Tornado Cash loses rejection claim

The Tornado Cash judge issued an oral ruling today denying both the Defense’s motion to compel discovery and their motion to dismiss the charges. This is a massive setback for the Defense, and the judge’s reasoning may not bode well for developers and projects going forward.

Motion to Compel

The Defense’s motion to compel discovery sought to access a wide range of government communications, including exchanges with foreign authorities under the Mutual Legal Assistance Treaty (MLAT) and with domestic agencies such as the Office of Foreign Assets Control (OFAC) and the Financial Crimes Enforcement Network . (FinCEN). Citing Federal Rule of Criminal Procedure 16, the Defense argued that these materials were essential to understanding the government’s case and could include exculpatory evidence. However, the judge made it clear that Rule 16 imposes a strict requirement: The defense must show that the requested information is material to their case, not just speculate about its potential usefulness.

The court rejected the Defense’s arguments as speculative, noting that references to what the information “could” or “could” reveal did not meet the necessary standard of materiality. For example, the Defense argued that MLAT’s communications with the Dutch government could shed light on the evidence against Tornado Cash or reveal the government’s investigative theories. The judge found this reasoning unpersuasive, pointing out that materiality cannot be established by assumptions or vague statements.

Similarly, the court denied the Defense’s request for all communications between the government and OFAC and FinCEN. Although the Defense argued that these documents were necessary to understand the theories of the government and potential witnesses, the judge concluded that the Defense failed to demonstrate how these communications were directly relevant to the charges at hand. The court reiterated that the onus is on the Defense to show a specific link between the requested documents and their defense strategy, which they failed to do.

When the Defense suggested an in camera examination – a private examination by the judge of the requested documents – to determine their materiality, the court refused. The judge argued that granting such a motion based on speculative claims would set a dangerous precedent, effectively forcing in camera reviews in all criminal cases when a defendant speculates about the relevance of certain documents. That, the judge pointed out, would undermine the purpose of Rule 16 and turn pretrial discovery into an unfettered search for potentially useful evidence.

The defense also raised concerns under Brady v. Marylandholding that the government could withhold evidence by exculpation or impeachment. While the court recognized the government’s obligations under Bradyfound no indication that these duties had been neglected. Without concrete evidence to suggest that the government withheld information, the court saw no reason to compel further disclosures. The judge warned that although the Defense’s arguments are theoretically possible, they do not have the necessary factual support to justify the court’s intervention. She said, however, that if it later found that the government had “interpreted its obligations too narrowly”, then there would be “unfortunate consequences for their case”.

Motion to Dismiss

The motion to dismiss presented a much more significant set of issues. The Defense’s main argument was the definition of a “money transmitter” under the Bank Secrecy Act (BSA). The defense argued that Tornado Cash did not qualify as a money transmitter because it did not exercise control over users’ funds; it only facilitated the movement of cryptocurrencies. However, the Court rejected this narrow interpretation. The judge clarified that the scope of the BSA does not require control of funds; Tornado Cash’s role in facilitating, anonymizing and transferring cryptocurrencies was enough to bring it into the realm of status. The judge compared Tornado Cash to custodial mixers, which were considered money transmitting companies.

Further complicating the Defense’s argument was their reliance on FinCEN’s 2019 guidance, which uses a four-factor test to determine whether a wallet provider is a money transmitter. The defense argued that this guideline, which includes a standard of “totally independent review,” should apply to Tornado Cash. The court disagreed, stating that this standard is specific to wallet providers and does not extend to mixers like Tornado Cash. Consequently, Tornado Cash’s lack of “total independent control” over the funds was irrelevant to its classification as a money transmitter.

Another key point in the court’s analysis was the distinction between expressive and functional code under the First Amendment. The defense argued that prosecuting Storm for his involvement in Tornado Cash amounted to punishing him for writing code, which they argued was protected speech. The judge acknowledged that while the code may be considered expressive, the specific use of the code to facilitate illegal activity — such as money laundering or evasion of sanctions — is not within the bounds of First Amendment protection. The judge emphasized that the court must focus on the conduct permitted by the code, not just the code itself. Even under intermediate scrutiny, which applies to content-neutral restrictions on speech, the judge found that the government’s interests in preventing money laundering and regulating unlicensed money transmission justified the restrictions imposed by the relevant statutes.

The court also addressed concerns about the immutability of Tornado Cash’s smart contracts, an issue raised by both sides. The judge acknowledged the existence of a factual dispute, but held that it was not a deciding factor in the present motion. However, the issue of immutability may play a role at trial in determining how much control Storm has over the service and its responsibility for its operations.

In closing remarks, the judge emphasized that while the use of code to communicate ideas may be protected by the First Amendment, the use of that code to facilitate illegal activity is not. This distinction is critical in the context of emerging technologies such as blockchain, where the line between speech and conduct can be blurred. The court’s ruling serves as a reminder that the legal system is prepared to hold participants in the digital economy accountable, even as it grapples with the complexities of applying traditional legal principles to new and evolving technologies.

The full transcript of the judgment will be made public once it has been prepared by the court reporter.

This is a guest post by Colin Crossman. The opinions expressed are entirely our own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.