Is DeFi Illegal Now? Tornado Cash Case Update | Jake Chervinsky

Today Jake Chervinsky is back on the podcast to discuss Tornado Cash developer Roman Storm's court case and its implications on DeFi and the crypto industry. Could DeFi be made illegal in the United States? Are DeFi developers going to be prosecuted if criminals use their code? Is it just DeFi? What other sectors could be at risk? The answers to these and many other questions are discussed in today’s episode. ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2 🗣️TOKU | CRYPTO EMPLOYMENT https://bankless.cc/toku ⚡️CARTESI | LINUX-POWERED ROLLUPS https://bankless.cc/CartesiGovernance ⁠ 🦄UNISWAP | BROWSER EXTENSION https://bankless.cc/uniswap ⚖️ ARBITRUM | SCALING ETHEREUM ⁠https://bankless.cc/Arbitrum 🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle ------ ✨ Mint the episode on Zora ✨ https://zora.co/collect/zora:0x0c294913a7596b427add7dcbd6d7bbfc7338d53f/75?referrer=0x077Fe9e96Aa9b20Bd36F1C6290f54F8717C5674E ------ TIMESTAMPS 0:00 Intro 4:44 Roman Storm’s Case 12:52 Is DeFi at Risk? 18:20 The Ruling & Its Implications 21:29 Money Transmission Explained 25:52 Roman Storm’s Arrest 30:54 Are All DeFi Protocols At Risk? 36:17 Prosecution of Privacy 43:11 What This Ruling Means & What’s Next 48:41 Best & Worst Case Scenario 53:11 Other Sectors At Risk 57:35 Other Cases 1:03:48 Totalitarian Nightmare 1:08:21 SEC Updates 1:12:00 US Election 2024 1:17:30 Geofencing 1:23:21 Are We Winning & Conclusion ------ RESOURCES Jake Chervinsky https://x.com/jchervinsky Jake Chervinsky’s Tweet https://x.com/jchervinsky/status/1839412423096467753 A Practical Guide to Geofencing https://variant.fund/articles/practical-guide-to-geofencing/ Defend Roman Storm https://juicebox.money/@defend-roman-storm ------ Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures ⁠

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  This is, in my view, for the first time, the United States government saying the developer of an open source immutable smart contract protocol should go to prison for how someone else abused that protocol even though there was nothing you could do to stop it.

• 0:19Ryan Sean Adams?

  Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is Ryan Shaw and Adams. David's out today, so I'm here to help you become more bankless. Pretty hard to go bankless if they make it illegal to go bankless. On Friday, September 26th, a US judge ruled that, quote, "control of funds was not necessary," end quote, "for money transmitter laws to apply to the tornado cash developer, Roman Storm." This is a court case I'm referencing that we've talked about a number of times on Bankless. If you're not familiar with it, we'll get into some of the details in today's episode. The question I had when I heard about this was, did they just make DeFi de facto illegal in the United States?

• 1:03Ryan Sean Adams?

  The development of DeFi? This is a terrifying precedent regardless, and it really begs the question, do all DeFi developers become criminals if criminals use their code? Are DeFi protocols now unregistered money transmitters? And what would that mean? Is the Department of Justice waging a war on money laundering? Or are they trying to wage a broader war on privacy and all forms of decentralized crypto? Crypto lawyer Jake Chivinsky is our guest today, and he shed some light on all of these questions. We've called this tornado cash case "the most important case in history so far of our fight for crypto freedoms." I think it'll answer questions like, can code be sanctioned by governments? Can crypto developers be arrested at the whim of an enforcement official?

• 1:48Ryan Sean Adams?

  That's what's at stake in this case. This case, and others like it, is not just about our right to financial privacy. That's important, and that's part of it. But it's about our broader right to develop and run software and preserve our civil liberties in this digital age. Liberties that I'm afraid are starting to erode. We're in the expert hands of Jake to help us navigate this. The episode today was sponsored by By our recommended crypto exchange Kraken. If you have not created an account and gotten started, go do it. There's a link in the show notes today.

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• 4:44Ryan Sean Adams?

  Bankless Nation, very excited to introduce you once again to Jake Chervinsky. He is probably Bankless's favorite crypto lawyer on Twitter, as evidenced by the number of times he's been on the Bankless podcast. And he's here once again. He is the chief legal officer at Variant Fund. He's on the board of the DeFi Education Fund. And we're here to talk about a very big case, a very important case that is going on in the US right now. This is the tornado cash case. But first of all, Jake, welcome to Bankless.

• 5:16Speaker 00

  Thanks for having me back, Ryan. Great to be here.

• 5:18Ryan Sean Adams?

  Do you need to say your typical legal disclaimer? Since I've had you on enough, I know that this sort of needs to be said, yes?

• 5:24Speaker 00

  Yes, and thanks for prompting me because sometimes I forget and then halfway through I have to stop. So yes, I am a lawyer, but nothing I say here is intended as legal advice. So don't do or not do anything just because I talk about it here. And if you do need counsel, feel free to reach out and I'm happy to make a recommendation.

• 5:40Ryan Sean Adams?

  There you go. Jake is a fantastic lawyer, but he is not your lawyer of Bankless Nation. So just remember that. I want to start with this tweet. So this happened on Friday, the 26th. There was a ruling in the Roman Storm case. And at the time, I didn't know the significance of that ruling. But that's, that's why I invited you on the podcast, really talk about this ruling. And you tweeted this out. Judge Phaila, her ruling denying Roman Storm's motion to dismiss the indictment is an assault on the freedom of software developers everywhere. This will go down in history as a perversion of law and a travesty of justice. And it will go down on appeal if that's what it takes. Strong words, fiery words there, Jake.

• 6:22Ryan Sean Adams?

  You are one who, you know, your voice on crypto Twitter generally is very rational.

• 6:30Ryan Sean Adams?

  Very, very moderate, very considered, I would say. So to hear these fiery words coming out of you is, was like a kind of a wake up call for me. Can you give us the context? Why did you tweet this out? And what happened on that Friday, September 26th?

• 6:45Speaker 00

  Yeah, happy to do that. And I appreciate your kind words. And I really do try to be as reasonable in my, my public statements as possible. And, you know, often there are very loud voices on either side of an issue. And, you know, in this case, I'm not just blowing hot air. I think that Judge Phelan's ruling on the motion to dismiss the indictment in the criminal prosecution of Roman Storm, one of the developers behind the Tornado Cash Protocol, is really a dangerous precedent to set for not just crypto, but for open source software development generally. So maybe let me start by giving you the procedural posture, where we are in this case. And then we can get into what Judge Phelan ruled last week in her oral ruling, not written ruling on the motion to dismiss.

• 7:28Ryan Sean Adams?

  That sounds good. And one thing I want to say about this, we'll talk about this case, the Roman Storm ruling as kind of the thing that's most recently happened. There are a series of cases that are kind of tied together in this Tornado Cash case. Some in the US, some outside of the US. We might touch upon some of the other cases. The Roman Storm one is probably the largest going on in the US and the most significant going on in the US right now. There's almost a Tornado Cash versus the governments around the world, like meta case, because it's a series of cases that are all tied together. But, okay, let's get into the Roman Storm case, the 26th, September 26th, and the ruling that was made. So can you talk about the background for that and tee us up here?

• 8:13Speaker 00

  Yeah, happy to do that. And also, we can step a little more meta than that even and talk about just sort of the global battle for privacy as well, because that's really how all of this sort of fits in. But to zoom in first on the Roman Storm case, the government decided, and when I say the government, I mean the Department of Justice, which enforces the criminal law in the United States, decided to indict the developers behind the Tornado Cash Protocol, so that includes Roman Storm, on three different criminal charges.

• 8:40Speaker 00

  Conspiracy to commit money laundering, conspiracy to operate an unregistered money transmitting business, and conspiracy to violate AIBA, which is the law that creates all of the sanctions rules in the United States. In other words, transacting or facilitating a transaction with a sanctioned party. In this case, the Lazarus Group in the DPRK, North Korea. And the reason the government took such an interest in the Tornado Cash case is because, as we all know and as we were all able to see, thanks to the transparency of a public blockchain, Tornado Cash did end up being used as a mixer by some bad actors in the space, even though the vast majority of use of Tornado Cash

• 9:24Speaker 00

  was ordinary people who just wanted to protect their privacy on-chain. And in the course of the prosecution, as a defense lawyer would do in basically any case, Roman Storm and his counsel filed a motion to dismiss the indictment. And the industry really showed up to support that motion to dismiss. So I co-authored an amicus brief, along with Amanda Tummenelli at the DeFi Education Fund, arguing why that motion should be granted. Coin Center filed an amicus brief, the Blockchain Association, and many others. And in essence, the argument on a motion to dismiss an indictment is, even if you accept all of the factual allegations that the government makes in the indictment, those facts do not add up to a crime.

