Introduction

Tokenization is the process of creating an asset, or a digital record of an asset, by issuing a blockchain-based token. It is gaining momentum at institutional and governmental levels[1] by transforming access to public and private investments in a manner expected to benefit all industry participants. As the financial services industry embraces digital transformation, tokenization gives private fund managers new tools to streamline operations, reach wider investor bases, and create value beyond what legacy processes allow.[2]

With the SEC, Nasdaq, and leading asset managers like Hamilton Lane, Franklin Templeton, and KKR focusing on scalable blockchain infrastructure, tokenization is now widely viewed as a lever for growth, investor engagement, and operational agility.

Tokenization in the Context of Funds

Tokenization has uses in all industries, but it has been adopted first and foremost in finance. In the context of funds, the technology addresses major pain points inherent to traditional structures, as we explain in “The Business Case for Fund Tokenization” below. 

Not all tokenized assets are securities. For example, Bitcoin is a tokenized asset that is not a security, but it is currently market-valued at more than $100,000 per unit. That said, there are two types of tokenized securities: (i) a digital representation of a traditionally issued security and (ii) a natively issued digital asset which is the security where permitted by applicable law.[3]  In the first case, the token is an on-chain record of a security created (and whose ownership is recorded and transfers of which are recorded) off-chain. In the second case, the token itself is the security. 

In the context of tokenized private funds, fund interests typically are the first type of tokenized security. They are issued pursuant to a private placement memorandum using Securities Act of 1933 registration exemptions. They are subsequently: (1) custodied through the traditional intermediated broker-dealer, exchange, clearing agency, and transfer agent system, or (2) self-custodied directly by the investor in a non-intermediated manner.[4] Tokenization transforms fund interests into digitally transferable tokens recorded on a secure blockchain, potentially enhancing the fund’s ability to facilitate trading in its securities directly on a peer-to-peer basis. It is the use of blockchain technology that facilitates secure, speedy, peer-to-peer transfer. 

In practice, tokenized fund interests are converted into unique digital tokens recorded on a blockchain such as Stellar, Ethereum, or Avalanche. Each token serves as a digital stand-in for a traditional fund unit and carries the same legal and economic rights, including claims on distributions, voting rights, and any relevant restrictions or compliance rules. Rather than handling investor records through traditional spreadsheets or paper processes, blockchain technology manages ownership and transaction data on a secure ledger visible to authorized parties.  These immediate advantages of tokenized securities have significantly contributed to the swift adoption of tokenization within the fund industry.

Why now? The technology is ready, the regulatory landscape is following, and the business upside is tangible. Financial institutions and investors want faster, easier onboarding, seamless digital user experiences, and the potential for broader participation in alternative assets. The benefits of tokenization in capital markets are expected to increase exponentially with the increasing number of institutional participants.[5] At the same time, blockchain technology’s ability to support demand for transparency, accurate recordkeeping, and faster settlement are earning positive marks from the investment community and regulators.[6]

The Business Case for Fund Tokenization 

The existing and immediately anticipated business uses of tokenization include the following: 

1. Operational Efficiency and Cost Savings

A direct digital ledger can reduce administrative overhead. Capital calls can be facilitated through programmable smart contracts, enabling instantaneous post-trade reconciliation.[7] This translates to agile fund launches, quick investor funding and a favorable impact on the bottom line.  When blockchain networks are used to maintain ownership records, the securities can serve as collateral in derivatives transactions, eliminating the need for investors to redeem the securities and then post cash as collateral.[8]

2. Investor Experience and Broader Access

Digital onboarding, incorporating AML/KYC protocols where applicable, enables managers to access a growing pool of investors seeking a streamlined, app-like experience. Tokenized feeder funds from Hamilton Lane and KKR/Securitize, for instance, are already drawing investors that would have been closed out of institutional private market strategies just a few years ago.[9]

Under appropriate circumstances, tokens also allow for lower minimum investments, fractionalized interests, and programmatic enforcement of eligibility. This provides the opportunity for a larger funnel for global capital, especially as alternative trading systems and tokenized platforms continue to mature.

3. Transparency, Real-Time Reporting and Auditability

Tokenized assets allow fund managers to get real-time insights into investor activity and a built-in audit trail for all transactions. LPs can check positions at any time. Stakeholders can monitor fund performance and operations with real-time access to data that previously required extensive reporting, scheduled calls, and manual administrative work.

4. Speedy Settlement

Tokenized securities can serve as a means of settlement for transactions involving other digital assets, including other tokenized assets, across peer-to-peer and broader on-chain transactions. This capability facilitates faster trade settlement and contributes to greater market efficiency. Where these assets are on the same network, near-instant and simultaneous settlement is possible.[10] Instead of the current settlement cycle of “T+1,” tokenization can move us to instant settlement or “T+0,” potentially also reducing counterparty risk because the trades are pre-funded.[11] 

Commercial Use Cases

Multiple examples of institutional adoption include the following:

• Hamilton Lane and Securitize: Due to the ability to maintain fractionalized interests, tokenized Hamilton Lane funds allow for potentially lowered barriers for accredited investors to access private credit, private equity, and secondaries, while leveraging programmatic fund administration and digital compliance for efficiency.[12]
• KKR, Securitize, and Avalanche: This was the first U.S. digital access to a KKR healthcare growth fund, using tokenized interests to offer institutional-quality products via digital interface.[13]
• Franklin Templeton: This is a blockchain-enabled money market fund that demonstrates that digital ownership and transferability can operate seamlessly within a traditional mutual fund structure.  In this fund, the transfer agent’s blockchain-integrated system is distinguishable from distributed ledgers/blockchains that lack access controls and other restrictions on which permissionless tokens are issued and transferred.  Unlike permissionless tokens, this fund’s shares recorded on the transfer agent’s blockchain-integrated system are designed to be under the unilateral control of the transfer agent. The transfer agent is responsible for maintaining the accuracy of share ownership on any blockchain network used by the blockchain-integrated system and can correct errors and unauthorized transactions in, and limit the transferability of, shares.[14]
• Nasdaq: The exchange is working with the SEC to permit tokenized versions of listed securities and products to trade and settle on blockchain, allowing greater liquidity, faster settlement and standardized market access.[15]
• Stablecoins: This is the first application of tokenization to achieve scale, demonstrating the efficiency and accessibility improvements that can arise from the use of blockchain-based networks.[16]

