DEF Coauthors New Working Paper; Victory in Van Loon v. Treasury Appeal in the 5th Circuit; Court Strikes Down SEC’s Dealer Rule; CFPB Excludes Crypto from Digital Wallets Rule
DEF Coauthors Working Paper “Through the Looking Glass: Conceptualizing Control and Analyzing Criminal Liability For Unlicensed Money Transmitting Businesses Under Section 1960”
DEF’s Amanda Tuminelli, along with Variant’s Jake Chervinsky and Daniel Barabander, coauthored an article in the International Academy of Financial Crime Litigators exploring the complexities of 18 U.S.C. § 1960, a U.S. statute criminalizing unlicensed money transmission. It critiques recent prosecutions of noncustodial blockchain software developers, arguing that §1960 requires proof that a business both obtains and relinquishes control over funds, a condition that blockchain-based protocols often do not meet. The authors advocate for a more precise legal framework to distinguish between legitimate blockchain activities and money transmission, suggesting that statutory amendments are needed to clarify criminal liability under §1960.
Victory in Van Loon v. Treasury Appeal in the 5th Circuit
What happened?
On November 26th, the United States Court of Appeals for the Fifth Circuit delivered its opinion in Van Loon v. Department of the Treasury, finding that the Treasury Department unlawfully designated Tornado Cash smart contracts under its existing sanctions authorities.
The case involves six plaintiffs who used Tornado Cash prior to the Treasury’s Office of Foreign Assets Control’s (OFAC) sanctions on the protocol for “its role in laundering virtual currency for malicious cyber actors.” By including Tornado Cash on its list of Specially Designated Nationals and Blocked Persons (SDN), OFAC prohibited any dealings with Tornado Cash “property,” which, according to OFAC, includes decentralized software like smart contracts and other open-source code. The six plaintiffs argued that OFAC overreached its statutory authority when it included Tornado Cash on the SDN list, because the smart contracts on which Tornado Cash relies are “unownable, uncontrollable, and unchangeable—even by its creators.”
The case was first heard in the Western District of Texas, Austin Division, which ruled that the Department of the Treasury did not overstep its statutory authority. The plaintiffs appealed the decision, and the Court of Appeals for the Fifth Circuit reversed and remanded the original decision. The Fifth Circuit concluded that smart contracts are not property in the ordinary meaning of the word or in the statutory meaning of the word because they are unownable. It also concluded that smart contracts are not property in the statutory sense because they are not a contract or a service. Smart contracts thus fall “outside the scope of OFAC's designation authority.” This means that “(1) [smart contracts] cannot be blocked under IEEPA, and (2) OFAC overstepped its congressionally defined authority.”
The Court also added that Congress may consider “updat[ing] IEEPA, enacted during the Carter Administration, to target modern technologies like crypto-mixing software.” Until that happens, however, the Court ruled that the immutable smart contracts like those utilized in Tornado Cash cannot be designated.
What does this mean?
This ruling marks a huge victory for DeFi at large. The Court’s ruling more clearly delineates the legal status of immutable smart contracts, affirming their decentralized nature. The ruling also reaffirmed the judiciary’s role in curbing government agency overreach.
In our view, this is the “end of the beginning” of this issue. Congress has already taken note of the Fifth Circuit’s suggestion that Congress review the statutory authority at issue, and we expect efforts to expand Treasury’s sanctions authorities to explicitly include immutable smart contracts.
Court Strikes Down SEC’s Dealer Rule
What happened?
Late last month, the District Court for the Northern District of Texas struck down the Securities and Exchange Commission’s (SEC) dealer rule. The court granted the Crypto Freedom Alliance of Texas (CFAT) and Blockchain Association’s (BA) motion for summary judgment in their lawsuit against the SEC challenging the rule. CFAT and BA had contested the rule back in May, asserting that the SEC unlawfully broadened the regulatory definition of what constitutes a “dealer.”
The court agreed, finding that the SEC exceeded its statutory authority under the Exchange Act by promulgating a rule that blurred the long-standing distinction between “dealers,” who conduct securities business for customers, and “traders,” who trade securities for their own account. Specifically, the rule subjected individuals and entities that provide market liquidity—even without offering traditional dealer services like advising or managing client assets—to dealer registration requirements.
The court determined the SEC’s interpretation of “dealer” was inconsistent with the statutory text, history, and structure of the Exchange Act. It highlighted that the Act differentiates between “dealers” engaged in a regular business of securities dealing and “traders” pursuing personal investment strategies. By expanding the definition to capture market participants engaged in trading that incidentally affects liquidity, the rule unlawfully redefined the scope of the SEC’s authority.
The court also criticized the rule as overbroad and unsupported by reasoned decision-making, a fundamental requirement under the Administrative Procedure Act (APA). It emphasized that the rule imposed significant regulatory burdens on DeFi participants using decentralized protocols and smart contracts, which inherently lack the intermediary functions of traditional dealers.
The court vacated the rule, concluding that the deficiencies in the SEC’s action—both statutory overreach and failure to engage in reasoned rulemaking—required the invalidation of the rule in its entirety.
What does this mean?
This ruling is a critical victory for DeFi because it protects its foundational principles of decentralization and innovation. By vacating the SEC’s expansive definition of “dealer,” the court ensures that participants in DeFi protocols—who rely on open-source software and automated smart contracts to facilitate peer-to-peer transactions—are not subjected to burdensome dealer registration requirements.
This decision reaffirms that automated systems, like AMMs, which provide liquidity through transparent and decentralized mechanisms, do not equate to traditional securities dealers offering intermediary services. It preserves the operational autonomy of DeFi ecosystems and supports their ability to innovate and grow without being stifled by regulatory overreach intended for entirely different market structures.
The court’s decision also underscores the need for regulatory agencies to act within clear statutory boundaries, particularly in rapidly evolving and novel technological sectors like DeFi. The IRS, in particular, should take note as it contemplates finalizing its similarly overbroad “broker” rulemaking.
CFPB Excludes Crypto from Digital Wallets Rule
What happened?
On November 21st, the Consumer Financial Protection Bureau (CFPB) finalized their rulemaking “Defining Larger Participants of a Market for General-Use Digital Consumer Payment Applications.” The rule subjects nonbank digital wallet technology companies to the CFPB’s supervisory authority under the Consumer Financial Protection Act (CFPA). The finalized rule states that a nonbank person qualifies as a “larger participant” if it (1) facilitates an annual covered consumer payment transaction volume of at least 50 million transactions as defined in the rule; and (2) is not a small business concern.
The original proposed rule’s definitions of “General-Use Digital Consumer Payment Applications” and “Larger Participants” were vague, potentially capturing noncustodial software wallet providers. In the finalized rule, the CFPB made two significant changes to its initial proposal: it increased the transaction threshold determining which companies require supervision, and it will only consider transactions made in US dollars, excluding digital assets from being encompassed in the rule.
What does this mean?
This is a win for DeFi and crypto more broadly. In January of this year, DEF responded to the CFPB’s proposed rule expressing our concerns with its broad definitions, inadequate cost-benefit analysis, and conflicts with other agencies’ interpretations of their jurisdiction. We appreciate the CFPB’s careful consideration of and responsiveness to these concerns.
