Research On Legal Challenges In Prosecuting Decentralized Finance (Defi) Crimes
Key Legal Challenges
Before diving into cases, it’s useful to frame some of the major hurdles in prosecuting DeFi crimes:
Decentralization & Anonymity: DeFi protocols often operate without a central controlling entity; users may be pseudonymous; smart contracts may run autonomously. This creates difficulty in identifying responsible actors, establishing control / “who is driver” of the offence, and attributing criminal intent.
Jurisdiction & Cross-Border Issues: DeFi transactions run on blockchains that are global, immutable, and may involve parties in multiple jurisdictions; enforcement is complicated by differing national laws, regulatory gaps, and difficulties obtaining evidence.
Novel Legal Theories & Technology: Applying existing statutes (money-laundering, operating unlicensed money transmitting business, securities laws, sanctions law) to DeFi tools raises issues: e.g., is a smart contract a money transmitter? Is a protocol operator custodial? These are unsettled.
Evidence & Traceability: While blockchain is transparent, linking on-chain addresses to real persons is notoriously difficult; prosecution must show control, knowledge, intent. Also smart contracts may be open-source and operated by many nodes.
Regulatory / Compliance Gaps: Many DeFi protocols may not fall neatly under existing regulatory regimes (e.g., MSB registration, securities laws) or may exploit gaps, making prosecution slower or unclear.
Policy Balance (Innovation vs Enforcement): Authorities face tension between policing DeFi abuses and not stifling innovation; questions of fair notice and legitimate privacy tools complicate matters.
With that in mind, here are several prominent cases illustrating these challenges.
Case 1: Tornado Cash (Mixer) – U.S. Prosecution of Founders
Facts: Tornado Cash is a cryptocurrency mixing service (smart-contract based) which allowed users to pool and withdraw cryptocurrency without straightforward tracing. U.S. prosecutors say the founders (including Roman Storm and Roman Semenov) created, promoted and profited from the service, and knowingly allowed or ignored use by criminals (including the North Korean “Lazarus Group”) to launder more than US$1 billion in stolen funds.
Legal Issues:
Whether operating a “mixer” constitutes an unlicensed money transmitting business (MTB) under U.S. law, and whether the founders had the requisite control or custody of funds.
Whether the founders knowingly facilitated money-laundering and sanctions violations.
How to treat decentralized technology: if the protocol is open-source, without a traditional “company” controlling it, what does “control” and “knowledge” mean?
Outcome:
In August 2025, Roman Storm was convicted of one count of conspiracy to operate an unlicensed money-transmitting business (which carries up to 5 years). He was not convicted on the more serious charges of money-laundering and sanctions violations (jury deadlocked on those). WIRED+2IRS+2
The U.S. Treasury (OFAC) and DOJ had earlier designated Tornado Cash for sanctions, and charged the founders. Department of Justice+2Department of Justice+2
Significance & Legal Challenges Illustrated:
This case showcases how prosecutors are applying conventional laws (money-transmitting business, money-laundering) to DeFi protocols.
The deadlock on the money-laundering counts signals the difficulty of proving intent/knowledge when the service is decentralized.
It also raises major questions: when is protocol simply code vs when is its creator liable? What about open-source contributions?
Jurisdictional and regulatory uncertainty: mixers are often global, nodes and users worldwide; proving the case required tracing funds, obtaining cooperation, linking actors.
The case may set precedent for how far enforcement will go against DeFi infrastructure rather than just users.
Case 2: NFT “Rug Pull” in DeFi Markets – U.S. Indictment (Florida, 2024)
Facts: Two individuals (Devin Alan Rhoden and Berman Jerry Nowlin Jr.) were indicted by U.S. prosecutors for a DeFi-style “rug pull” in NFTs. They minted two NFT collections (“UndeadApes” and “Undead Lady Apes”) on the Solana blockchain in March 2022, manipulated the market, then laundered proceeds through the Solana and Ethereum blockchains, and engaged in wire fraud and money-laundering. Department of Justice
Legal Issues:
Whether a DeFi/NFT mint plus market manipulation constitutes wire fraud / fraud in investment context.
How to trace the proceeds and apply money-laundering statutes in a decentralized chain environment.
Whether the NFTs constituted securities or investment contracts under U.S. law.
Outcome:
The U.S. Attorney’s Office in Florida charged the two with conspiracy to commit wire fraud and money-laundering (maximum 5 years each). Department of Justice
Significance & Legal Challenges Illustrated:
This case demonstrates that DeFi/NFT manipulations are coming under traditional fraud laws, even though the underlying instruments are novel.
The prosecution had to trace flows across blockchains (Solana and Ethereum) and translate blockchain evidence into admissible forensic proof.
It illustrates how DeFi’s rapid innovation creates new modes of fraud, but prosecutors still rely on existing statutes (wire fraud, money-laundering).
Challenges: linking pseudonymous addresses to real actors; proving the rug-pull was intentional; handling cross-chain transfers.