• 10:08Speaker 00

  And the core of the argument in the Tornado Cash case for Roman Storm is that he is not credibly accused in the indictment of actually committing those offenses: conspiracy to commit money laundering, or operate an unregistered transmitting business, money transmitting business, or violate sanctions, merely because he wrote code that he put onto a blockchain that operates in an autonomous and self-executing fashion, and then was abused by bad actors after the fact without his personal involvement. So that was essentially the argument that was made in the motion to dismiss the indictment. And we can dig more into the details there. But just, yeah, go ahead, Ryan.

• 10:49Ryan Sean Adams?

  It seems like a clear Clear-cut argument. I mean, is it a pretty clear-cut argument? Is there precedent around this?

• 10:56Speaker 00

  Well, you would hope that it would be a clear-cut argument that individuals should not be held liable for the bad acts of some other third party that they are not actually participating in. But in this case, it does get a lot more complicated for a couple of reasons. What the government did in the indictment, at least in my personal opinion, is they really conflated the ways in which Storm was involved in the Tornado Cash Protocol. They make a bunch of allegations about what Storm had done, including writing the immutable smart contracts that comprise the Tornado Cash Protocol, but not just that. They also alleged that he was operating a website, right? You can go learn about Tornado Cash online. He

• 11:39Speaker 00

  was operating a user interface, or at least was making updates to a user interface that people could use to access the protocol. He also was involved in creating a relay network, which was a separate off-chain system that allowed users to better protect their privacy when they used Tornado Cash. But the government admits in the indictment that the core of the Tornado Cash Protocol, the pool contracts that people actually use in order to get privacy, and that North Korea was using in this case, were not in Roman Storm's control. And that's why the argument was, he can't be committing a conspiracy

• 12:18Speaker 00

  to commit money laundering if he literally could not conduct the transaction that constitutes money laundering, because that transaction is literally out of his control through an immutable smart contract protocol. And the same issue for operating an unregistered money transmitting business, which we should get into this a little bit later, has been pretty well-defined already, not by the Department of Justice, but by FinCEN over at the Treasury Department. And the way they define this type of business just doesn't sync up with how the Department of Justice described it in the indictment.

• 12:52Ryan Sean Adams?

  This is a key piece here because I want folks to see this case as I'm now starting to see it, you know, post this ruling and even before is because this isn't just about tornado cash. It's far broader than that. It's not even just about privacy. It is that, but it's also far broader than that. What you just said is, did Roman Storm have control over an immutable smart contract is pretty key because everything that we are building in DeFi is an immutable smart contract, at least the purely decentralized things are. So you think of like the Uniswap protocol, right? It's a non-custodial smart contract that

• 13:35Ryan Sean Adams?

  has some funds inside of it, but it's outside of the bounds of the developers of the Uniswap protocol, right? It's immutable, it's on-chain, they don't control it, they can't access it, they cannot moderate who puts, you know, funds inside of the Uniswap protocol. And that's been true of Uniswap V1 all the way to V4 today. So this is broader than just privacy. It's certainly broader than just tornado cash. This is about all of decentralized finance, isn't it? Because a lot of this hinges upon this idea of, you know, did Roman Storm, was he responsible for the non-custodial smart contract deployment?

• 14:16Ryan Sean Adams?

  Essentially, a DeFi protocol that he published on the Ethereum blockchain. Is that, is that, is that about right? Or what have I gotten wrong in that description?

• 14:25Speaker 00

  I think you're absolutely right. And, and maybe a few thoughts about this. One is, this really strikes to the heart of what we are trying to do in DeFi. The purpose of DeFi is to create decentralized systems that do not rely on trusting a single centralized third party in order to operate or in order for users to get access to them. The second that you reintroduce a centralized intermediary with control over a smart contract in a traditional Web2 finance kind of way, then you're not doing DeFi anymore, at least in my opinion, right? You're losing all the benefits of And transparency and trustlessness and permissionlessness that is at the heart of what we are trying to build in this industry.

• 15:09Speaker 00

  And if you go all the way back to 2013, so let's go back in time to sort of the beginning of the analysis of this particular regulatory issue. The Financial Crimes Enforcement Network, which is a Bureau of the Treasury Department that enforces the anti-money laundering laws, recognized that this nature of a public blockchain, its decentralization and its permissionlessness was in tension with the Bank Secrecy Act, which essentially says if you are a financial institution and you're processing transactions on behalf of customers, then you have some anti-money laundering compliance obligations. You need to monitor those transactions. You need to do KYC, know your customer, identify who all your customers are.

• 15:54Speaker 00

  You need to identify suspicious activity. You need to report that to the government. You need to have internal controls to make sure that you as a company are following all of those rules and a number of other types of compliance obligations. Now, in the context of a decentralized smart contract protocol, there is no way to identify the users of the protocol. There is no financial institution that can comply with those obligations. But in the very early days, when folks were still wrapping their mind around what is a blockchain-based business, there were questions about whether a centralized exchange should be treated like a financial institution under the Bank Secrecy Act. And thankfully, FinCEN was maybe the only agency at any point in time to give clear

• 16:36Speaker 00

  guidance about when compliance with the Bank Secrecy Act was necessary. And they explained if you have control over user funds, if you are a money transmitter under their regulations, meaning you accept funds from one party and transmit funds to another party or another location, well, you're a money transmitter and you have to comply with all those regulations. And over the course of years, from 2013 all the way up to 2019, FinCEN continued to give guidance about when actors in the crypto industry were or were not money transmitters under their regulations. This all came to fruition in 2019 guidance that summed up FinCEN's entire view on this

• 17:21Speaker 00

  issue. And the 2019 guidance is probably the most referenced regulatory guidance of anything in crypto. It's something that all of us for the last five years in DeFi have looked to to understand. Do we need to KYC users of this system or not? And in my view, the 2019 guidance makes very clear that an immutable smart contract protocol is not a money transmitter, or rather, the developers of that protocol are not money transmitters by virtue of developing the protocol and do not need to register with FinCEN. Nonetheless, here comes the Department of Justice in this criminal prosecution. And their argument is, we are not bound by Treasury's guidance.

• 18:03Speaker 00

  You all in the industry may feel like you've been following what they told you to do for the last five years. That may satisfy them, but not us. And even if you are not in violation of the Bank Secrecy Act, nonetheless, you may be violating the criminal law and you may have to go to prison for it. So that's what's happening in this case.

• 18:20Ryan Sean Adams?

  So that's essentially what they're saying about Tornado Cash. And that's why the stakes are so much wider. The stakes are potentially all of DeFi in the United States. So can you get us to the, like, and just to clarify my understanding of this, Jake, is like, in the ruling, maybe we'll get to the ruling that that happened on that Friday in September, in the ruling, the judge, by saying that Rem and Storm had responsibility, that Tornado Cash and his development of Tornado Cash was essentially a money transmitter, right? Then, de facto, is she not implying that all DeFi protocols, potentially smart contracts, could be money transmitters? Or like, was this just tied to privacy?

• 19:05Ryan Sean Adams?

  Anyway, let's get, let's get to the actual ruling and what the implications might be. So what happened in the ruling on the 26th?

• 19:12Speaker 00

  Yeah, so as I said, in the motion to dismiss the indictments, there were many arguments, but the crux of the argument was Roman Storm was not operating an unregistered money transmitting business because what he was doing, offering a website, offering a user interface, writing the original code, working on the relay or network, that is not money transmission because he was not accepting funds and then transmitting funds on behalf of any other person. He never had custody over user funds. He did not have control over the protocol. And the judge basically said, that is not my interpretation of the law. Wow.

• 19:52Speaker 00

  My view of the law is a person does not need to have control over user funds or custody over those funds in order to engage in money transmission. And, you know, it's very important to note, first of all, that motions to dismiss indictments are very rarely granted. So in a sense, it's not surprising that Storm lost the motion. The standard is extremely difficult to meet. Courts are very deferential to the government. They basically say, well, as long as the indictment sort of hints that there was a crime, as long as the language of the statute that alleges an offense is somewhere in the indictment, then more or less this can go to trial. But Judge Phelan went way beyond just saying,

• 20:37Speaker 00

  this indictment is at least sufficient to move on to trial. She actually made a holding on the core legal issue that control is not necessary to engage in money transmission. And she sort of steps back and does what I think is a bit of a sleight of hand that the government does as well, which is to describe tornado cash as a whole as a service. So she says that Roman Storm was offering a service that was the tornado cash protocol, but she doesn't engage at all with the details about what that service actually might be. And I think we could all agree that, you know, Storm was offering some type of service. There was a business here. There were ways in which he was being compensated for that business, but the business-

• 21:22Speaker 00

  This was not the business of money transmission, and that's something that Judge Phelan, at least in my opinion, just didn't engage with in the ruling.

• 21:29Ryan Sean Adams?

  Okay, so can we talk about this term money transmission? Because we're talking a lot about this. This court hinges upon the judge's definition of like what money transmission actually is and who's a money transmitter and who's not. We'll talk more about that. But like, why is that even important? So say I'm a money transmitter, Jake. Does this imply some level of responsibility, culpability, a set of things I have to do? Why is money transmission so important here?

