Judge rules Tornado Cash is not protected under the First Amendment

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Welcome to the On the Margin Newsletter, brought to you by Ben Strack and Casey Wagner. Here’s what you’ll find in today’s edition:

• Before the Tornado Cash case heads to trial, Casey breaks down what to know, and why crypto supporters are disappointed.
• Ben unpacks the latest PCE report and why it likely means more dovish policy from the Fed.
• Happy Friday! Find our weekly recap of economic data below. 

US v. Storm will proceed to a jury trial

The US government’s case against Tornado Cash founder Roman Storm will proceed to a jury trial, a federal judge ruled yesterday. 

A quick recap: Storm and fellow Tornado Cash co-founder Roman Semenov were indicted in August 2023. The pair was charged with three federal counts: conspiracy to commit money laundering, conspiracy to commit sanctions violations and conspiracy to operate an unlicensed money transmitting business.

Storm, in March 2024, filed a motion to dismiss all charges — arguing that simply building the protocol is not money laundering, which requires a “financial transaction involving a financial institution.” Since users maintain control of their assets when using Tornado Cash and no fees are charged, the protocol cannot be a “financial institution,” Storm’s team said. 

Prosecutors — in their opposition to the motion — argued that Tornado Cash was a money transmitting business and, therefore, a financial institution. 

Storm also filed a motion to compel discovery, which was a formal request for prosecutors to hand over any and all communications between federal agencies and Dutch officials relating to Storm, Semenov, the case and Alexey Pertsev (more on him in a bit). 

Judge Katherine Polk Failla, who is also overseeing the SEC’s case against Coinbase, denied both motions in a telephone conference Thursday afternoon. The jury trial is scheduled to begin on Dec. 2. But given the amount of discovery in this case, I wouldn’t be surprised if it got pushed back. 

“At this stage in the case, this court cannot simply accept Mr. Storm’s narrative that he is being prosecuted merely for writing code,” Failla said. “For starters, that’s an overstatement of what’s actually charged in the indictment.”

In his motion to dismiss, Storm’s team argued the charges infringed upon his First Amendment rights, asserting that computer code is speech and therefore protected by the Constitution. Prosecutors, and the judge, ultimately, disagreed. 

“It is true that computer coding can be ‘expressive conduct’ protected by the First Amendment,” Failla said. “But when a programmer is using a code to direct a computer to perform various functions, that code is not protected speech.” 

Additionally, Failla said, the government has sufficiently shown to have “substantial interest in promoting a secure financial system by combating money laundering,” unregistered money transmitting services and sanctions evasion. 

Among Storm’s supporters are three crypto-focused advocacy groups: the Blockchain Association, Coin Center and the DeFi Education Fund — each of which filed amicus briefs last spring in support of the defendants. 

These parties, as expected, were disappointed in Thursday’s decision. 

“Judge Failla’s ruling denying [Storm’s] motion to dismiss the indictment is an assault on the freedom of software developers everywhere,” Jake Chervinsky, a lawyer on DeFi Education Fund’s team, wrote on X. “This will go down in history as a perversion of law and a travesty of justice.”

Amanda Tuminelli, also representing DeFi Education Fund, added that Failla’s decision to dismiss on a “matter of law,” versus considering the factual issues, was “offensive.” 

Thursday’s ruling comes months after a Dutch court found Pertsev guilty of laundering $1.2 billion of crypto through Tornado Cash. 

Storm’s attorney did not immediately return Blockworks’ request for comment. 

— Casey Wagner 

$83 million

The assets under management (as of Sept. 26) in the T-Rex 2x Long MSTR Daily Target ETF (MSTU) — only about a week after the fund hit the market. 

REX Shares debuting MSTU followed Defiance ETFs’ launch of the Daily Target 1.75X Long MSTR ETF (MSTX) in August. The latter product surpassed $300 million in assets yesterday.

Bloomberg Intelligence analyst Eric Balchunas said the T-Rex fund’s AUM puts it in the top 20% of the 515 ETFs launched this year. It shows “just how much ‘need for speed’ there is out there,” he added.

At 2 pm ET, MSTR shares were trading at $177.79 — up 7% from 24 hours ago. 

