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Federal prosecutors will no longer charge developers of decentralized-finance protocols, or DeFi, with transmitting funds without a license if they did not engage in the underlying criminal conduct that led to their detection, the head of the Justice Department’s Criminal Division said.

Absent federal guidelines that explicitly define developers as money services businesses, or MSBs, the department will not hold them criminally liable for “merely writing code” unless they knowingly aided or abetted a crime or played an active role in a criminal conspiracy, the official, Mark Galeotti, told attendees of a blockchain conference in Jackson, Wyoming, on Thursday.

“Generally, developers of neutral tools, with no criminal intent, should not be held responsible for someone else’s misuse of those tools,” Galeotti told attendees. “If a third-party’s misuse violates criminal law, that third-party should be prosecuted—not the well-intentioned developer.”

DeFi software relies on the smart contracts—immutable, anonymous lines of code—to automate transfers of cryptocurrency, but aside from creating those lines, developers generally have no control or ability to monitor the transactions that follow.

“Where the evidence shows that software is truly decentralized and solely automates peer-to-peer transactions, and where a third-party does not have custody and control over user assets, new [money transmission] charges against a third party will not be approved,” said Galeotti.

Put another way, developers in such cases would only face charges if they knowingly allowed for the transfer of illicit funds or designed their software specifically to aid criminals.

To date, prosecutors have primarily used the charge of transmitting funds without a license “as a way in” to identify and investigate other crimes, such as money laundering or terrorist financing, or to pressure a suspect into cooperating, a former federal investigator told ACAMS moneylaundering.com.

“Running an unlicensed MSB is a challenging charge on its own, because to juries, it feels very regulatory and technical, instead of criminal,” the former investigator said on condition of anonymity. “But it’s a great predicate offense .. that you can use to get a search warrant and dig deeper into the business.”

Tornado Cash

Galeotti unveiled the new policy two weeks after federal jurors in New York found Roman Storm, co-founder of the decentralized cryptocurrency mixer Tornado Cash, guilty of operating an unlicensed MSB without also convicting him of money laundering and sanctions evasion.

Prosecutors failed to persuade the jurors that by developing a platform predicated on transmitting funds without a license, Storm knowingly facilitated both crimes even if he did not personally handle the underlying transactions.

“The Tornado Cash service operated as an unlicensed money transmitting business because it engaged in the transfer of funds for the public,” Assistant U.S. Attorney Thane Rehnar argued in a pretrial conference in October 2023. “That’s sort of the core of what the indictment alleges.”

In 2019, the Financial Crimes Enforcement Network defined “anonymizing convertible virtual currency services,” namely, cryptocurrency mixers and tumblers, as MSBs, which must register with the bureau, obtain licenses from all states in which they plan to operate, adhere to anti-money laundering requirements and report suspicious activity.

Storm’s defense claimed during his trial that the absence of a central administrator or operator at Tornado Cash excludes the service from FinCEN’s definition of an MSB, which, they argued, presumes the direct involvement of a “person” or “entity” in transmitting a customer’s funds and thereby exercising some level of control over them.

Contact Chelsea Carrick at ccarrick@acams.org