In a major policy shift, federal prosecutors are changing how they approach decentralized finance, or Defi.
After years of uncertainty around liability for coders and software developers, officials are now drawing a clear line between creating technology and committing a crime.
The US Justice Department has announced it will no longer target software developers who build Defi platforms without proof of criminal intent.
This signals a significant change from earlier enforcement strategies where prosecutors charged developers for operating unlicensed money transmission businesses.
Regulators have long applied stringent rules to companies in the money remittance business, but the rise of Defi systems is putting those standards to the test.
Traditional payment platforms face clear obligations, while DeFi projects say those same rules don’t make sense in a code-driven environment.
Money transmitters such as PayPal and Cash App must secure licenses and comply with anti-money laundering obligations. They also have to verify customers and report suspicious transactions.
But decentralized exchanges argue these rules don’t fit their model since they have no control over user activity on their platforms.
The issue came under the spotlight after a New York jury recently convicted Roman Storm, co-founder of Tornado Cash, on conspiracy charges linked to operating an unlicensed money transmitting business.
Jurors could not reach a decision on whether Storm committed money laundering or violated sanctions.
Prosecutors said the service allowed illicit finance, while critics of the case argued Storm had only written code.
According to Galeotti, future cases in the Defi and crypto space will require proof that a developer knowingly aided fraud, sanctions evasion, or laundering.
“Innovating new ways for the economy to store and transmit value and create wealth, without ill-intent, is not a crime,” he said.
He added that laws banning unlicensed money transmission will not apply to developers unless there is evidence of deliberate wrongdoing.
Featured image from Getty Images, chart from TradingView