• 22:01Speaker 00

  Yes, it's a great question. And this might get a little bit in the weeds of the law, but hopefully the listeners will appreciate understanding a bit more how these different statutes play together. Exactly to your point, if you're a money transmitter, then you are a type of regulated financial institution under the Bank Secrecy Act, which is that law that the Treasury Department, FinCEN, enforces. As a money transmitter, you have to go register with FinCEN. You have to KYC all of your customers or users. You need internal controls. You need to designate a compliance officer. You need to do all kinds of reporting and record keeping under the Bank Secrecy Act. So being a money transmitter imposes a lot of compliance obligations on you

• 22:43Speaker 00

  under Title 31 of the U.S. Code, which is where the Bank Secrecy Act is. Totally separately from that, you also could be subject to criminal liability under Title 18 of the U.S. Code. That's where all the criminal laws are that the Department of Justice enforces. And Title 18 makes it a crime, specifically under Section 1960, to operate an unregistered money transmitting business. So the way that ordinarily we would think about this before the Department of Justice recently took a different position is, if you're a money transmitter, but you don't register with FinCEN, you've committed two separate violations. Number one, a civil violation under Title 31 of the Bank Secrecy Act.

• 23:26Speaker 00

  The Treasury Department might enforce that violation against you. And number two, a criminal violation under Section 1960 of Title 18, then the Department of Justice might come and prosecute you criminally. But we all assumed that this was all or nothing, right? You've either complied with the law or you've not complied with the law and violated both of those different statutes. Here, the Department of Justice is saying, That's wrong. You can be in compliance with Title 31, following all of Treasury's guidance, and nonetheless be engaged in money transmission as we differently define it under Section 1960. And that frankly breaks my brain. I don't know how an industry could possibly operate

• 24:08Speaker 00

  when we can't follow the guidance of the Treasury Department, which is tasked with enforcing this type of statute.

• 24:14Ryan Sean Adams?

  So you said, is it Title 18, 1960?

• 24:17Speaker 00

  Title 18 is the criminal code, yes.

• 24:18Ryan Sean Adams?

  That's the criminal code. And this is what Roman Storm was explicitly charged with, among other things, a violation of Title 18. You said that is a criminal charge. So when you talk about criminal charges, right, I mean, we're talking about, what, jail time? Like, what are the penalties for this type of criminal charge?

• 24:37Speaker 00

  Yeah, the potential penalty for operating an unregistered money transmitting business under 18 U.S.C. Section 1960 is five years in prison. And, you know, he's also accused of violating Section 1956, which is the money laundering statute. You know, you could tack on more years for that. And then there's also the sanctions violation, which, again, all hinges on essentially the same general allegation, that Storm is liable for third-party misconduct that he could not control at the time that it took place.

• 25:08Ryan Sean Adams?

  And these charges stack too, right, Jake?

• 25:11Speaker 00

  You know, it depends on sentencing. You know, often if there is a conviction for more than one charge, the sentences end up running concurrently. So you could get three, five-year sentences, but you don't serve 15 years. You know, you serve the five minus some for good behavior. This is all stuff that gets worked out in sentencing. But we are talking about the liberty of a software developer. You know, this isn't just a question of whether there could be a fine for a company or whether the business can continue operating. This is, in my view, for the first time, the United States government saying the developer of an open-source immutable smart contract protocol should go to prison for how someone else abused that protocol even though there was nothing he could do to stop it.

• 25:52Ryan Sean Adams?

  It's actually wild. And of course, we don't know all of the facts and all of the evidence will come out in the court case. And that court case will go to trial December 2nd. So I don't think either of us are here saying like, we know all of the facts and all of the evidence of this case. But can we talk about the circumstances through which Roman Storm was actually arrested? So someone hearing that might be, well, but we live in a reasonable society. Okay, Jake, yeah, these laws are kind of on the book. But like, you saying things like, you know, DeFi developers could go to jail and they could be like criminals. That's not practically how the US works, right? I mean, we are a country of innovation.

• 26:35Ryan Sean Adams?

  We support developers and entrepreneurs. But can we just talk about the circumstances by which Roman Storm was actually arrested? So he was a privacy DeFi developer, right? Deployed Tornado Cash. We've already talked about some of the other activities that he did in association with this deployment. My understanding, Jake, is he was actually arrested from his house, you know, somewhere in Washington State, in the like, early hours of the morning. I don't know if he had a family there, but like in front of his family, it was like literally arrested. So this wasn't the case of like, hey, you're getting some warnings and we'd like you to comply and you need to do XYZ like, or else. It was

• 27:15Ryan Sean Adams?

  suddenly, the FBI, a SWAT team's at his house and yoinking him and like taking him into custody. Is that accurate? Because that's what I seem to remember from this.

• 27:26Speaker 00

  Well, I remember the same report. I don't want to scare people too much, right? I don't want all the DeFi developers listening to this to think that men in windbreakers are going to show up at their door at 6:00 AM tomorrow and put them in handcuffs. Because I don't actually think that that's what's likely to happen. And I don't want to scare anybody too much. But First, we don't know whether there were conversations between the Department of Justice and Storm or others at Tornado Cash or their council before there was an arrest. Frankly, it would shock me if there was no contact at all and doors got kicked down without any warning whatsoever. So I think that that's an unlikely result, although indeed, if the government does decide to make an arrest, they usually don't tell you

• 28:10Speaker 00

  way in advance because they're worried that you're going to free you. And especially in crypto, you know, where it's, you know, there may be some risk of flight. I think the government tries not to let folks know in advance that there may be an arrest. But I think if I were to steel man the government's case here, not the case on the facts, but in terms of how they're operating, let me give at least my most reasonable interpretation or what I think that someone working for the Department of Justice would say if they, you know, if they had the freedom to actually discuss this, which by the way, they don't. So we don't really know what's going on behind the scenes. I think what they would say is, we are not coming after all of DeFi and we are certainly not coming after all open

• 28:51Speaker 00

  source software developers. That's preposterous. We're reasonable people and we understand the world operates on open source software. We are going after people who are building tools that are being abused by our geopolitical enemies, by brutal dictatorial regime, North Korea, which none of us should be supporting in any way. And we are only doing that because we know that the developers, and again, this is what they would say, it's not my view, but they would say where we know that the developers are aware of that illicit use of the technology that they built. And nonetheless, despite that knowledge, they are continuing to profit from their work and they're continuing to try to improve it and they are not doing

• 29:33Speaker 00

  anything in their power. And there are some things potentially in their power to do to try to stop that type of illicit use. But no one else needs to be worried about this. We exercise prosecutorial discretion. And if you are trying to work with us to stop the bad guys, then you don't have to be worried about men in windbreakers coming to your house at 6 a.m. tomorrow morning. That is, I think, what they would say. My response to that is, that's a nice thought. We're not here in crypto to trust the government to do the right thing. In fact, we're here to build technology that stops bad actors, whether they're in government or anywhere else, from exerting their outsized influence and power to take advantage of other people.

• 30:16Speaker 00

  And even if we think the government is making good decisions now, I think everyone could be worried about what a next administration looks like, no matter what side of the political aisle you're on, and whether there could be some abuse of prosecutorial discretion in the form of selective prosecution, where the government decides, we're only going to go after people we don't like, and we're going to interpret the law so broadly that there is no more rule of law. The law is, if we don't like you, we're going to come get you. And to me, that's what this legal precedent sounds like as the Department of Justice is describing their authority to prosecute software developers under Section 1960.

• 30:54Ryan Sean Adams?

  I mean, it's a little bit like, you know, trust me, bro enforcement. And that's what's so concerning about this, because like, you don't know who is on the other side of that enforcement. And that's not how the legal system works. That's not how the US is supposed to be designed. We should have a set of civil liberties that protect us from like, this kind of enforcement. Let me ask kind of a question, this may be somewhat of the elephant in the room. So, this DeFi protocol was targeted for privacy use cases. And to your point, the vast majority of its transactions were just people simply trying to preserve their privacy when interacting on chain. So, chains like Ethereum, of course, Bitcoin, et cetera, they don't have privacy native to the layer one.

• 31:38Ryan Sean Adams?

  So if you want that, like, any level of privacy, without some third party seeing how you transact, you know, the way I might pay you a hundred dollar bill and you and I don't have to tell anyone, it's not recorded anywhere, it's not on a public ledger. We want that, to maintain that cash level of privacy, then tornado cash was an avenue to do that. Lots of people in the US and crypto use this as just like a tool, including my co-host, David Hoffman, by the way. He's a part of another like tornado cash. Related lawsuit that we could, we talk about later. But anyway, the elephant in the room is of course, tornado cash was built for privacy. There are other define protocols that are a bit more general, not necessarily privacy, but like a automated market maker, right? Say like a Uniswap, for instance.

• 32:22Ryan Sean Adams?

