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Judge rules crypto protocols can be money transmitters without controlling funds

Judge rules crypto protocols can be money transmitters without controlling funds

Rule Changes

Decision allows Tornado Cash and Samourai Wallet prosecutions to proceed

August 30th, 2026: Judge rules control of funds not required

Overview

Updated Aug 31

A 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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Key Indicators

$237.8M
Forfeiture ordered against Samourai Wallet founders
A court ordered the total forfeiture; the founders paid $6.4 million from fees Samourai actually collected.
5 years
Longest U.S. sentence in a non-custodial crypto prosecution
Samourai co-founder Keonne Rodriguez received five years in November 2025; co-founder William Lonergan Hill received four.
4
Tests for money transmitter status under the ruling
Courts weigh whether a business accepts funds, transmits funds, controls funds, or instructs others to release funds; control is one factor, not a requirement.

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People Involved

Organizations Involved

Timeline

August 2022 August 2026

10 events Latest: August 30th, 2026 · 1 week ago
Tap a bar to jump to that date
  1. Money transmitter definition on trial

    Legislation

    With 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.

  2. Treasury sanctions Tornado Cash

    Sanctions

    The 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.

Scenarios

1

Second Circuit upholds the money transmitter ruling

Likely Resolves by End of 2027

Discussed by: The Justice Department, which won the ruling and cites the First Circuit's 2025 decision in United States v. Ibanez as precedent

The Tornado Cash defendants appeal Judge Failla's ruling to the Second Circuit. The appeals court reviews whether the Bank Secrecy Act's money transmitter definition reaches software developers who never control funds. An affirmance would make the government's theory the settled law of the country's most influential financial appeals court.

2

Congress writes the custody line into statute

Possible Resolves by Jan 3, 2027

Discussed by: Industry groups including the Blockchain Association, the Digital Chamber, and the DeFi Education Fund, which filed amicus briefs in the Lewellen case

Lawmakers pass the Blockchain Regulatory Certainty Act, Section 604 of the CLARITY Act, defining non-custodial software developers as outside the money transmitter definition. Passage would shield future developers from prosecution but would not undo the Samourai convictions already on the books.

3

Supreme Court takes the money transmitter question

Unlikely Resolves by Q2 2028

Discussed by: Tornado Cash defense counsel, who have indicated they will appeal the ruling and could carry the case to the Supreme Court

After the Second Circuit rules, defense counsel petition the Supreme Court. The Court could grant certiorari to decide whether the Bank Secrecy Act reaches non-custodial code, particularly if the CLARITY Act fails and a circuit conflict emerges. Denial would leave the government's theory intact.

Historical Context

3 moments from history that rhyme with this story — and how they unfolded.

1999

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.

Then

Encryption software moved off the munitions list, enabling modern online commerce.

Now

It seeded the 'code is speech' tradition behind the crypto industry's slogan 'code is not custody.'

Why this matters now

The current dispute asks whether code that moves money is expression or regulated financial conduct, the same question Bernstein raised for encryption.

May 2019

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.

Then

Crypto firms faced new registration demands, and some startups left the U.S. market.

Now

The interpretation became the legal foundation for the mixer prosecutions of the 2020s.

Why this matters now

The August 2026 ruling is the judicial enforcement of that 2019 interpretation, extended to software that never touches funds.

March 2021 – March 2024

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.

Then

The Justice Department established that mixer operators face felony liability, and prison sentences followed.

Now

The convictions confirmed that custodial mixers were illegal. The new cases test whether the same statute reaches code whose creators never hold funds.

Why this matters now

The custody boundary was not contested in those cases; it is the exact line in dispute now.

Sources

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