Tornado Cash, DAOs, and the First Amendment: A Legal Paradox in the Digital Age

The prosecution of Tornado Cash developers represents one of the most significant challenges to software freedom and developer rights in decades. This case sits at the intersection of cryptocurrency regulation, free speech protections, and the evolving nature of decentraliaed autonomous organizations (DAOs), creating a legal battlefield with implications far beyond the crypto industry.

The Tornado Cash Protocol: Privacy by Design

Tornado Cash emerged as a groundbreaking privacy protocol built on the Ethereum blockchain. Unlike traditional financial institutions, it operates through immutable smart contracts—self-executing code that cannot be altered once deployed. Users deposit cryptocurrency into a shared pool, where it mixes with others' funds, breaking the public trail that typically makes blockchain transactions traceable.

The protocol operates as a decentralised autonomous organization (DAO), where governance decisions are made collectively by token holders rather than centralized management. Crucially, the developers designed the core smart contracts to be "trustless" and immutable, meaning they deliberately removed their own ability to control the protocol after deployment.

This design philosophy reflects a fundamental principle of decentralised technology: creating tools that operate independently of their creators. The developers essentially built a digital privacy tool and then intentionally relinquished control over it—a decision that would later become central to their legal defense.

The Founders' Legal Nightmare

The legal troubles began in August 2022 when the U.S. Treasury's Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash, claiming it facilitated over $7 billion in money laundering activities, including hundreds of millions for North Korea's Lazarus Group hackers. The sanctions effectively criminalised any American's use of the protocol.

Three developers found themselves in the crosshairs of federal prosecution: Roman Storm and Roman Semenov, charged in New York with conspiracy to commit money laundering, sanctions violations, and operating an unlicensed money transmitting business, and Alexey Pertsev, arrested in the Netherlands and sentenced to over five years in prison by a Dutch court.

The charges against these developers marked an unprecedented expansion of criminal liability. Unlike traditional money laundering cases involving banks or exchanges that actively process transactions, the Tornado Cash developers never touched user funds, executed transactions, or maintained custody of assets. They simply wrote and published open-source code.

The Freedom of Speech Defense: Code as Expression

The prosecution has reignited a decades-old debate about whether computer code qualifies as protected speech under the First Amendment. This question first gained prominence in the 1990s during the "crypto wars" over encryption export controls.

The landmark case Bernstein v. U.S. Department of State established that software source code constitutes speech protected by the First Amendment. Judge Marilyn Hall Patel ruled that there was "no meaningful difference between computer language, particularly high-level languages, and German or French." The Ninth Circuit Court of Appeals affirmed this decision, recognising that code serves as "an expressive means for the exchange of information and ideas."

Storm's defense team has leaned heavily into this precedent, arguing that "at its heart, this prosecution represents an unprecedented attempt to criminalise the development of software." The Electronic Frontier Foundation, which originally established the code-as-speech precedent, has filed amicus briefs supporting the developers and representing computer science professor Matthew Green, who republished the Tornado Cash code for academic purposes.

The EFF's involvement underscores the broader implications: if writing privacy-enhancing code becomes criminal, it could chill innovation across the entire open-source software ecosystem. The organisation argues that prosecuting developers for how others use their published code violates fundamental free speech protections.

Legal Inconsistencies and Prosecutorial Overreach

The Tornado Cash prosecutions have exposed significant inconsistencies in federal law enforcement's approach to cryptocurrency regulation. Several developments highlight these contradictions:

FinCEN Guidance Controversy: Storm's defense team revealed that prosecutors allegedly withheld evidence showing that the Financial Crimes Enforcement Network (FinCEN) had concluded as early as 2023 that non-custodial mixers like Tornado Cash do not qualify as "money transmitting businesses" under federal law. This guidance directly undermines one of the key charges against the developers.

In a parallel case involving Samourai Wallet developers, FinCEN officials reportedly stated that because the service never took custody of user funds, it likely didn't qualify as a money services business. Storm's lawyers argue this same logic applies to Tornado Cash, claiming prosecutors "played fast and loose" with this exculpatory evidence.

Sanctions Reversal: In November 2024, the Fifth Circuit Court of Appeals ruled that OFAC exceeded its authority by sanctioning Tornado Cash's immutable smart contracts. The court determined that autonomous code controlled by no legal person cannot be sanctioned as "property" under the International Emergency Economic Powers Act. Following this decision, the Treasury Department quietly removed Tornado Cash from its sanctions list in March 2025.

Prosecutorial Adjustments: Acknowledging these legal challenges, prosecutors have already dropped portions of the money transmitting business charges while maintaining the core conspiracy allegations. This partial retreat suggests recognition that their original legal theory was flawed.

The DAO Dilemma: Governance Without Control

The Tornado Cash case highlights the legal system's struggle to understand decentralised autonomous organisations. Traditional legal frameworks assume centralised control and clear corporate hierarchies, but DAOs operate through distributed governance mechanisms that challenge these assumptions.