  And of course, the Uniswap Labs front end can implement whatever they want as far as, you know, future KYC, future screening, they can, you know, D list assets, they can do whatever they want. But the code itself that operates, any of the Uniswap protocols, right? Is immutable on chain. Any other third party could spin up an interface. You don't even need an interface. You could trade tokens using kind of like command line firmware type stuff without a user interface. And there is nothing stopping any quote unquote bad actor from, and I should acknowledge, North Korea is absolutely a bad actor. Like acknowledge the national security concern here. Like, understand that piece of it, right? What we're talking about is the legal precedent that sets.

• 33:03Ryan Sean Adams?

  But anyway, any actor can participate without the developer's permission. And so how does that like, why, why should this stop at tornado cash? Why does this not filter down into all of the other DeFi protocols? Is there some sort of argument about proportion of like illicit bad actor use? Or is that what the judge is implying? Or is that the entire problem that this is all so vague at this point?

• 33:30Speaker 00

  I think that's exactly the problem. And if you look at the criminal statute that Storm is accused of violating, operating an unregistered money transmitting business, there's nothing given in there about illicit financial activity, or at least it can apply even if there is no illicit activity whatsoever. So if you take the government's theory at it on its face, I do think you could apply it to any number of other types of DeFi protocols. Now, again, the government is going to say that's not their intent and their real goal and the purpose of these statutes in the first place is to give them authority to root out bad actors and money laundering.

• 34:07Ryan Sean Adams?

  Ah, they want the flexibility here, right?

• 34:10Speaker 00

  That's exactly right. And Judge Phelan, in her oral ruling, even said, you know, sure, technically speaking, in the past, money transmitters have had control over user funds, but I don't see that as being necessary under the statute, and I have to interpret the statute as being flexible to keep pace with novel ways that people are trying to abuse the financial system. So she's sort of admitting that she is expanding the law in a new way, but that the law is intended to cover new types of conduct, so the government will have the authority that it needs to go after illicit actors. So I do think that this is a concern for everyone else, more so, though, than the legal analysis. And

• 34:50Speaker 00

  this is so often the case with crypto, because laws and regulations are so vague and hard to understand when you apply them in a decentralized, permissionless environment. The question is not what the law says. The question is one of practical risk and practical calculations by the government, what they want to go after and what they don't. And when they look at something like Uniswap, a decentralized exchange protocol, that itself does not provide privacy, in other words, there's really no way to use something like Uniswap to obscure the source of funds. All the transactions are going to get traced, and so you can't launder

• 35:31Speaker 00

  money because you can't stop the government from tracing transactions through the protocol. The government basically says, yeah, we can trace this stuff, so we don't really feel like we need to characterize this as an unregistered money transmitter. It's when you have privacy that the government says, we are not comfortable with this. And many people have noted, so this isn't my thought, but if cash, which of course is totally private, were invented today, the government would almost certainly not want to allow it, because they want to surveil all of our transactions all of the time. That's how law enforcement works in the modern world, and they are not going to give that up easily, just because we built technology that doesn't require centralized intermediaries in order for us

• 36:16Speaker 00

  to transact at a distance.

• 36:17Ryan Sean Adams?

  This is so interesting. So basically, in theory, this judge's ruling, and we'll talk about the significance of this judge's ruling because this judge does not get the last say on this issue. I mean, per your tweet, and it will go down on appeal if that's what it takes. You think ultimately this will be struck down. But let's say this judge's theory holds, then she's basically saying, if you're a developer deploying an immutable smart contract, and a third-party actor uses that or does something with that code, you might be a money transmitter, and you might be prosecuted under Title 181960 under criminal charges. But practically, what you're saying is, the US government apparatus,

• 37:01Ryan Sean Adams?

  and the DOJ, and everybody who's kind of looked at this issue, they're not, I mean, Uniswap's been in operation for a long time. DeFi's been out there for a very long time. I mean, you've been in this industry for as long as anyone, Jake, I mean, looking at these issues. And they're not knocking down DeFi developers' doors and arresting them. And it's because we have this maybe uneasy impasse in that our Layer Ones and DeFi itself are transparent, are not private. And so they've kind of like not prosecuted it in the way they're coming after Tornado Cash. Where they are targeting is when privacy, when there's a layer of privacy, when they can't see in the transaction itself who the

• 37:45Ryan Sean Adams?

  source is. That's what they're most worried about. And so that's where we get the ire of the US government. I guess that's kind of the, the trust me, bro, is like, you're kind of trusting that the DOJ is not going to come after any of our other DeFi protocols just because they're not private, because they're public. And so we have this uneasy impasse where they have all of these powerful analytic tools, and they can trace, they essentially get their AML KYC anyway. It's just in the background where they can track all of these transactions. Another quip that I think is somewhat true is like, along with Cash being illegal if it was proposed today, I think if Bitcoin had privacy on like the base layer of Bitcoin, or Ethereum had privacy on the base layer-

• 38:27Ryan Sean Adams?

  Of Ethereum. I don't know that the governments around the world would have allowed it to propagate in the way that it has. And I sort of view that as a practical matter. It seems to be when there's immutable smart contract code and privacy combined. That's when you face the full might of the financial surveillance like government apparatus. That's what they really don't like.

• 38:51Speaker 00

  I think that's spot on and very well said. And I should add, I have friends at the Department of Justice. They're very good people. They want to do the right thing. They're working for the government because they believe in what they're doing. And we should be grateful that they're there because we do need them to go after the actual bad actors. And I do think, one way to put it is, trust me, bro. But another is to say, they are trying to make good decisions about how they wield their prosecutorial discretion. The problem is what we want to see is for them to go after the actual bad guys. The people who are engaged in criminal conduct, not the people who are building neutral tools that can be used by ordinary people

• 39:33Speaker 00

  for totally reasonable and legitimate purposes. We want to protect privacy. Privacy is guaranteed to us by the Fourth Amendment to the United States Constitution. I, for one, still really like the Constitution, the Bill of Rights, my favorite part for sure, the Fourth Amendment, probably my favorite amendment. Maybe after the First Amendment, the Fifth is pretty good, too, and the Fourteenth as well. But you see what I'm saying, right? We have to balance the very reasonable goals of the folks at the Department of Justice to stop illicit activity and protect people, to genuinely protect us from bad actors, with our civil liberties. What we cannot say is, we will abandon privacy entirely because that will make it easier for the government to hunt down the bad guys. Because what that leads to

• 40:18Speaker 00

  Every single time you see the rise of an authoritarian government anywhere in the world, and we have so many concerns about authoritarianism now here in the United States, no matter where you are in the political spectrum, is the first thing they do is they take advantage of their control over the financial system and over the criminal justice system to go after their enemies, their political enemies. And if we interpret the law this broadly to give the government this much power, we have to be very worried about how they will use that power next.

• 40:47David Hoffman?

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• 41:31David Hoffman?

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• 42:15David Hoffman?

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• 43:00David Hoffman?

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• 43:10Ryan Sean Adams?

  Okay. Can we talk about this ruling itself? So, the ruling has some, you know, terrible implications, let's say, for non-custodial DeFi tools in general, particularly privacy, but not just privacy. How binding is this ruling? Like, where do we go next with this type of thing?

• 43:33Speaker 00

  Yeah, so, great question. And the answer is, it's not binding. And not only is it not binding, but Judge Phelan decided not to issue a written opinion. So, all we're ever gonna get is this transcript. And that means a couple of things. Most importantly, for the lawyers out there who will understand this, it means the opinion won't go on Westlaw, which is the main research database that people use to look for precedent that is persuasive, even if it's not binding. So, this is actually gonna be pretty hard for people to find. You could say that was intentional, that she didn't want the opinion to be cited, although, frankly, very few orders on motions to dismiss indictments get written up as written orders. So, it may not be that noteworthy that she decided not to write it up.

• 44:16Speaker 00

  The sort of downside of her not writing it is that the transcript is pretty, it's pretty vague. You know, she didn't give us the deep reasoned analysis that you would ordinarily get from a written opinion. So, as you know, Ryan, when we get orders from Judge Judges, including frankly, from Judge Phelan on some of the SEC's cases, right, motions to dismiss and motions for summary judgment. They're very long, dozens of pages, lots of case citations, very deep and detailed explanations of what the basis of the ruling was. We're just not going to get that here. And in a sense, that's a blessing for us in the industry because it's not that likely that the next judge confronted with a similar set of facts or a similar legal argument

• 45:01Speaker 00

  will go to Judge Phelan and just say, well, she already comprehensively dealt with this issue, so I'm just going to cite her and defer my judgment to hers. I think that's a really positive thing. Then there's the fact that this order itself probably doesn't get appealed on its own. What happens next is the case goes to trial. And the trial is currently set for early December. I think it's December 2nd. And from everything I can see, just looking at the public docket, it seems like the parties are on pace to go to trial in December. And obviously, who knows what will happen at trial? There will be weeks of testimony and evidence submitted to a jury, right?

• 45:41Speaker 00

  12 Americans who are peers of Storm will get to decide, did the government actually meet its burden of proving beyond a reasonable doubt that Storm actually committed these offenses? And what could happen is the jury could say, found not guilty, acquitted. And that would be the end of the entire story. There would be no further discussion of any legal issue. The case would just disappear. On the other hand, if Storm is convicted, the jury finds that he committed one or more of these offenses, then you will have an appeal. And the appeal could be about any number of issues that came up during trial, including things having absolutely nothing to do with any of these issues around money transmission or government authority, right?

