Judge rules crypto protocols can be money transmitters without controlling funds
Rule ChangesDecision allows Tornado Cash and Samourai Wallet prosecutions to proceed
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Overview
Updated 1 hour agoA federal judge has ruled that a crypto protocol can be a money transmitter even when its operators never control users' funds. Judge Katherine Polk Failla rejected the no-custody defense at the center of the Tornado Cash and Samourai Wallet cases, letting the prosecutions proceed.
Under the ruling, control of funds is just one of four tests for money transmitter status, not a requirement. A 2025 federal appeals court decision reached the same conclusion. The ruling lands as Congress weighs the CLARITY Act, which would exempt non-custodial developers—leaving the meaning of a federal crime to the courts and Congress.
Why it matters
Developers of non-custodial crypto software can be charged as money transmitters even though they never hold a user's coin.
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The Justice Department (DOJ) enforces Section 1960 of the United States Code, which makes operating an unlicensed money transmitting business a federal crime.
A non-custodial Ethereum privacy protocol that mixes users' coins to break the link between sender and receiver.
A non-custodial Bitcoin wallet whose Whirlpool feature anonymized transactions by mixing users' coins.
Lawmakers are weighing Section 604 of the CLARITY Act, which would exempt non-custodial software developers from money transmitter rules.
Timeline
August 2022 August 2026
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Judge rules control of funds not required
Latest LegalJudge Katherine Polk Failla ruled that a crypto protocol can be a money transmitter even when it never controls users' funds. The ruling rejected the no-custody defense in the Tornado Cash and Samourai Wallet cases and let the government's prosecutions proceed.
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Money transmitter definition on trial
LegislationWith the Samourai sentences complete, Congress weighed the CLARITY Act's Section 604, which would codify that non-custodial software developers are not money transmitters. Industry groups pushed for the custody line to be written into statute.
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Prosecutors argue custody is not required
LegalIn the New York prosecutions, the government repeated its position that the statute's plain text imposes no custody requirement, setting up the August ruling.
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Court dismisses pre-enforcement challenge
LegalA Texas federal court dismissed developer Michael Lewellen's lawsuit seeking to shield his non-custodial donation protocol Pharos from money transmitter prosecution, ruling he showed no credible threat of prosecution.
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Hill sentenced to four years
LegalSamourai co-founder William Lonergan Hill was sentenced to four years and fined $250,000, closing the first major prosecutions of non-custodial crypto software under the money transmitter statute.
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Rodriguez sentenced to five years
LegalSamourai co-founder Keonne Rodriguez was sentenced to five years in federal prison and fined $250,000. The court also ordered $237.8 million in forfeiture.
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Appeals court rejects custody requirement
LegalThe U.S. Court of Appeals for the First Circuit affirmed the conviction of Marten Ibanez, who matched bitcoin buyers and sellers without taking custody. The court held that the money transmitter statute does not require control of funds.
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Samourai Wallet founders arrested
LegalThe Justice Department charged Keonne Rodriguez and William Lonergan Hill with money laundering conspiracy and operating an unlicensed money transmitting business, alleging the non-custodial wallet processed over $2 billion in unlawful transactions. Rodriguez was arrested in Pennsylvania; Hill in Portugal.
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Tornado Cash founders indicted
LegalThe Justice Department charged Roman Storm and Roman Semenov with money laundering conspiracy, operating an unlicensed money transmitting business, and sanctions conspiracy. Storm was arrested in Washington state.
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Treasury sanctions Tornado Cash
SanctionsThe Treasury Department's Office of Foreign Assets Control added the Ethereum mixer to its sanctions list, alleging North Korea's Lazarus Group laundered hundreds of millions of dollars through it.
Historical Context
3 moments from history that rhyme with this story — and how they unfolded.
Bernstein v. United States (1999)
In the 1990s, the U.S. government classified encryption source code as a munition subject to export controls. Mathematician Daniel Bernstein sued, and a Ninth Circuit panel ruled that source code is speech protected by the First Amendment. The decision was later vacated as moot after export rules were relaxed.
Encryption software moved off the munitions list, enabling modern online commerce.
It seeded the 'code is speech' tradition behind the crypto industry's slogan 'code is not custody.'
The current dispute asks whether code that moves money is expression or regulated financial conduct, the same question Bernstein raised for encryption.
FinCEN's 2019 crypto guidance (May 2019)
FinCEN, the Treasury bureau that enforces the Bank Secrecy Act, issued guidance stating that anonymity-enhancing cryptocurrency services such as mixers, and peer-to-peer exchangers, are money transmitters. The guidance applied rules written for wire transfer companies to software that moves digital coins.
Crypto firms faced new registration demands, and some startups left the U.S. market.
The interpretation became the legal foundation for the mixer prosecutions of the 2020s.
The August 2026 ruling is the judicial enforcement of that 2019 interpretation, extended to software that never touches funds.
Helix and Bitcoin Fog mixer convictions (2021-2024)
Larry Harmon, operator of the Helix bitcoin mixer, pleaded guilty in 2021 to operating an unlicensed money transmitting business. Roman Sterlingov, who ran Bitcoin Fog, was convicted in March 2024 of money laundering and unlicensed money transmitting. Both services held and moved customers' coins directly.
The Justice Department established that mixer operators face felony liability, and prison sentences followed.
The convictions confirmed that custodial mixers were illegal. The new cases test whether the same statute reaches code whose creators never hold funds.
The custody boundary was not contested in those cases; it is the exact line in dispute now.