Bitcoin breaks $66k after PCE data release 

Bitcoin reached $65,000 yesterday and went above $66,000 Friday morning ET — the latter level being a first since late-July. 

In short, the latest Personal Consumption Expenditures (PCE) data reinforced expectations of a continued dovish Fed policy stance. 

The break of $66k came a little over an hour after the US Bureau of Economic Analysis published the August PCE data, which showed a slight increase of 0.1% from July (rising 2.2% year-over-year). The report is the Fed’s preferred inflation gauge. 

Casey noted in yesterday’s edition that Morningstar senior economist Preston Caldwell was predicting a 0.15% month-over-month PCE boost. FactSet consensus estimates had pegged a 2.7% jump on an annual basis.

Any significant rise above estimates could have dampened the prospect of further rate cuts by the Fed, wrote Derren Nathan, head of equity research at Hargreaves Lansdown, in a Friday note. 

As we now know, that didn’t happen. 

“Today’s lower-than-expected PCE numbers have strengthened the dovish sentiment sparked by last week’s rate cut, fueling optimism that inflation pressures are cooling faster than anticipated,” said 21Shares crypto research strategist Matt Mena.

The US central bank’s current forecast suggests another half-point reduction by the end of 2024, Nathan said. 

The probability of a Fed rate cut amounting to 50 basis points at its November meeting was at nearly 57%, as of 2 pm ET — up from about 49% a day ago, CME Group data shows. 

Let us remember there’s an additional opportunity for the Fed to lower rates in December. 

All things considered, Mena expects the stage is set for BTC to possibly retest the range between $68,000 and $70,000 — noting China’s recent liquidity injection as well.

Mena had noted that as of early Friday, the CoinDesk 20 Index was up nearly 8% this week, compared to a less than 1% gain by the S&P 500. 

At 2 pm ET, BTC was up about 1% from 24 hours ago. The S&P 500 was roughly flat over that span. 

Mena added: “This highlights the growing confidence in BTC and digital assets as investors increasingly seek alternative stores of value and high-yield opportunities amid a favorable macroeconomic backdrop.” 

— Ben Strack

Did You Notice

Happy Friday! Ben already broke down this week’s headline economic report, the PCE print. But there were some other notable data points from the past few days. Here’s a recap: 

• US initial jobless claims once again ticked lower during the week ended Sept. 21, coming in at 218,000, Thursday’s report shows. Economists had predicted 223,000 first-time filers. We are now at a four-month low for initial claims. It’s a positive sign that the labor market is remaining strong, which bodes well for those hoping for a 50bps interest rate cut from the Fed in November. 
• Thursday’s Durable Goods Orders report showed annual orders for durable goods (defined as long-lasting items, ranging from computer equipment to industrial machinery) were virtually flat in August — posting a very modest $100 million increase. This comes after a large increase in July (9.9%), which was mostly attributed to a large increase in aircraft orders. All in all, the report shows the Fed’s coveted soft landing is still achievable as a decline in orders would signal an economic slowdown. 
• The final Consumer Sentiment index revision on Friday came in at 70.1 vs. the expected 69.3 and previous read of 67.9. It’s not usually a market-moving report (especially the last revision), but we are now at a five-month high for consumer sentiment. Consumer Confidence, on the other hand, is on the decline, with Tuesday’s report showing confidence is now at a three-year low. The latter report, conducted by The Conference Board, likely ticked lower because consumers are growing increasingly concerned about the labor market and stagnant wage growth. 

Bulletin Board 

• Japan’s governing party elected Shigeru Ishiba as its leader, setting him up to become prime minister in the coming days. Ishiba is supportive of the Bank of Japan’s interest rate hikes, helping to boost market confidence even as his victory surprised investors. The yen rallied as much as 1.4% following Ishiba’s win. 
• The US House Foreign Affairs Committee this week advanced a resolution demanding the Nigerian government to release Binance executive Tigran Gambaryan. The resolution can now proceed to a full floor vote, but one has not been scheduled and the House is now in recess ahead of the election.
• We are a little over a week out from Permissionless III. The Blockworks conference in Salt Lake City will feature congressional leaders, legal experts and the biggest names in the crypto industry. Plus, Casey, Ben and Felix will all be on the ground. Get your tickets today!

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