• 46:26Speaker 00

  Evidence that was submitted that shouldn't have been or things of that nature. Also, what would likely be challenged is not the order on this motion to dismiss, but rather jury instructions that Judge Phelan will give to the jury, explaining to them what the law is. Is to help them decide whether Storm is guilty or not guilty. So we're going to get more over time from Judge Phelan that will be challenged. And in all likelihood, this ruling on the motion to dismiss just gives us a sense of how she's going to continue interpreting the law going forward.

• 46:59Ryan Sean Adams?

  And this judge is the same judge who's going to be presiding over the kind of the main case that happens in December. And you're nodding your head yes. And the instructions she gives to the jury, will they be instructions that like,

• 47:13Ryan Sean Adams?

  about this non custodial versus custodial issue? In other words, will she kind of slant the jury to say, hey, it's still a money transmitter, even with non custodial. So you have to factor that into your analysis. And in other words, can this really sway the jury towards one interpretation of the law?

• 47:31Speaker 00

  So often that is what happens. We don't know what the jury instructions will look like, how many of them there will be, what issues they will be on. And the process of figuring out jury instructions involves both of the parties. So at some point, Judge Phelan will ask both Storm and his counsel and also the government, what jury instructions do you think that I should give? You can imagine, or guess at least, that the government is going to want very strong authority in the jury instructions. They'll want her to instruct the jury. In order to find a violation of section 1960, you do not need to find that Roman Storm had control of reuse or funds, et cetera, et cetera. And often judges do sway a jury in the way that they give instructions.

• 48:16Speaker 00

  But there's no way to know that right now. For all we know, Judge Phelan will decide, I don't need to give a jury instruction on this issue. I think it's totally clear all on its own. The jury can just read the statute. And if they have a question, they can also send questions as they are deliberating. So this really is a long process that goes on leading up to the trial in pre-trial motions practice, and then also throughout the trial, and then also as the jury is deliberating.

• 48:41Ryan Sean Adams?

  Wow, okay. What's the worst case scenario that could happen for DeFi, for crypto, coming out of this case? And what's kind of the best case scenario?

• 48:53Speaker 00

  I mean, at this point, the best case scenario for DeFi would be an acquittal. Because I think if the government just loses this case, even if there's not a legal reasoning that they get as to why, that would be a strong rebuttal to their attempt to regulate this industry through criminal prosecution of software developers. So without a doubt, that's the best thing that could happen for DeFi. I'll throw in a bit of a pitch, if you don't mind, that the best way that listeners can help Roman Storm get an acquittal is to support his defense. And hopefully, Ryan, you and I will tweet out or otherwise publicize links where people can make donations. Good lawyers are expensive, and Storm does need more funding in order to make sure that he has the best representation.

• 49:37Ryan Sean Adams?

  You know what's crazy here, Jake? So we have been talking about this and tweeting it out. In fact, Bankless has donated to this cause. I've heard from a number of people who are actually afraid of donating to this case. I mean, that gives you a sense for kind of the chilling effect that this type of case kind of brings. And I don't know if these fears are rational or not. I mean, regardless, it is causing a chilling effect. It's not illegal to donate, is what I would say. There'll be a link in the show notes. And if you care about these issues, then, well said by Jake, this is what we need to do. Okay, what is, so that was the best case scenario, that's acquitted. What's a worst case scenario?

• 50:19Speaker 00

  Yeah, so and just exactly to your point, and this is quite sad. I think in the worst case scenario, Storm would be convicted. There would be an appeal on this issue that we're discussing, whether there should be some control requirement under the definition of money transmission in the criminal code. That could go up to the Second Circuit Court of Appeals. In a worst case scenario, they would affirm, meaning they would validate Judge Phelan's ruling that control is not necessary. Circuit Court's right opinions, a Circuit Court opinion going the wrong way on this issue would be binding in the Second Circuit. So the next time the government brings a case in the Southern District of New York, the judge would be required to follow the Second Circuit's ruling.

• 51:03Speaker 00

  Perhaps there could be appeal up to the Supreme Court. You know, we're now talking many years down the road and the Supreme Court doesn't take a whole lot of cases, especially when there's only one circuit court opinion on the issue. They usually look for cases where one circuit court has said one thing and another circuit court has said another thing. So everyone is aware that in different parts of the country, the law is different and the Supreme Court is trying to resolve that split. We wouldn't have that, I think, in this case. So it's hard to imagine Supreme Court review. Also, unlike some of the other cases we tend to bring to the Supreme Court, or at least want to in the crypto industry, where the Supreme Court is very suspicious of the administrative

• 51:45Speaker 00

  state and its authority, where the court is limiting the ability of the SEC, for example, to assert its jurisdiction, the Supreme Court tends to be much friendlier to the government in cases involving national security and law enforcement. So it's hard to put together five Supreme Court justices who would side with us on this issue if, in fact, the Second Circuit has decided that control is not necessary under Section 1960. So worst case scenario, this does become the law of the land. And like you said, folks are afraid to build immutable smart contract protocols in the United States without being told by their lawyers, if you want to build this, you have to put KYC into it before you launch it. I think that's sort of the worst case scenario.

• 52:30Ryan Sean Adams?

  Into the protocol itself, not just the user interface, into the protocol itself, right? That's what a lawyer would say if control is not necessary, if that becomes the precedent.

• 52:41Speaker 00

  I mean, I do think that's the implication here, right? And I do wonder if there are going to be some conservative lawyers out there who even hear what Judge Phelan just said and start advising their clients, you can't launch a decentralized permissionless smart contract protocol because even though you don't control it, it still might be a money transmitter. So you have to do KYC literally on-chain, which I suppose could be theoretically possible somehow. But if that's what we're doing, it's not DeFi.

• 53:07Ryan Sean Adams?

  It's not DeFi any longer.

• 53:08Speaker 00

  And I don't think it's what motivates any of us to be here.

• 53:11Ryan Sean Adams?

  Wow, control not necessary. Can I ask briefly, this would seem to have implications beyond crypto. Of course, this is a crypto-focused podcast, but we're talking about code that's published in some way, in an open-source way, and a bad actor using this code. I mean, does this have implications for like AI, let's say, like AI models and AI generation? I mean, where does this kind of thing stop?

• 53:39Speaker 00

  I think it has vast implications outside crypto. I think, you know, even before we get to AI, just think about what money transmission means if it doesn't require control or custody of user funds. Is my internet service provider a money transmitter? Because I used the internet in order to use a DeFi protocol?

• 53:59Ryan Sean Adams?

  Right.

• 54:00Speaker 00

  Does Comcast need to register now with the government and start tracing all of my transactions? So I think that even in the scope of money transmission, this is very dangerous.

• 54:10Ryan Sean Adams?

  Even before that, Jake, I think of being an ETH validator. I mean, what is that? I mean, you're certainly processing some transactions, aren't you, as part of this?

• 54:18Speaker 00

  Absolutely. Absolutely. And, you know, thankfully, again, FinCEN, in its guidance about money transmission, has always said miners and validators are not money transmitters. But you have to wonder if the Department of Justice is going to say, well, they're not Title 31 money transmitters, but they are Title 18 money transmitting businesses. And I just, I don't know how crypto could survive in the United States if that were the case. But to your question, outside crypto, we are dealing with this, again, core issue of when is software developers liable for a third party that misuses software that they created without their knowledge and without their participation? AI can be used for anything, you know, whether it's getting information, or whether it's a future world

• 55:03Speaker 00

  of AI agents, where all of us are using some type of AI agent to go out and do things for us on the internet. Well, is the creator, the developer of the AI agent, going to be liable for everything that anyone does with that agent just because they built the neutral tool? Again, I don't think we can have a modern, digital world if the government gets to target literally anybody they dislike just because they are interpreting the law this expansively.

• 55:30Ryan Sean Adams?

  Anyone they dislike, and even if you just say, well, it's only it's only the privacy sort of case. Well, I guess my question is like, how about somebody who develops some new encryption algorithm, you know, ZK snarks or RSA encryption? And this is certainly used in privacy contexts. It's open source code. Are they on the hook for how North Korea might might use their encryption software?

• 55:53Speaker 00

  And it's crazy to imagine that. But if you go back to the 90s and you go back to the crypto wars, right? Not the cryptocurrency wars, the cryptography wars, long before we were building on blockchains. That was the fight that was happening in the 1990s. The government was deeply suspicious of and not accepting of end to end encryption on the internet. They wanted to treat encryption as munitions. And it really wasn't until commerce came online that the government backed off of that perspective. And there are a lot of people who are now in crypto, who were fighting that battle back then, who will explain this a lot better than I can. But it wasn't that we convinced the government, hey, encryption is okay. You don't have to

• 56:35Speaker 00

  worry about us having private communications with people on the other side of the world. It was that businesses showed up and said, hey, we need to take credit card payments on the internet. And there's no way we can do that if we don't have widespread encryption. So back off. And that's what got the government to back off. And I think the best hope, and I say this all the time in so many different contexts, the best hope for crypto to overcome some of these concerns about the risks that decentralized public blockchains pose. And let's be honest about this. There are risks. There's no question about that. But the way we overcome the risks is that the benefits are so much greater that there is no way to deny the advancement of the technology. And that's why my hope for anyone who's listening to this right now, if you're a

• 57:20Speaker 00

  builder, keep building, build consumer apps that are undeniably valuable, that everybody wants to use. And that's going to put us in the best position to win not just the court battles, but the policy battles in Washington DC, because that's where this is ultimately going to get sorted out.

