in money transmitting," Carlasare wrote in April, "but there is decent textual support to make the argument in Section 1960."

"Congress wanted a very broad definition of “money transmitting’ to include “but not be limited to” transferring funds on behalf of the public by ANY and ALL means including but not limited to transfers within this country or to locations abroad by wire, check, draft, facsimile, or courier."

Developers Do Not Need To Be Aware Of Specific Criminal Activity To Be Charged With Conspiracy To Commit Money Laundering

Addressing the charges on conspiracy to commit money laundering and sanctions violations, Storm's defense argued that the government was unable to prove that the defendant had knowledge of specific funds involved in criminal activity on Tornado Cash, and that Storm couldn't have violated sanctions law as "informational materials", such as software, are exempt of the International Emergency Economic Powers Act (IEEPA).

As CoinCenter pointed out, "publishing the immutable pool smart contracts to the Ethereum blockchain, took place long before [...] there was any indication that any sanctioned persons would be using the protocol."

After becoming aware of criminal activity on Tornado Cash, CoinCenter added, "the Defendants, as alleged, took a single day to decide to block traffic associated with identified [sanctioned entity] Lazarus Group wallets from using their web server, the only part of the Tornado Cash protocol under their control. That they failed to retract previously released software or change the immutable pool contracts, an impossibility given the Ethereum blockchain’s operation, in no way suggests that they willfully and knowingly confederated to commit sanctions evasion."

"To argue to the contrary would be to suggest that the developers of the Linux open-source operating system confederated with the regime of Iran, merely by freely releasing a valuable computing tool that Iran would later use to operate computers related to its weapons programs," CoinCenter exemplifies.

"Crafting such a broad standard for sanctions liability would massively chill the publication of software and could be used to villainize countless researchers, scientists, and developers whose selfless release of free and open-source software is largely responsible for the information technology revolution of the last half-century," CoinCenter added.

However, according to CoinDesk, judge Failla argued that it was irrelevant whether Storm was aware of criminal activity involving Tornado Cash.

"To be guilty of money laundering, the defendants need not be guilty of, involved in, or even aware of the specifics of the specified unlawful activity,” Failla reportedly said. “The government did not have to allege that Mr. Storm was aware of the specific nature of, much less a participant in, the underlying criminal activity.”

As Law360 reports, Failla ultimately argued that specific knowledge of a crime is not a prerequisite for money laundering offenses. "Mr. Storm needed to know that he was dealing with the proceeds of some crime, even if he did not know precisely which crime," Judge Failla said, according to Law360.

Addressing the arguments on IEEPA exemptions, Failla argued that "Mr. 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," according to Law360.

As Law360 additionally reports, "judge Failla noted that the laws at issue don't punish coding, they punish financial crimes. Just the fact that Storm's charged conduct includes publishing software "is insufficient to turn these into some sort of overbreadth challenge," the judge Said."

This article was updated on Oct. 9th, 2024 2pm EST to reflect CoinCenter's legal opinion on Corley.

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