Smart contracts won’t save them.

Nor will the automation of DeFi.

Like it or not, devs must design their innovative technology in compliance with the law. And if that means infringing on the privacy-first ethos of crypto, too bad.

This was the crystal clear message a three-judge panel in the Netherlands sent the crypto world Tuesday when they convicted Alexey Pertsev of permitting the laundering of $2.2 billion of stolen funds through Tornado Cash, the crypto mixer.

A judge speaks

While Pertsev and a legion of his supporters argued prosecutors misunderstood the nature of DeFi, the judges implored Pertsev to recognise his responsibility as decision-maker in what they call a company.

“If the defendant had wanted to have the possibility to take action against the abuse, then he should have built it in,” Judge Henrieke Slaar said on Tuesday. “But he did not.”

Crypto leaders and privacy advocates called the verdict and the 64-month prison sentence Pertsev received tragic, and a call to arms.

“It’s a declaration of war against financial privacy,” said Sjors Provoost, a Bitcoin Core developer who was present at the hearing in the Dutch city of ‘s-Hertogenbosch.

‘From now on, all developers must become Satoshi.’

Alireza Siadat, Annerton

Alireza Siadat, partner at German law firm Annerton, warned the verdict will have a “massive impact” on blockchain and developers in the DeFi industry.

“From now on, all developers must become Satoshi,” he told DL News, referring to the Bitcoin creator whose identity has remained a secret for 15 years.

Siadat was shocked by the verdict and, reflecting the sentiment of many in crypto, cast doubt on the integrity of the legal process.

“It seems like the verdict was there before the prosecution started the investigation.”

During his two-day trial in March, Pertsev argued no developer or anyone else would have been able to stop Tornado Cash from providing anonymous transaction services to users.

This is because the protocol is open source, meaning it is accessible to anyone, and runs on smart contracts.

Responsibility

Pertsev was one of the main developers of the programme designed to allow Ethereum users to transact anonymously. He was arrested in 2022 after US authorities sanctioned Tornado Cash as a threat to national security.

From the outset, Pertsev hung his defence on the argument that he should not be held responsible for how Tornado Cash was used by others.

The judge said he could not hide his culpability behind product design.

“The characteristics of the smart contracts are the conscious choices of you as developers,” Slaar told Pertsev as she delivered the verdict. “Tornado Cash functions in the way it was designed.”

Pertsev was taken straight into police custody from the courtroom, and will be assigned to a prison in the Netherlands where he will spend the next four-and-a-half years. (The judges shaved 8 months from his sentence for the time he was detained following his arrest.)

He has until May 28 to appeal.

“I’m disappointed with the outcome of the verdict,” Keith Cheng, Pertsev’s defence lawyer, told DL News on Tuesday.

Cheng, who was not present at the court hearing, said he would discuss the verdict with his client.

‘Shortcut’ for criminals

In the 26-page verdict, the judges said Tornado Cash was a breeding ground for illicit transactions.

One user was the US-sanctioned North Korean cybercrime organisation, Lazarus Group, which was behind the $625 million hack on Axie Infinity’s Ronin Bridge platform in 2022.

The hackers moved $450 million of the proceeds through Tornado Cash, according to court papers.

The judges said that the protocol created a “shortcut” for financing crimes, totalitarian regimes, and terrorism. “[It] is made in such a way that it is unchangeable and unstoppable,” the ruling said.

'It was Tornado Cash that executed the concealing and disguising activities.'

Dutch judges in Pertsev verdict

Bitcoin developer Provoost said the verdict will make it easier to monitor financial transactions. “This verdict is perfect for dictators,” Provoost said.

He added that the judges were “completely oblivious to the trade-off between privacy and financial surveillance.”

Another important upshot from the verdict was the court’s assertion that the developers should have been aware from the beginning that Tornado Cash would appeal to criminals.

A Dutch government agency, the Financial Intelligence Unit, said crypto mixers are a money laundering indicator in 2017, the court noted.

Grounds for appeal

Judith de Boer, partner at the Dutch law firm Hertoghs Advocaten, said this finding in the verdict is not so strong.

“This is the only evidence used to support this claim,” Judith de Boer told DL News. Assuming this is common knowledge is debatable, she said.

Another weakness is that the verdict rules that Tornado Cash itself is a perpetrator rather than its developer:

“It was Tornado Cash that executed the concealing and disguising activities… Tornado Cash carries out money laundering activities,” the verdict said.

But actions are carried out by people, de Boer said. Tornado Cash can only be considered a tool.

The verdict overlooks another requirement: The awareness of money laundering needs to happen at the same time the funds are concealed, de Boer said.

These issues may provide grounds for an appeal of the verdict, the lawyer said.

In any event, the Dutch court has laid down a marker for cases involving technological innovation and financial privacy.

And in September, Roman Storm, Pertsev’s fellow Tornado Cash dev, is expected to stand trial in the US on money laundering and related charges.

This will be the next test of the issues at play in the Pertsev case.

Inbar Preiss is DL News’ Brussels-based regulation correspondent. Contact the author at inbar@dlnews.com.