• 57:35Ryan Sean Adams?

  Make it so useful the authoritarians can't turn it off, right?

• 57:38Speaker 00

  Exactly.

• 57:39Ryan Sean Adams?

  It would be disastrous for them to turn it off. Okay, so that's just one piece of the ruling, the most significant piece. Let's just drive by a few other related Tornado Cash cases. So there was a case ongoing in the Netherlands, which was one of the, I guess, co-founders of Tornado Cash, Roman Storm's co-founder. It's Roman Pertsev.

• 57:58Speaker 00

  Alexey Pertsev.

• 57:59Ryan Sean Adams?

  Alexey Pertsev, excuse me. There's another Roman involved here too, but Alexey Pertsev. What's the background on that case? I believe he was actually convicted in the Netherlands. That's going in appeal, but the case did not work out favorably for crypto and DeFi in that situation. Do you know what the latest is there?

• 58:17Speaker 00

  Yeah, so there were three developers of Tornado Cash, three main developers, Roman Storm, Roman Semenov, and Alexey Pertsev. And all three of them are being pursued for criminal charges somewhere in the world. Pertsev was arrested and charged in the Netherlands, and he already had his trial and unfortunately lost the trial and was convicted for essentially similar allegations. And I'm not a Dutch lawyer, so I won't even try to explain what Dutch law was. But I do remember reading the reports and the court's opinion, which sort of sounded like the worst imaginable version of what we're talking about now, that Pertsev was liable for, and it wasn't even about North Korea so much as it was other hackers and

• 59:00Speaker 00

  cyber criminals, was liable for helping them launder money just because he had been involved in designing this protocol. And the way the opinion read was sort of like, privacy itself is a crime, and the only reason you would want privacy is in order to do something criminal. So the fact that he knew he was building a privacy-preserving protocol means he was doing this with some criminal intent. Now, here's the good thing, as I understand it, about Dutch law. Pertsev has an appeal. And unlike in the United States, where an appeal challenges a ruling on a very specific narrow issue, in the Netherlands, an appeal is an entirely new trial.

• 59:44Speaker 00

  And since the original trial, Pertsev has gotten a new counsel, and the industry has also realized how serious this is. And there's a lot more support from those in the industry to try to help him get better results on the appeal. So I'm not sure exactly what the date is, but that is coming up pretty soon, and we should be watching what happens in the Netherlands as well.

• 1:00:03Ryan Sean Adams?

  Another related one, Preston Van Loon versus, I believe it's the US Treasury, maybe, but correct me if I'm wrong here. Now, this is from the other side of it, so we're not talking about Tornado Cash developers. I believe we're talking about someone, a user like us, and we happen to know Preston. He's in crypto circles, he's a core dev. But I believe this is from a user's perspective for Tornado Cash, though you maybe described the details and what the progress is with that case and how it relates here.

• 1:00:28Speaker 00

  Yeah, sure. So what we've been talking about so far is the government's attempt to attack privacy-preserving protocols by charging individual software developers with some type of crime. The case you're talking about, Van Loon, has to do with a totally separate way the government is coming after privacy, which is through sanctions. And you may remember, the first time that we started hearing about government skepticism of Tornado Cash was not a prosecution of the developers, it was a decision to sanction the protocol itself, and to say that it was unlawful for any person in the United States to use the Tornado Cash protocol. So that is an infringement, at least in my

• 1:01:11Speaker 00

  perspective, of our rights to use that software. And the challenge that Preston Van Loon, and also his co-plaintiffs, and also David, who is a plaintiff in a very similar case in Florida, the argument basically is, the government does not have the authority to sanction an inanimate piece of software, right? And not to get too deep into the weeds of IEPa and the sanctions laws, but essentially, the type of sanctions that OFAC, the Office of Foreign Assets Control at the Treasury Department, which enforces the sanctions laws, used in order to go after Tornado Cash, requires them to prove that what they are

• 1:01:53Speaker 00

  sanctioning is a person or the property of a person. And what the government said was, "Tornado Cash is an entity that can be treated as a person, and the protocol is the property of that entity, Tornado Cash." And the plaintiff's argument basically is there is no such thing as an entity called Tornado Cash. You can look at various people who are involved in the protocol, offerers of front-end interfaces, holders of torn governance tokens, et cetera, but they are not an entity that is offering a service that can be sanctioned. And the protocol itself is a set of immutable smart contracts. It is literally by definition not the property

• 1:02:36Speaker 00

  of anyone because nobody can control it. And therefore OFAC lacks authority in order to sanction Tornado Cash as a protocol. And here's, let me give you a bright spot because this is actually a really positive thing. There was unfortunately a bad decision in the district court in that case in Texas.

• 1:02:54Ryan Sean Adams?

  I'd heard about this.

• 1:02:55Speaker 00

  Valoon lost and the court basically said, this is national security and the government kind of gets to do whatever it wants. And sure, if they say Tornado Cash is an entity, then fine, sanctions are okay.

• 1:03:07Ryan Sean Adams?

  There's a lot of that going around. I got it.

• 1:03:09Speaker 00

  It's, yeah, it's, you know, not the rule of law, it's the rule of vibes, basically. And I'm not doing justice to the opinion. It was obviously a reasoned opinion written by a district judge.

• 1:03:18Ryan Sean Adams?

  Sure.

• 1:03:19Speaker 00

  There was an appeal to the Fifth Circuit and there was an oral argument in the appeal maybe a few weeks ago.

• 1:03:25Ryan Sean Adams?

  Okay.

• 1:03:26Speaker 00

  And the government got roasted by the panel of circuit judges.

• 1:03:30Ryan Sean Adams?

  Wow.

• 1:03:31Speaker 00

  It sounded very much like the circuit judges did not believe the government's argument, did not believe that Tornado Cash was a sanctionable entity, did not believe that an immutable smart contract was property. And so we're all waiting with bated breath, but hoping that we get a good ruling from the Fifth Circuit on this issue.

• 1:03:48Ryan Sean Adams?

  What would it mean if the government could just sanction code, sanction like GitHub repos, I suppose, or just like sanction like Ethereum addresses that are connected to smart contracts? I mean, the effect of it with Tornado Cash is that it's illegal to interact. If you have an Ethereum address in a wallet and you interact with that Tornado Cash, it's on the OFAC sanction list. So you are in violation. So don't do this at home, kids. That's the current status. But beyond Tornado Cash, where does this precedent kind of leave us?

• 1:04:21Speaker 00

  I mean, to me, it's a totalitarian nightmare. I mean, basically, what you're saying is whatever the government doesn't like, they come up with a reason why no one gets to use it. And again, you don't have to be on the left or the right of the political spectrum to imagine how this could play out. You could have a government that says providers of healthcare services for women are engaged in criminal activity using software. So we are going to sanction healthcare databases that allow those types of clinics to track how they are providing healthcare services for women. Or you could have the government say, we think that firearms dealers are engaged in criminal activity, so we are going to sanction the software that they are using

• 1:05:06Speaker 00

  on websites to display firearms that they have for sale, or something like this. It really is, when I say a totalitarian nightmare, it's the end of the rule of law and the beginning of the rule of whatever the person in power happens to think at that time.

• 1:05:21Ryan Sean Adams?

  Right, okay. And like even if you just constrain this precedent to just smart contract code, right? Anybody, for whatever reason, could suddenly add a DeFi smart contract to the OFAC sanction list, and that just makes it de facto illegal for the US to use it. So your most beloved DeFi protocol, say, Uniswap, is just picking on Uniswap because it's so large. I mean, suddenly, one day, that smart contract, one version of Uniswap, maybe the non-AML KYC versions of Uniswap that have been present since its inception, that gets added to an OFAC sanction list at the whim of somebody in this dark, mysterious Washington DC apparatus? Then it's just illegal.

• 1:06:02Speaker 00

  Right. And what you would hope is there will be some guardrails around when they make those decisions. And indeed, they couldn't just pick a piece of software and say, this is illegal now. They would have to make sure that they are not making a decision that is arbitrary and capricious. A term that we talk about a whole lot in crypto, right? And we talked about this a little bit in the context of tornado cash as well. Why is tornado cash, quote unquote, "bad enough" that it is on the table for sanctions? And this Raises questions about, well, how much illicit activity is enough illicit activity that the Treasury Department gets to sanction it? Is it 50%? Is it 30%? Is it 10%? How do we know if those numbers are right? How much illicit financial activity is going through a decentralized exchange

• 1:06:46Speaker 00

  protocol or a lending protocol? It's not zero because it's never zero. Look at the traditional financial system. It's certainly not zero.

