A new ruling by a U.S. judge broadens the definition of money transmission, imposing Bank Secrecy Act (BSA) requirements on crypto businesses, even if they don’t control funds during transactions.
TL;DR
A U.S. court ruling now considers crypto protocols as money transmitters even if they don’t control funds, expanding compliance under the Bank Secrecy Act. This ruling could impact privacy-focused projects, increase legal risks, and slow crypto innovation.
Executive Summary
In a landmark ruling, a U.S. District Court judge in New York has decided that crypto protocols can be classified as money transmitters under the Bank Secrecy Act (BSA) without controlling funds during transactions. The case, which specifically affects projects like Tornado Cash and Samourai Wallet, clarifies that businesses involved in transmitting money or value can be subject to money transmitter laws, even if they don’t have physical control over the assets.
This ruling has major implications for the cryptocurrency industry:
- Broader regulatory scope: More decentralized services and crypto businesses may now be required to comply with the BSA and anti-money laundering (AML) regulations, even if they do not control funds.
- Increased legal risks: Operators of privacy-focused services may face criminal charges if they don’t register as money transmitters.
- Impact on innovation: Fear of legal consequences could discourage software developers from creating decentralized or privacy-centric services, affecting innovation.
- Global consequences: This ruling could influence regulatory frameworks worldwide, leading to tighter global crypto regulations.
Although crypto advocates plan to appeal the decision, this ruling marks a significant shift in the legal landscape, potentially increasing compliance burdens for many crypto businesses.
Landmark Ruling: Crypto Protocols Can Be Money Transmitters Without Controlling Funds
In a decision that could reshape the regulatory framework for cryptocurrencies, a U.S. District Court judge has ruled that crypto protocols may be classified as money transmitters even if they do not control the funds they help transmit. The ruling has sparked concerns within the crypto industry, particularly for privacy-focused services such as Tornado Cash and Samourai Wallet, which are now facing increased scrutiny under the Bank Secrecy Act (BSA).
The Case: Tornado Cash and Samourai Wallet
The ruling stems from a legal battle involving Tornado Cash and Samourai Wallet, two services that help users anonymize their crypto transactions. Both argued that because they do not control the coins being transmitted, they should not be classified as money transmitters, and thus, not subject to the BSA’s requirements. However, the court rejected this argument, siding with the government’s position that control over funds is not a statutory requirement for money transmission.
According to the judge, businesses can be considered money transmitters if they:
- Accept funds,
- Transmit funds,
- Control funds, or
- Provide instructions for funds to be moved.
The ruling is significant because it establishes that control of funds is only one of four factors courts use to determine whether a business is a money transmitter.
Implications for the Crypto Industry
The ruling could have far-reaching consequences for the cryptocurrency sector, especially for decentralized protocols and businesses that rely on avoiding fund control to minimize regulatory burdens. The immediate effects of this ruling include:
- Broader Compliance Obligations: More crypto services may be required to comply with BSA regulations and Anti-Money Laundering (AML) requirements, even if they do not hold or control the funds directly.
- Increased Legal and Criminal Risk: Founders and operators of services like Tornado Cash and Samourai Wallet now face the risk of criminal charges for BSA violations if they fail to register as money transmitters. This expands the potential liability for many in the industry.
- Chilling Effect on Privacy Projects: Privacy-focused services may find it harder to operate without facing legal challenges, as the ruling could discourage developers from building tools that anonymize transactions.
Impact on Innovation and Global Consequences
This ruling could slow innovation in the crypto space, particularly for decentralized finance (DeFi) and privacy-centric projects. Developers may fear the legal consequences of being classified as money transmitters and avoid creating new protocols or services. Additionally, this decision could set a precedent that impacts regulatory frameworks in other countries, leading to tighter global regulations on crypto businesses.
Future Legal Developments
While crypto industry representatives plan to appeal this decision, the ruling stands as a significant clarification of the law, potentially increasing compliance burdens across the sector. Further clarification will come when the court’s written opinion is issued.
For now, crypto protocols that transmit funds—even without controlling them—must prepare for a new era of regulatory oversight.
This ruling signals a shift in how the law treats decentralized and privacy-focused crypto services. If upheld, it could redefine what it means to be a money transmitter, leading to stricter regulations and potentially chilling innovation in the cryptocurrency industry.
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This page was last updated on October 16, 2024.
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