Crypto Mixer Tornado Cash: Why Custody Changed the Question

Prepared by the editorial team. Updated August 31, 2026.

Crypto mixer Tornado Cash is hard to place inside financial regulation for a structural reason rather than a political one. Almost every rule in the field is written to govern somebody who holds other people’s assets, and this design has nobody in that position.

Why is financial regulation built around intermediaries?

Because an intermediary is where obligations can be imposed and enforced. A party that holds client assets can be licensed, audited, required to identify customers, compelled to file reports, ordered to freeze accounts and penalised for failure. The rules assume a chokepoint, and custody is what creates one.

This design is old and predates electronic money entirely. Banking supervision, money transmission licensing and anti-money-laundering law all developed around institutions that stand between a payer and a payee, because that position gives them both the information and the ability to act. Requiring the payer and the payee to police themselves was never realistic at scale.

The pattern is visible in the vocabulary of the rules. Definitions turn on accepting funds, transmitting funds on behalf of another, exercising control over a customer’s assets or maintaining an account relationship. Each of those phrases describes a relationship with a party in the middle, and each obligation that follows presumes that party can carry it out.

What happens to those rules when nobody holds the assets?

The obligations lose their addressee. A rule requiring a service to identify its customers needs a service capable of deciding whom to serve, and immutable code applies the same logic to every caller without knowing or caring who they are. The duty is not evaded so much as unassignable, which is a different problem.

The Tornado Cash pool contracts illustrate the point concretely. They are Ethereum smart contracts with no owner, no pause function and no upgrade path, so no person, company or governance vote can alter their behaviour, refuse a transaction or return funds. A deposit records a commitment and a later withdrawal presents a proof revealing a nullifier, and the contract releases each deposit exactly once without any party taking possession in between.

That is why the sanctions question became so contested. Designation is an instrument for blocking property in which a party holds an interest, and in November 2024 the Fifth Circuit held in Van Loon v. Department of the Treasury that the immutable contracts were not property at all, because nothing that cannot be owned, altered or excluded from fits the ordinary meaning of the word. The ruling was narrow and addressed the scope of sanctions authority rather than the legality of anyone’s conduct.

Why did the argument shift to what developers did?

Because the humans are the only remaining place a duty can attach. If the code holds nothing and decides nothing, then any theory of liability has to describe acts by people: writing and publishing software, running an interface, arranging a business around it, taking fees, or agreeing with others to do something unlawful. Conduct, not code, becomes the subject.

That shift is what the criminal proceedings have been about. The United States case against Roman Storm rested on a conspiracy theory rather than on the contracts themselves, and in August 2025 a jury convicted him on one count of conspiracy to operate an unlicensed money transmitting business while deadlocking on two further counts covering money laundering conspiracy and sanctions evasion conspiracy. A deadlocked count is not an acquittal, and a retrial on those counts is scheduled for April 26, 2027 before Judge Katherine Polk Failla in the Southern District of New York.

The unresolved parts of that record matter as much as the verdict. Storm moved for acquittal in September 2025, oral argument was heard in April 2026, and the motion remains undecided, so no sentence has been imposed. In the Netherlands, Alexey Pertsev was convicted in May 2024 and sentenced to 64 months under Dutch law, then conditionally released in February 2025 to prepare an appeal that is still pending.

How can you document a compliance question about a protocol?

You state the question narrowly, separate verified facts from characterisations, identify which party a rule would attach to, note what remains unsettled, and send the file to a qualified adviser with a date on it. This is a documentation method for internal use, and it is not legal advice or guidance on any service.

Step 1: State the question narrowly

Write the question in one sentence naming the specific activity, the specific party and the jurisdiction involved, because broad questions about whether something is legal cannot be answered and consume the time of whoever receives them. A narrow question also reveals when the real issue is factual.

Step 2: Separate verifiable facts from characterisations

Record the technical facts you have confirmed yourself in a separate list from any description you have taken from a third party, since an analysis built on an unverified characterisation inherits its errors. Labels applied by vendors belong in the second list.

Step 3: Identify which party the rule would attach to

Name the party whose conduct the rule you are worried about is written to govern, because most financial obligations run to a defined actor rather than to a system in general. If you cannot name that party, that itself is the finding.

Step 4: Note what remains unsettled

Write down explicitly which parts of your question depend on law that is currently contested or under appeal, so that the record shows uncertainty rather than manufacturing false confidence. Several questions in this area are genuinely open.

Step 5: Send it to a qualified adviser and date the file

Route the completed note to a qualified legal or compliance professional and date every version of it, because the value of an internal record is that it shows what was known and asked at a particular moment. Undated files are worth very little afterwards.

Where the intermediary assumption breaks down

The table lists common regulatory obligations beside the capability each one presumes, and notes what happens when that capability is absent. Each row is a duty that assumes somebody sits in the middle. It describes the general structure of the rules and is not a statement of current requirements.

Obligation	Capability it presumes	Effect when custody is absent
Customer identification	Ability to accept or refuse a customer	No party can refuse; the code serves any caller
Suspicious activity reporting	A firm that observes and judges activity	No observer with discretion exists to file
Asset freezing	Control over funds held for a client	Nothing is held, so nothing can be frozen
Licensing and registration	An entity able to apply and be supervised	The applicant would have to be defined first
Record keeping	Internal systems under a firm’s control	Records are public but deliberately unlinked

None of these gaps means the underlying conduct is beyond law. They mean the specific tool listed on the left cannot operate, which pushes any enforcement theory towards general criminal statutes about what people did.

Has the question been settled by any of this?

No. One appellate court decided a narrow point about sanctions authority, one jury reached a partial verdict on one defendant, one foreign conviction is under appeal, and a retrial has not yet happened. Nothing in that record establishes a general rule about how financial regulation applies to code with no custodian.

The March 2025 delisting is the event most often overread. Treasury removed Tornado Cash from the sanctions list, so the name is not currently designated, and that is a factual statement about one list on one date. It is not an exoneration, it does not touch criminal statutes, and it does not prevent future designations of other parties under other criteria.

What has genuinely changed is the shape of the argument. Nobody now seriously contends that an immutable contract can be treated as a customer-facing business with duties of its own, and the contested ground has moved to questions about intent, agreement and control among the people nearby. Those are old questions in criminal law applied to a new setting, which is why the outcome remains hard to predict and why specific situations belong with qualified counsel rather than with a general article.

Frequently asked questions

Does non-custodial mean the same thing as decentralised?

No, and conflating them causes a good deal of confusion. Non-custodial is a narrow statement that no party controls user funds, while decentralised is a loose claim about how governance, development and infrastructure are distributed. A design can be genuinely non-custodial while depending on a very small number of people.

Do other jurisdictions treat custody as the deciding factor?

Custody is central in many regimes but not the only trigger anywhere, and European frameworks in particular reach some activities that fall short of holding client assets. The Dutch proceedings against Alexey Pertsev were decided under national law rather than United States rules, which is one reason outcomes have differed.

Could a rule be written that reaches ownerless code directly?

Legislatures can write new rules, and proposals to reach software or its publishers have been discussed in several jurisdictions. Whether such a rule would survive constitutional challenge is a separate question, and nothing decided so far in this area answers it.

Does immutability protect the people who deployed the code?

Immutability is a fact about the contracts rather than a shield for anyone. It supported the argument that the contracts themselves were not property capable of designation, but it says nothing about what the people who wrote, promoted or profited from the system did or intended.