Case 3: Use of DeFi Protocols in Money-Laundering and Exploits (Various)
Facts: Academic studies (and preliminary enforcement) show that many DeFi protocols are exploited: rug pulls, smart-contract vulnerabilities, flash-loan attacks, mis-use of token contracts, and large scale laundering. For example, one study mapped 1,141 crime events (2017-2022) in DeFi, estimating at least US$30 billion loss in crypto assets across DeFi and CeFi. arXiv+1
Legal Issues:
Many of these events are not yet criminally prosecuted (or publicly reported) but highlight the enforcement gap: large losses but fewer prosecutions.
Identifying legal frameworks: what statute to use when a smart contract is exploited? What about the developer or deployer’s liability?
Allocation of liability: DeFi protocols may lack a central operator; users may be at fault; smart contract bugs may lead to passive parties suffering.
Outcome:
While many incidents occur, relatively few high-profile prosecutions exist (compared to volume of events). Enforcement is catching up.
Significance & Legal Challenges Illustrated:
The gap between scale of crime and prosecution becomes clear.
It underscores the challenge for prosecutors: technology keeps evolving faster than regulatory / legal adaptation.
The evidence burden is heavy: blockchain traceability helps, but linking nodes/addresses to persons and proving intentional wrongdoing remains difficult.
Some DeFi protocols argue they are simply code; thus liability arguments for developers/operators remain unsettled.
Case 4: Regulatory Sanctions & DeFi – Legal Framework Uncertainty
Facts: In the Tornado Cash-related context, a U.S. appeals court ruled that the sanction by the U.S. Treasury Department (OFAC) against Tornado Cash smart contracts exceeded its authority under the relevant statute, because the smart contracts did not constitute “property” under the statute. Reuters+1
Legal Issues:
Whether smart contracts (code) or decentralized protocols can be treated as “property” or legal persons for sanction/enforcement purposes.
The extent to which regulatory enforcement (via sanctions) can supplant criminal prosecutions in DeFi contexts.
The risk of “regulation by prosecution” vs clear legislative frameworks.
Outcome:
The court held that OFAC acted beyond its authority in that case; this creates uncertainty in enforcement.
Significance & Legal Challenges Illustrated:
This case underscores that legal frameworks are not yet tailored for DeFi and smart-contract mechanisms; existing laws may not cleanly apply.
It raises defence arguments: innovators may argue they simply publish code and do not control use. The regulatory/legislative gap gives room for contestation.
It shows that even when wrongdoing is evident (large laundering flows), the procedural/statutory basis for enforcement may be challenged.
Case 5: Emerging Enforcement Themes – DeFi Developers & Infrastructure Providers
Facts: Beyond mixer examples, enforcement agencies are signalling potential liability for DeFi infrastructure providers, protocol developers, and relational actors (relayers, decentralized exchange operators). For example, the DOJ’s National Cryptocurrency Enforcement Team has issued guidance that DeFi services must assess whether they are engaged in money transmission, implement AML/CTF programs, and consider sanctions risks. Skadden+1
Legal Issues:
Whether a DeFi developer or infrastructure provider (who does not hold custody of user funds) may face criminal liability for money-transmitting violations or aiding money-laundering.
Whether “code authorship” or “protocol deployment” constitutes an act of facilitation or knowingly enabling illicit conduct.
The question of mens rea: did the developer know illicit conduct would occur; did they have reasonable expectation of misuse; what obligation did they have?
Outcome:
While full-scale criminal convictions in all categories are still limited, the Tornado Cash case above is a major step. Regulatory notices and enforcement priorities are shifting.
Significance & Legal Challenges Illustrated:
This indicates a major shift: prosecutors are looking beyond users to protocol creators and infrastructure providers. That raises novel defence and constitutional issues (free speech, code as speech, liability of software).
It highlights how legal standards (custody, control, knowledge) will be re-examined in the DeFi context.
It also underscores the compliance burden that DeFi infrastructure will face: e.g., KYC/AML programs, registration with regulators, disclosures – many of which are not currently built-in.
Summary of Key Takeaways
Existing laws are being stretched to cover DeFi crimes (money-laundering, unlicensed money transmission, fraud) but are often not perfectly fitted.
Proving liability in DeFi is especially challenging: identifying persons, proving knowledge/intent, establishing custody/control of funds, showing protocol operator responsibility.
Decentralization challenges traditional notions of control and responsibility: if there is no central operator, who is liable? The developer? The protocol governance? The user?
Jurisdictional fragmentation complicates investigations: chain flows cross borders, nodes/global, evidence in different jurisdictions, legal cooperation needed.
Defence and policy concerns: innovation, privacy, open-source code, decentralization create arguments that prosecution may chill legitimate development; courts/regulators must balance these.
Enforcement is increasing, but the gap between the scale of DeFi crime and prosecutions remains wide. That means many regulators and prosecutors are still developing capacity, strategies, and legal theory.
Future legislative/regulatory action likely needed: more tailored statutes for DeFi, clearer registration/AML obligations for DeFi infrastructure, dedicated legal frameworks for smart contracts, decentralized organizations, hybrid control models.
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