• 1:06:54Ryan Sean Adams?

  Well, that's the point. That's the point. If we were doing arbitrary and capricious, I mean, if you were to sanction the banking system, there's like a massive amount of, you know, money laundering and sanction violations that goes on the traditional banking system. You don't see these types of actions.

• 1:07:11Speaker 00

  You don't because the government has enough authority over those banks and other financial institutions to feel comfortable that they can, number one, surveil transactions and number two, censor transactions. And for that matter, number three, exclude unfavorable people, right? Disreputable people or people who they believe shouldn't be allowed to get access to the financial system from accessing those financial institutions. They don't have those things. Well, at least they don't have two of the three. They have transparency on public blockchains. They can see what transactions are happening as long as there's no privacy. But they don't have censorship and they don't have the ability to exclude people from getting access. If you take away that that first piece of it, surveillance as well, that's when

• 1:07:55Speaker 00

  they say, we are no longer comfortable with this technology. We're going to use every tool that we have available to us to go after it, whether it is prosecuting individual software developers or sanctioning code or passing new rules like the Treasury Department has tried to do in order to expand their authority so that they can stop people from launching permissionless protocols in the future.

• 1:08:20Ryan Sean Adams?

  I think everything that we've described, Jake, you and I have talked about this before. You've been on Vegas, talked about this, this whole class of problems around, you know, control not necessary, non custodial versus custodial, privacy, surveillance, all of these things. This is sort of the the final boss of, you know, crypto getting through. Regulatory past. There are some mini bosses that we also have been fighting. And speaking of arbitrary and capricious, let's talk about Mr. Arbitrary and Capricious over there. We got to touch on the SEC really quick. A lot swirling there. Not as critical, I would say, as the other issue that we talked about. I just have full confidence that we're ultimately going to be able to defeat

• 1:09:03Ryan Sean Adams?

  the Arbitrary and Capricious leadership at the SEC. Maybe that happens soon, hopefully, or maybe that takes some time to play out. We had Graywall, who is, I believe, a prosecutor at the SEC. He is now leaving, given marching orders under mysterious circumstances. I don't know if you have reflections on that. We have the SEC trying to appeal its ripple case. Why are they trying? Like, I know why they're trying to do that, but like, give it up already, guys. We have Coinbase versus SEC. What are some of the highlights that you would kind of mention on our boss fight with the SEC?

• 1:09:35Speaker 00

  Yeah, well, and first I'll say I totally agree with your framing that the big boss, the ultimate boss in the end, is this challenge to state authority over the financial system. Financial markets regulation is, you know, obviously very important as well, but I think we spend so much more time talking about the SEC and the CFTC and so little time talking about DOJ and Treasury. That's, you know, I think it's great that we've had that conversation. But yeah, what's the latest with our friends at the SEC? So Gerbiere Graywall was the Director of the Enforcement Division. So he's sort of the one who was in charge, much more so than Chair Gensler, on a day-to-day basis of the SEC's campaign of harassment and regulation by enforcement.

• 1:10:18Ryan Sean Adams?

  The chief attack dog, wasn't he?

• 1:10:19Speaker 00

  I mean, really, you know, in the end, it's the Director of the Enforcement Division who's making these decisions about which cases to bring. So I think, you know, he gets credit, we'll say euphemistically, for what the SEC has done the last few years. He announced, or at least the SEC announced just recently, that he will be stepping down. They only gave nine days of notice before he stepped down, and there is no replacement in line for taking over. It's going to be, you know, an acting deputy who's going to be in charge now. It's a little bit weird, I have to say, not usual for that to happen. We could try to read some, you know, fun things into it and say that it's, you know, a sign that we're

• 1:11:00Speaker 00

  winning the battle. I would love to think that's true. I think the reality probably is it's a political decision. I'm guessing that he wanted to leave his post before the election. You know, after the election, if he left, it may look like he was either being fired or being forced out. He probably was hoping that there would be a replacement and I'm imagining, again, speculating, it'd be very hard to find a lawyer who wants that job right now. Doesn't seem like a very fun position to be in. So maybe they just couldn't find someone and he decided, you know, he had waited long enough and he wanted to get out of there. But it is actually nice to see, frankly, the beginning of turnover in leadership at the SEC from the folks who have been persecuting

• 1:11:42Speaker 00

  the industry for so long. It's not to say we're going to see an immediate change in SEC policy, but it is just a nice reminder that Chair Gensler and his crew are not here forever, and we will be here longer than them. So we just have to outlast them. I think that's a really important thing to keep in mind.

• 1:12:00Ryan Sean Adams?

  Do you have any takes on the timeline here? Do you think the election changes this if it goes one way or the other? You know, Trump said he would fire Gary Gensler, like he explicitly said that. I don't know if you have takes on that. It just seems from if Trump wins, and it's a coin flip at this point at the time of recording, if Trump wins, Gary Gensler's time has got to be like numbered in days, I would think, or maybe this is all bluster. I'm not sure your take on that. And then if Kamala Harris wins, what's, you know, does Gary have a future in that administration?

• 1:12:30Speaker 00

  Yeah. Well, I think it's very unpredictable. I'll give you my best speculation and what the conventional wisdom is. And the conventional wisdom is that a President Trump would essentially immediately solve the financial markets regulatory issues by putting Republicans in charge of the SEC and the CFTC, who would take a much more reasonable view on crypto regulation. And, you know, whether that's Hester Purce taking over as chair, although I think she maybe doesn't want that job as much as we would all love her to have. Or Commissioner Ueda or someone else. I do think that a Trump administration would very likely and very quickly solve a lot of the issues that we have over at the SEC.

• 1:13:13Speaker 00

  Although, you know, I'm one to be skeptical of campaign promises, no matter where they're coming from. So I think the proof always remains in the pudding. President Harris, I think, is really quite unpredictable. My view is that she has essentially decided affirmatively that she doesn't want to take a position on crypto, that it's not to her benefit. You can see her running a campaign that is very focused on the middle class and populist messaging. It is not to her political advantage to start talking about financial markets regulation. It really wouldn't fit in with the platform that she's pursuing. And I think what that means is she and her campaign have decided to just basically not engage on this issue.

• 1:13:55Speaker 00

  I think, again, the conventional wisdom is, and this does make sense, that we should expect that a Harris administration would be more of the same from a Biden administration. But honestly, that's not necessarily true. And she has made a couple of statements here and there, most recently at a speech at an economic club, I think in Philadelphia, where she talked about how she wanted to support blockchain technology and remain dominant in that area. That's sort of the minimum viable statement you could make to not say, I'm going to keep trying to destroy this industry. So to be worth all that much. But I do think there's an opportunity either that she would pick someone to run the SEC

• 1:14:37Speaker 00

  who doesn't come from, let's call it, the far-left progressive Warren camp of the Democratic Party, and rather might come from a more moderate wing of the party that's not necessarily extraordinarily permissive, but does at least want to balance the interests of innovation and business in the United States with the interest of consumer protection and investor protection. So I think we could hold that hope for that. We also could imagine an SEC chair who is selected totally irrespective of what they think about crypto, and we could just sort of get lucky and get somebody who has a different view on crypto. I still think that crypto is idiosyncratic enough that, you know, folks aren't getting

• 1:15:19Speaker 00

  selected for leadership roles because of what they think about crypto.

• 1:15:23Ryan Sean Adams?

  One thing that David and I have talked about is the ultimate tell for Kamala Harris will be because she's barely acknowledged crypto and when acknowledging it incredibly tepid in any statements, but the biggest tell that we're looking at, I don't know if you agree with this, is who she surrounds herself with in the administration. So who her administrative picks are. It's not just SEC, of course, but it's also some of the architects behind this other thing that we don't have scope to talk about, but just like the Operation Choke Point, the FDIC, all of these other agencies kind of choking off the crypto industry from the banking system. If she picks those, if the folks responsible for that in her leadership roles in her White House, that does not bode well, at least

• 1:16:08Ryan Sean Adams?

  from my perspective. You think that's about right? We should be watching who she surrounds herself with? Or do you think all of these people might get a change of heart under a Kamala Harris administration? Can that happen?

• 1:16:19Speaker 00

  A change of heart. I love phrasing it that way. Look, there's a couple ways to look at this. The first is personnel is policy. And so if you're choosing personnel who have taken these types of positions before, that is an expression of what her policy is going to be. And I think you're right. She's selected some folks who have been at the heart of some pretty damaging policy initiatives for the industry. On the other hand, personnel follows what their boss tells them to do. And I think we shouldn't underestimate the willingness of elected officials who are responsive to their constituencies to change their minds when their constituencies change their minds. And so I don't think the fact that she's picked folks who have been sort of on the other side of this issue before

• 1:17:04Speaker 00

  means they have to stay on the other side of the issue. It just means we have our work cut out for us, again, to build products that people want to use and then to explain why those products are so important to the United States, to our economy and to our national security, to those elected officials in DC, so that we can very incrementally make progress. And that's what we've been doing in DC for years, and we're going to keep doing that, no matter who's in charge of the government.

