On February 10, Alexey Pertsev will have been in a Netherlands jail, awaiting trial, for exactly six months. He has been accused by Dutch prosecutors of money laundering because he was a developer of Tornado Cash, a cryptocurrency “mixer”.
The case has alarmed privacy activists and crypto developers because it suggests that merely creating code can land a developer in prison if the protocol is used later for criminal activity. The worry is that many protocols are encrypted and decentralised in such a way that even the developers who created them cannot control what they are used for. Any major blockchain, for instance, can be used by anyone for any kind of transaction. Those transactions cannot be reversed or changed if it turns out they facilitated criminal activity.
Experts in crypto law told DL News that developers should be afraid. Coding can indeed make you criminally liable in European and US jurisdictions, depending on your intent and the extent of your knowledge, several lawyers who specialise in digital asset law told DL News.
Tornado Cash is a decentralised protocol on several blockchains like Ethereum. It intends to give users enhanced privacy by making their transactions impossible to follow on the blockchain. Tornado allows users to deposit cryptocurrency into a central pool, which is then mixed into multiple lots, and then withdrawn into new wallets, in a way that breaks the link between the original deposit and its withdrawal.
But on August 8 of last year, the US Treasury’s Office of Foreign Assets Control sanctioned Tornado, effectively banning any American, or any person on US soil, from using the platform. Tornado “has been used to launder more than $7 billion worth of virtual currency since its creation in 2019,” the Treasury said. “This includes over $455 million stolen by the Lazarus Group, a Democratic People’s Republic of Korea (DPRK) state-sponsored hacking group that was sanctioned by the U.S. in 2019, in the largest known virtual currency heist to date.”
‘The coder’s intent is a central consideration — always in criminal law and most of the time in civil suits as well’— Kyle Langvardt, assistant professor of law at the University of Nebraska
Pertsev — the founder and CEO of PepperSec, the company that developed Tornado — was arrested by Dutch authorities two days later.
Pertsev was held in jail for around three months without knowing exactly what the charges against him were. In a hearing in late November, the Dutch public prosecutor finally announced that he was being charged with money laundering.
The US ban on Tornado “ultimately labels all active users for seeking individual anonymity on-chain, as criminals,” according to the Tornado Cash Community web site. “The sanctimonious ideology that privacy should be only for the selected ‘faithful’ few has huge implications for discrimination enacted through censorship. Privacy is an individual right that everyone should be entitled to.”
The fear among devs is based in reality.
In the US, the FBI is currently investigating the collapse of Samuel Bankman-Fried’s FTX, once the third-largest crypto exchange by volume. Prosecutors have already obtained a guilty plea from FTX’s former CTO, Zixiao “Gary” Wang, who now faces up to 20 years in prison for four different counts of financial or securities fraud. Part of the evidence against him was that Wang “participated in the creation of the software code that allowed Alameda to divert FTX customer funds,” according to the US Securities & Exchange Commission’s civil lawsuit against him.
Andre Cronje, the founder of Yearn who now works with the Fantom Foundation, which develops the Fantom blockchain, recently told DL News that it’s “highly likely” he’ll end up in jail, based on the number of controversies that have dogged his career, even though there is no suggestion of wrongdoing by him.
He’s right to worry.
“You can’t just decide that you fall outside existing or current regulation,” said Alex Shirtcliff, who specialises in crypto asset litigation as a partner at UK law firm Blake Morgan. “Creativity works both ways. There is increasing creativity in litigators, and increasing understanding from regulators and authorities about this space, and you can’t just decide that the law doesn’t apply to you.”
Kyle Langvardt, an assistant professor of law at the University of Nebraska, agrees.
“A case involving liability for the coder will be complicated, because the coder’s intent is a central consideration — always in criminal law and most of the time in civil suits as well.”
“One thing you can’t generally do in law is avoid liability by taking steps to avoid having knowledge of facts that would otherwise implicate you in unlawful conduct. This is called the ‘wilful blindness’ doctrine,” he says.
“So it’s true, certainly, that Tornado Cash is autonomous, that’s it’s mostly a black box, and that it’s possible to use Tornado Cash for lawful purposes — but none of that matters if in fact you were trying to facilitate money laundering.”
Pertsev denies the charges against him. “The accusations against Alex threaten to kill the entire open-source software segment. No one will dare to write and publish open-source code, no one will invest in the segment if they could be made responsible for the use of the tool they created by other parties,” his innocence campaign website says. His wife and other supporters did not respond to requests for comment.
There are increasing attempts by US regulators and the courts to expand their jurisdictions to cover crypto. The US SEC, the US Commodity Futures Trading Commission, and the US Department of Justice have all brought high-profile cases against crypto operators.
In the UK, Craig Wright — who has in the past claimed to be Satoshi Nakamoto, the creator of Bitcoin — has attempted to use the civil courts to force the operators of three blockchains to code a backdoor that will allow him to regain control of about £3 billion in Bitcoin lost in a hack of his home-office computer. He is claiming they have a similar “fiduciary duty” toward him that any bank might have to protect its customers. The case failed in the High Court but is being appealed.
Only in the UK can devs rest easy, for now.
British law enforcement agencies simply don’t have the expertise to bring crypto crime cases — yet. “To date, there haven’t been any successful prosecutions in this country,” says Mike Rainford, a partner and joint head of business crime at JMW, another UK law firm.
“No one here [in government] understands it. The police do not have that ability as it stands,” he said. “They have not got the resources, they have not got that level of [research] intelligence among the people who are working on it, to successfully investigate and put to the Crown Prosecution Service for a possible prosecution.”
“That’s why it’s so popular with organised crime. Why would it not be?”