As the U.S. crypto regulatory environment gradually eases, over 30 cryptocurrency companies and foundations jointly wrote to Congress yesterday (26th), requesting clarification on the scope of Title 1960 of the U.S. Code to prevent non-custodial technology developers from being excluded from innovation due to criminal liability risks.
DEF Joins 34 Crypto Companies in Letter to Congress
The open letter, initiated by the DeFi Education Fund (DEF) and co-signed by 34 industry players, was submitted to the financial and judicial committees of both the Senate and House on March 26th, directly pointing out that the Department of Justice has developed a dangerous bias in its legal application of Section 1960.
According to the provision, a money transmitting business must involve holding and transferring funds on behalf of others. However, in recent years, the Department of Justice has expanded this definition to include software developers who do not hold user funds, effectively bringing non-custodial technologies under regulatory scrutiny. The Department of Justice argues that:
The definition of "money transmitting business" in the Bank Secrecy Act (BSA) is unrelated to the definition in Section 1960.
This has led to a more aggressive interpretation of Section 1960. The joint letter emphasizes that this contradicts the official stance issued by the Financial Crimes Enforcement Network (FinCEN) under the Treasury Department in 2019, which clearly stated that developers who do not control fund flows are not considered "money transmitting businesses" and should not be subject to related regulations.
DEF thus calls for:
"Congress should urge the Department of Justice to correct its incorrect interpretation of the law and further clearly revise Section 1960 to convey the original legislative intent."
Specific Case: Tornado Cash
The Department of Justice's prosecution of Tornado Cash co-founder Roman Storm is a typical example of this issue. Although Storm did not control user assets or directly participate in criminal activities, he was indicted for illegal operation of a money transmission business and money laundering because the protocol had been used by North Korean hackers for money laundering.
The case is currently being handled by Federal Judge Katherine Polk Failla, who initially ruled that the lawsuit can proceed, reasoning that the relevant laws do not involve constitutionally protected free speech. The DeFi Education Fund warns that if such lawsuits become the norm, it will place U.S. crypto developers in legal risks, potentially accelerating the exodus of talent and technology.
Further Reading: Tornado Cash Controversy Continues? Coinbase Furious: U.S. Treasury Obscures and Avoids Final Ruling
Industry Calls on Congress to Intervene, Preventing "Regulation by Criminal Indictment"
DEF's Legal Director Amanda Tuminelli stated that the most urgent policy goal is for Congress to clarify the legislative intent of Section 1960 and prevent the Department of Justice from using "regulation by criminal indictment". The foundation's spokesperson emphasized:
Our primary task is to ensure long-term protection for software developers (including in DeFi, crypto, AI, and other fields). We believe that clarifying Congress's legislative intent for Section 1960 is in the best interest of software developers.
The letter was sent to three major responsible agencies, including the Senate Banking Committee, Senate Judiciary Committee, and House Financial Services Committee. The 34 signatories include exchanges like Coinbase, Kraken, and Crypto.com, venture capital firms Andreessen Horowitz, Paradigm, and Dragonfly, as well as projects like Uniswap Labs, Polygon Labs, and ConsenSys, showing that the industry is pinning its hopes on Congress clearly defining regulatory boundaries.
However, despite the SEC withdrawing multiple lawsuits against crypto companies and advancing stablecoin regulatory reforms after Trump's return to power, according to DEF, constraining the Department of Justice's overly broad interpretation of Section 1960 remains a significant challenge.
In addition to DEF, a non-custodial protocol development team called Pharos also filed a lawsuit against the Department of Justice at the beginning of the year, alleging that its expansive interpretation of Section 1960 is unconstitutional and attempts to criminalize development activities through vague definitions. As such lawsuits continue to increase, the Department of Justice will inevitably face pressure to respond and clarify.