Courts have grappled with whether a DAO can be sanctioned as an entity when no single person or group controls it. The Tornado Cash DAO could vote on certain optional features and new projects, but it had no power to alter the immutable smart contracts that formed the protocol's core functionality.

This design creates a legal paradox: how can developers be held criminally liable for a system they deliberately designed to operate beyond their control? The prosecution argues that the developers remained responsible because they promoted the protocol and received governance tokens. The defense counters that publishing autonomous software cannot make someone liable for every subsequent use of that software.

Broader Implications for Innovation

The outcome of these cases will have far-reaching consequences for software development, particularly in privacy-enhancing technologies. Legal experts warn that criminalising neutral tool development could:

Chill Open Source Development: Developers may avoid creating privacy tools if they face potential criminal liability for misuse by third parties. This could stifle innovation in areas ranging from cryptocurrency privacy to general-purpose encryption.

Create Regulatory Uncertainty: Without clear guidelines distinguishing between legitimate development and criminal activity, developers cannot assess their legal risk when creating new technologies.

Undermine Dual-Use Technologies: Many privacy tools serve legitimate purposes while potentially enabling illicit activities. Masks protect identity for legitimate reasons but can also help criminals avoid identification. The law has traditionally protected such dual-use technologies unless there's clear intent to facilitate specific crimes.

Fragment Global Innovation: Aggressive prosecution in the United States may drive privacy technology development to more permissive jurisdictions, potentially undermining American technological leadership.

The First Amendment's Uncertain Boundaries

While established precedent recognises code as speech, the Tornado Cash case tests the limits of this protection. Courts must balance free speech rights against the government's legitimate interest in preventing money laundering and sanctions evasion.

The prosecution argues that functional code differs from purely expressive speech because it directly enables harmful actions. They characterise Tornado Cash not as protected expression but as a tool designed to circumvent financial regulations.

Privacy advocates counter that this logic could be applied to any privacy-enhancing technology. If code loses First Amendment protection when it enables both legitimate and illegitimate uses, fundamental privacy tools from encryption to VPNs could face similar restrictions.

Constitutional Tensions and Practical Realities

The case exposes fundamental tensions between constitutional rights and regulatory enforcement in the digital age. The government faces real challenges in combating sophisticated cybercriminals who exploit privacy technologies. North Korean hackers have indeed used Tornado Cash to launder hundreds of millions in stolen cryptocurrency.

However, privacy advocates argue that these legitimate concerns don't justify abandoning constitutional protections for software developers. They note that criminals also use cars, phones, and cash to facilitate crimes, but society doesn't hold manufacturers criminally liable for such misuse.

The Electronic Frontier Foundation argues that if the government wants to regulate privacy protocols like Tornado Cash, it should pursue new legislation through Congress rather than stretching existing laws beyond their intended scope. This approach would provide clear guidelines while preserving legitimate development work.

The Road Ahead

Roman Storm's trial, scheduled for July 2025, will likely serve as a watershed moment for developer rights and privacy technology. The case will test whether the legal system can adapt to decentralised technologies while preserving fundamental constitutional protections.

Industry observers note that the prosecutions have already had a chilling effect on privacy technology development. Some developers have relocated to more permissive jurisdictions, while others have abandoned privacy-focused projects altogether.

The stakes extend far beyond cryptocurrency. As artificial intelligence, quantum computing, and other emerging technologies create new possibilities for both beneficial innovation and potential misuse, the Tornado Cash precedent could influence how society balances technological progress with legitimate regulatory concerns.

Conclusion: The Future of Code Freedom

The Tornado Cash cases represent more than a dispute over cryptocurrency regulation—they're a fundamental test of whether constitutional protections can adapt to the realities of decentralised technology. The prosecution's novel theory of developer liability challenges decades of precedent protecting software as speech.

If the government prevails, it could establish a new paradigm where publishing neutral tools carries potential criminal liability for all subsequent uses. This would represent a dramatic departure from traditional legal principles that distinguish between creating tools and using them for illegal purposes.

Conversely, if the defense succeeds, it could strengthen protections for privacy technology development while forcing regulators to craft more targeted approaches that address specific criminal conduct rather than broadly criminalize technological capabilities.

The resolution of these cases will help determine whether the digital age enhances or erodes fundamental rights to free expression, privacy, and innovation. As decentralised technologies become increasingly prevalent, the legal system's response to Tornado Cash may well define the boundaries of permissible innovation for generations to come.

Whatever the outcome, the Tornado Cash prosecutions have already revealed the urgent need for clearer legal frameworks that can accommodate technological innovation while addressing legitimate regulatory concerns. The challenge facing lawmakers, courts, and technologists is creating rules that protect both constitutional rights and public safety in an increasingly decentralised world.