• 1:17:30Ryan Sean Adams?

  There's so many other cases in the SEC, of course, we could talk about because that Director of Enforcement was certainly busy. I think that's out of scope today. And actually, I think, I don't know if you agree with me, Jake, but it sort of feels to me like the Gary Gensler SEC regulating crypto by enforcement reign, he's kind of peaked. We are now pushing back. We are now going to win. We're winning the court system. It's just like we've seen peak FUD from the SEC with respect to crypto. And I think we're going to continuously erode all of those things and actually win this over. So we don't need to spend too much more time talking about it. Maybe one other item I wanted to talk about before we wrap this up and close with some thoughts here. You wrote a fantastic

• 1:18:14Ryan Sean Adams?

  geo fencing paper, which is kind of interesting. And if we connect all of these cases of, we've got the tornado cash case and that boss fight, and we've got the SEC court case, we've got other things going on with the CFDC. I mean, you are very busy, my friend, as a DeFi crypto lawyer. Let's just say that. Geo fencing is how a lot of users experience it. And so I go to a website for a particular airdrop, let's say, or to interact with a particular DeFi exchange or protocol, and I'm hit. If I have an ISP resides in the US as a US resident, I'm hit with, "Sorry, you cannot access this page. You cannot do

• 1:18:54Ryan Sean Adams?

  the thing you were trying to do." A list of banned countries, and it'll be like Iran, North Korea, and the United States of America, right? Which is just not the club that I see myself as a US citizen belonging in. But this has been incredibly frustrating for users. And it all stems from this lack of regulatory clarity. If you're a project in the US and you have some sort of token, or you have some sort of exchange, because we have no idea what the laws are, that we can't open it up to everybody. So can you talk about geo fencing, just as a practice? And I know at Variant, you give some advice to even some of the US-based projects, or even outside of the US, what their practice

• 1:19:38Ryan Sean Adams?

  should be with respect to geo fencing. Just in general, what have you learned on this topic?

• 1:19:43Speaker 00

  For sure. And like you said, at Varian, I spend a lot of my time working with founders of early-stage crypto startups to figure out what is their legal and regulatory strategy going to be with the help of their own counsel. And we get a lot of questions about geofencing because, like you said, it's really hard often to figure out how do we comply with whatever a US regulation says we have to do in order to launch a product or service? Or how do we change the product or service in a way so that those compliance obligations don't apply? And I would say in almost every case, the goal is not to abandon the US market. Like you said, it's really frustrating as a US person, myself included. There's some

• 1:20:23Speaker 00

  really cool new crypto thing, I want to check it out, and I get geofenced. And what I noticed before deciding to write this paper, along with my deputy general counsel, Dan Barabander, is that folks in the industry were making really bad decisions about geofencing. You know, a lot of people were geofencing products and services that it wasn't clear why they needed to be geofenced. There was no reason why, as a US user, I couldn't access that type of product or service. And then some people who had products or services that were clearly not compliant with US law and cannot be compliant with US law, for example, some margin leverage or derivatives protocols that, frankly, the CFTC has absolute authority

• 1:21:07Speaker 00

  over that type of product, and there's really just no way to register with them. There's really no hope other than to geofence. Those products are not getting geofenced. It's so sad, by the way. Look, it is really sad, but as a founder of a company, you have to make intelligent, risk-adjusted decisions. And so what we wanted to do is help people understand, number one, when should I be geofencing? Make sure people aren't geofencing products that they shouldn't be, so they can take advantage of the US market if there's no reason why they shouldn't. And then, more importantly, if they should be geofencing, how do they do it the right way? Because a lot of times, you see a geofence, and then geofence is basically, what is your IP address? And that is the only part of the geofence. And if you go to the CFTC and

• 1:21:52Speaker 00

  you say, I was blocking IP addresses. Isn't that good enough? They're going to say, no, that's not good enough. Welcome to an enforcement action. So it's really important to figure out how to geo-fence properly if you're going to do it. And I would encourage anyone out there who's thinking about geo-fencing to take a look at our paper and see some of the best practices and explanations that we give about how to try to do that effectively, obviously, with the help of your own lawyer.

• 1:22:16Ryan Sean Adams?

  It's sad that we actually have to do that. I'll say, and hopefully, this is only temporary until we get some more regulation heading our way and legislation heading our way, that these geo-fences can be removed. But, I mean, some of these geo-fences, like to your point, they just seem so pointless and silly because any DeFi user who's based in the US, and I can say this because I'm not the lawyer on this show, I mean, like, we all know how to use a VPN, okay? So, I mean, like, you almost have to in this day and age. And the enforcement actions aren't coming to individual users, of course. Could you imagine if the SEC or CFTC came to individual users and said, no, sorry, Gary Gensler has not gone that far, though I wouldn't put it past him if you give him another few years?

• 1:23:01Ryan Sean Adams?

  So, a lot of people just use DeFi with a VPN. And it's a pain that we have to do that, but I guess that's the current state of where we are and the lack of regulatory clarity.

• 1:23:12Speaker 00

  Well, I'm not going to comment on that any further than to say, check out the paper, including the section that we wrote on VPN blocking and how to think about doing that if you need to.

• 1:23:21Ryan Sean Adams?

  Let's just zoom out and close this up, Jake. So, first of all, thank you again for being with us. And we'll see how this realm of the storm, turning into cash case goes. That's on December 2nd, for everyone paying attention at home. And Bankless is going to be doing some coverage, of course, as that's ongoing. Just zooming out. How are we doing overall? Are we winning or are we losing? I'm not entirely sure how to assess this. Ask me any given day, and I might feel one direction or another. But if you zoom out, you look at 2024 and the progress that we've made and all the work that's still to come, how would you assess it? Are we winning or losing?

• 1:23:59Speaker 00

  We're winning. I'm gonna say that in a full-throated way. I think we're winning. I think of this as a war with many different fronts. And if you think about the various issues we've talked about, you know, the financial markets, regulatory issue on one front, you know, the SEC and the CFTC and others, the illicit finance and national security issue, another front, the banking and prudential regulatory issues, like you said, choke point, which we didn't have time to get into, maybe some other day, right, another front. At any given time, we're making progress, pushing forward in one front, maybe losing ground in another. I think exactly as you said, we're doing an extraordinary job of fighting back against the SEC and the CFTC.

• 1:24:44Speaker 00

  I honestly feel pretty good about where we are with those issues. I think we've got pathways to do business in the United States, even though the SEC doesn't want us to, because we are right on the law and they are wrong, and we have the courts to back us up. I think on these illicit finance issues, this is sort of the big boss, and I think that the industry is just now starting to understand, and hopefully will better understand, having listened to this conversation, that we're losing ground there, that we are at a point where law enforcement and the intelligence community and the national security apparatus are perceiving the technology that we are building as a threat to their authority, even though that is not how we intend it, even though we want them to be able to do their

• 1:25:27Speaker 00

  jobs and go after the bad guys and win these types of geopolitical fights. They are not that happy with technology that they can't control. And we need to think a lot harder about what legal arguments, what policy arguments, and also, frankly, what types of technical arguments, right, types of technical projects we can build to get more of an advantage on that front. So I think we're winning. I think we can do it. I think it will take all of us working together. And as always, Ryan, thrilled to talk to you about this and hope that folks will come away with a better understanding of how important this issue is.

• 1:25:58Ryan Sean Adams?

  You know, the only set of actors that crypto is bad for is totalitarians. And so from that perspective, hopefully, the United States, founded on principles of freedom, comes to realize this and starts exporting this to the world. I guess just lastly, Jake, what gives you optimism, just in general, about this fight?

• 1:26:19Speaker 00

  The founders, honestly. You know, like I said, I spend a lot of my time working with mostly very young people who are very passionate and very optimistic and are building the coolest stuff I have ever seen in my life. And I really think when you think deeply about what this technology can empower, when you think about what the internet is, how young it is, right? When I grew up, it was the very beginning of the internet in the 90s, right? Look how far we've come in so short a time. But if you imagine the internet 100 years from now, 200 years from now, I just cannot envision that internet existing only at the mercy of very large tech companies that have centralized control over everything. Right?

• 1:27:02Speaker 00

  We live in a digital world, as you guys always say, and I'll leave it to you to say the direction that we're all going. But the direction we're going is for us to own digital assets so that we can live real, full, and fulfilling digital lives. And I just don't think there's any way that that's going to stop.

• 1:27:20Ryan Sean Adams?

  Well, let's talk about that direction as we close. And thank you, Jake, once again for joining us. Some action items. Donate to the Roman Storm case, the link in your show notes to do that. Also, Jake's geofencing paper that we talked about, we'll include it there. But the direction we're headed in is west, as always. Crypto is risky. You could lose what you put in, but this is the frontier. It's not for everyone, but we're glad you're with us on the Bankless journey. Thanks a lot.