There is no law more existential for crypto projects than § 1960, which makes it a crime to operate an “unlicensed money transmitting business.” § 1960 is front and center in the Tornado Cash case, where a court held in September that Roman Storm could violate the statute even without control over user funds. Today, @atuminelli, @jchervinsky, and I published the most detailed analysis I’m aware of on how to interpret the statute in The International Academy of Financial Crime Litigators. Our core finding: § 1960 requires control, so the Tornado Cash court got it wrong. Check out the article here: https://edit.financialcrimelitigators.org/api/assets/cd682a1c-1cb0-4c99-a491-ac6155f4bdc2.pdf.

Chief Legal Officer at DeFi Education Fund @fund-defi. Human to bader the dog. Avid reader of fantasy fiction. Constantly seeking excellent food.

Let’s run through why § 1960 requires control.

Because I’m going to be referring to the text a lot, here’s § 1960 in its entirety: https://www.law.cornell.edu/uscode/text/18/1960

§ 1960(a) makes it a crime for a person to “conduct[], control[], manage[], supervise[], direct[], or own[] all or part of an unlicensed money transmitting business.” OK, so the key term is “unlicensed money transmitting business.” What’s that?

We must go to § 1960(b)(1) to find out. That provision says that an “unlicensed money transmitting business” is defined as an entity that is a “money transmitting business” AND does either (A), (B), or (C). Because of the AND, if we do not have a “money transmitting business,” then we do not need to go into (A), (B), or (C) because we definitionally do not have an “unlicensed money transmitting business” and therefore cannot violate § 1960(a).

GC and Investment Partner @variant | ex software engineer/@ycombinator founder, attorney Cravath | casts are not legal advice | I am not your lawyer

So what constitutes a “money transmitting business” is the key question. Well, that’s unfortunately not defined in this statute (at least not as a whole term). But “money transmitting” is defined under § 1960(b)(2) as including “transferring funds on behalf of the public by any and all means.” 

Alright, we finally arrived at the heart of it: To be a “money transmitting business,” we need to figure out what it means to “transfer[] funds on behalf of the public.” 

To answer this question, we reviewed the case law (all of the circuit law on point!) and determined that “transferring funds on behalf of the public” requires an intermediary to obtain control over funds to receive them and relinquish control over the funds to transmit them.

The Second Circuit case of Bah, which is binding on the Tornado Cash court, shows why. In that case, the defendant owned a restaurant in New York, would receive cash from customers there, drive it across the river to New Jersey, and send it from his business in New Jersey to recipients abroad. 

The defendant had a money transmitting license in New Jersey but not New York, so the government was in a bit of a bind because it was lawful to transmit the money in New Jersey. To try and get around this, the government argued that the defendant driving the funds from New Jersey to New York itself constituted a “transfer” under § 1960(b)(2).

The court rejected this argument. Why? Because the defendant never relinquished control over the funds when driving them from New York to New Jersey. As stated by the court: “So long as Bah (or his agents) maintained possession of any payments, the movement of the money across state lines would not itself violate the statute, because § 1960 prohibits the ‘transfer"’ of money, not the transportation of money by an individual.” 

Bah clarifies that to "transfer" funds under § 1960(b)(2), a party must relinquish control over the funds. Logically, for a party to relinquish control, it must first obtain control. This is what it means to "receive" funds: it is the process of a party first obtaining control over funds that might later be part of a transmission.

Circuit courts have repeatedly applied this “receive” and “transmit” framing of “money transmitting” under § 1960(b)(2). For example, the Second Circuit in United States v. Velastegui defined a money transmitting business as one that "receives money from a customer and then, for a fee paid by the customer, transmits that money to a recipient in a place that the customer designates." Similarly, in United States v. Banki, the Second Circuit cited the Velastegui definition and held that it was "legally correct" that "[t]o be a ‘money transmitting business,’ the business must transmit money to a recipient in a place that the customer designates, for a fee paid by the customer." In United States v. Singh, the Ninth Circuit adopted Velastegui’s definition.

Indeed, we did not find a single circuit court case that engaged with a substantive analysis of the text of § 1960 that did not involve the receipt and transmission of funds.

In our paper, we explain that the Tornado Cash court did not properly engage with these cases, which is concerning because Bah, Velastegui, and Banki are binding on the court. While the government attempted to distinguish some of these cases, we walked through its arguments and dismantled them piece by piece.

The net of this is that we believe that an intermediary obtaining and relinquishing control is necessary to allege a § 1960 charge because, without control, there is no “money transmitting” at all. It follows that self-custodial protocols that never take control over user funds simply cannot be money transmitting businesses. 

Be sure to check out the piece: https://edit.financialcrimelitigators.org/api/assets/cd682a1c-1cb0-4c99-a491-ac6155f4bdc2.pdf.