Dutch judge rules that Tornado Cash co-founder and core developer Alexey Pertsev is guilty of money laundering. Pertsev has been sentenced to 64 months in prison. Over the past year, the DeFi regulatory issue sparked by Tornado Cash has been highly scrutinized by the industry. This year, despite the team’s repeated emphasis on their compliance orientation, DeFi leader Uniswap was still sued by the SEC. Today’s guilty verdict for Tornado Cash’s co-founder raises questions about the impact on future DeFi startup teams and how DeFi will coexist with regulation. The trial of Pertsev’s case serves as a warning to other cryptocurrency service providers. In April 2023, the US Treasury Department released an assessment report on illegal financial activities in DeFi, revealing potential risks in DeFi services and analyzing how criminals exploit these services. Three months later, four US senators introduced the “Cryptocurrency National Security Enhancement and Enforcement Act” to strengthen regulation in the KYC, AML, and DeFi fields. The act provides a new framework for regulating DeFi, requiring that DeFi be regulated like other cryptocurrency institutions, and that anyone who controls the project must be held accountable for it. If no specific individual can control the DeFi service, then any investor who invests more than $250,000 in the project should be held responsible for it. The focus of Pertsev’s trial is whether the laws aimed at preventing money laundering can adapt to the values of blockchain-based financial innovation and anonymous transactions. In a hearing in March, the prosecutor argued that the protocol developers did not do enough to prevent criminals from using Tornado Cash. Pertsev’s defense argued that the prosecutor should consider the open-source and automated nature of Tornado Cash’s core smart contracts. Pertsev’s defense lawyer, Keith Cheng, stated that project teams cannot prevent users from using open-source smart contract code in any way they like. The contributors to the protocol are a decentralized organization without a single person in charge, like a traditional company. But the prosecutor rejected this view, believing that the benefits of the technology outweigh the legal obligations to prevent the platform from assisting criminals and sanctioned entities in concealing the source of stolen assets. The prosecutor, Martine Boerlage, said, “Tornado Cash operates not only as a smart contract but also as a company.” However, perhaps due to the controversial nature of the case, Pertsev’s trial process in the Netherlands was very opaque, and the prosecution did not disclose his indictment until a week before his trial. The pre-trial and a series of hearings were also conducted in Dutch. Pertsev has received various forms of support, including petitions, crowdfunding for lawyers, and declarations of innocence from protocols that have been hacked. The arrest of Pertsev has sparked strong protests from the crypto community, especially the developer community, who are concerned that the charges against Pertsev may set a dangerous precedent for convicting software developers. Previously, the US Department of Justice and other regulatory agencies had criminally charged Tornado Cash founders Roman Storm and Roman Semenov, accusing them of money laundering, violating sanctions, and operating unlicensed money transfer businesses during the operation of Tornado Cash. The two face at least 20 years in prison. Storm was arrested last year and will stand trial in September this year, while Semenov has not been arrested. The outcome of Pertsev’s verdict is likely to determine the outcome of the future trials of the two Tornado Cash founders. In fact, after Tornado Cash, many protocol owners have been accused of criminal activities that occurred on their platforms. For example, Uniswap was accused of allowing fraudulent tokens to be issued and traded on the platform, but the lawsuit was ultimately dismissed by the court in 2023. Last year, a16z wrote a comment letter for the Financial Stability Board’s “International Regulation of Cryptocurrency Activities” themed event, which started by discussing the difference between DeFi and CeFi and how an appropriate regulatory framework should govern Web3 applications rather than Web3 protocols (regulating companies rather than software). The debate over which aspects of DeFi protocols and applications are suitable for regulatory environments has been ongoing. However, most legal experts agree that any DeFi front-end associated with the United States (broadly defined) must comply with US sanctions laws. On April 11th this year, the US Securities and Exchange Commission (SEC) issued a warning to Uniswap Labs, indicating plans to take enforcement action against the company. The warning was issued in the form of a “Wells Notice,” which provides the company with the opportunity to refute any charges before the SEC initiates formal litigation. Currently, it is unclear the specific nature of the SEC’s charges against Uniswap Labs. The market reacted sensitively to this news, with UNI prices dropping from $14 to the current $9.58, a more than 14% decline. During this period, the on-chain trading volume of UNI tokens surged and even reached the top of the Dexscreener Ethereum token hotlist. Uniswap responded promptly. Uniswap founder Hayden Adams confirmed on social media that Uniswap Labs received a warning from the SEC and issued a public letter in response. In the letter, Hayden mentioned that the team believes their product is legal and accused the SEC of not focusing on formulating clear and informed rules but instead choosing to target high-quality participants in the crypto field such as Uniswap and Coinbase while letting bad actors like FTX “slip away.” Additionally, Hayden emphasized in the letter that Uniswap, as a US-based internet company, demonstrates its long-standing commitment to compliance. Hayden also mentioned that the battle with the SEC will last for several years and that they are prepared to appeal to the Supreme Court. Despite being sanctioned, Tornado Cash remains the largest cryptocurrency mixer. Tornado Cash is a privacy protection protocol that allows for the mixing of 10 different cryptocurrencies, with the largest amount being ETH on the Ethereum mainnet. In July 2021, the Tornado Cash pool contract held over $700 million worth of ETH at its peak. A week before Pertsev’s trial, a complaint shared by the court stated that from July 9, 2019, to August 10, 2022, “in at least several countries including the Netherlands, Russia, the United States, or Dubai, Pertsev developed a habit of money laundering with one or more other individuals.” The court believes that Pertsev should at least have suspected the criminal origins of illegal transactions on the Tornado Cash platform. The complaint lists nearly 40 transactions processed by Tornado Cash from various cryptocurrency platforms, totaling 535,809 ETH, including KuCoin and Liquid (acquired by FTX before its closure in 2022). The largest amount, 175,100 ETH (approximately $585 million), came from Axie Infinity on the Ronin network, involving the largest theft case in the history of cryptocurrency at that time. The attacker was the notorious Lazarus Group, a North Korean hacker organization. In August 2022, Tornado Cash and related Ethereum addresses were included in the US Office of Foreign Assets Control’s (OFAC) specially designated nationals list. The US Treasury Department claimed that Tornado Cash was a key tool for the Lazarus Group, which was responsible for the $625 million hack of Axie Infinity and other major cryptocurrency thefts. By May 2022, the Lazarus Group had transferred 37,000 ETH to Tornado Cash, approximately $100 million. Experts believe that “black money from an official hacker of a certain country” accounts for 20% of the balance held by the Tornado Cash smart contract. Tornado Cash has stated that despite their efforts, they were unable to prevent the addition of black money by the Lazarus Group. After all, Tornado Cash is designed to help users obfuscate their on-chain transaction history. The crypto community also believes that developers should not be political prisoners simply for writing code, and these sanctions involve more than just attacks on cryptocurrencies. However, the sanctions did not have a significant impact on the Tornado Cash project itself, as $77.35 million in assets were still transferred via Tornado Cash on the Ethereum mainnet in the following month. Tags: Lazarus, DeFi, SEC, Tornado Cash, Uniswap Labs, Ethereum, smart contracts, regulation. Source: https://www.theblockbeats.info/news/53491