The developments mentioned above are only the beginning of what lies ahead for tokenization.  In his “Keynote Address at the Crypto Task Force Roundtable on Tokenization,” SEC Chairman Paul Atkins compared the migration to on-chain securities with its potential to remodel aspects of the securities market by enabling entirely new methods of issuing, trading, owning, and using securities to the transition of audio recordings from analog vinyl records to cassette tapes to digital software decades ago.  “For example, on-chain securities can utilize smart contracts to transparently distribute dividends to shareholders on a regular cadence. Tokenization can also enhance capital formation by transforming relatively illiquid assets into liquid investment opportunities. Blockchain technology holds the promise to allow for a broad swath of novel use cases for securities, fostering new kinds of market activities that many of the Commission’s legacy rules and regulations do not contemplate today.”[17]

Risk and Regulatory Realities

No innovation comes without risk. Regulatory compliance remains non-negotiable. During his tenure as head of the SEC during the last administration, Gary Gensler adopted an aggressive “regulation-by-enforcement” approach towards the crypto industry by insisting that most digital tokens are unregistered securities and that crypto exchanges should be regulated under existing securities laws. This view was borne out by a surge of enforcement actions, which have been dismissed or settled on industry-favorable terms in the new administration.  While uncertain regulatory treatment of many tokenized assets continues, the current administration and the agencies have signaled openness and enthusiasm for digital asset innovation, adding momentum but also drawing greater regulatory focus.[18]  Today’s environment is defined less by roadblocks and more by this search for clarity in that the SEC and FINRA have made it clear that blockchain technology is permitted so long as offerings comply with securities laws when those laws apply.[19] This is also true in the area of tokenized securities.

The enactment of the GENIUS Act and progress on the CLARITY Act have begun to establish a comprehensive and definite regulatory framework for digital assets as work continues on Capitol Hill.[20]  

Even without legislation, there have been helpful regulatory developments specifically relating to tokenization, including answers to Frequently Asked Questions related to blockchain issues clarifying that a registered transfer agent may utilize distributed ledger technology as its official Master Securityholder File, as defined under Exchange Act Rule 17Ad-9(b), without the need to maintain a duplicate or “digital twin” of its master securityholder file exclusively off-chain.[21] Similarly helpful is the SEC’s withdrawal of the Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities.[22] Further enhancement to regulatory clarity in the area of tokenization includes the recently stated view of the SEC Division of Trading and Markets that a registered transfer agent may utilize distributed ledger technology as its official Master Securityholder File in satisfaction of the transfer agent rules[23] and that a broker-dealer can establish possession or control of a crypto asset security (including a tokenized security) in satisfaction of the Broker-Dealer Customer Protection Rule.[24] 

While further regulatory improvements are welcome and are expected, including in the area of custody and trading, the integration of the already existing compliance frameworks into digital processes should continue to enable managers to expand the opportunities already available to them. On the other hand, issuers looking to innovate are expected to ensure that tokens accurately reflect compliant ownership interests, disclosures are thorough, and operational risks such as cybersecurity, custody, and data reconciliation are effectively managed.

How Fund Managers Can Get Started

While the benefits are numerous and many yet unknown, and the costs are undoubtedly significant even with the improving regulatory environment, steps that fund managers can consider to better align themselves with industry leaders in the area of tokenization include these:

• Educate and Assess: Run team training sessions on tokenization and review which existing fund processes (like subscriptions and redemptions) could benefit from going digital.
• Pilot a Tokenized Vehicle: Select an existing fund or launch a new feeder fund, select a blockchain provider with financial experience, and work with a transfer agent to execute investor onboarding and token issuance.
• Expand with Market Readiness: Track tokenized secondary market developments, prepare to digitize legacy investor records, and set clear steps for rolling out tokenization to other fund vehicles as infrastructure matures.
• Stay Ahead Internationally: If targeting investors in Europe, understand and plan for MiCAR requirements and cross-border digital compliance early.

We can help fund managers tokenize fund interests using transfer agents, broker-dealers, ATSs (such as Securitize), custodian banks, payment banks, and other market participants that are active in this domain, some of which are our clients.   

Conclusion

Tokenization does more than update back-office systems for fund managers. It enables access to new markets, strengthens investor relationships and positions fund managers’ business for real, scalable international growth. While compliance remains essential, the real impact is on how business leaders can adopt secure, regulatory-friendly digital models to boost efficiency, expand their clientele, and stay competitive as the industry evolves. For teams ready to take a practical, test-and-learn approach, the age of tokenized funds has already begun.  We expect to see continued regulatory focus on making the participants in these endeavors feel confident that the United States is a safe environment in which to launch and build blockchain-enabled financial services solutions for the long term.[25]

Digital Asset Treasury Companies (“DATCOs”) are a new class of public companies whose treasuries hold significant amounts of digital assets on their balance sheets. As distinguished from a public company that uses digital assets only incidentally, or not at all, a DATCO’s business plan is to acquire and manage digital assets (like BTC or ETH) as “permanent capital.” 

This model gained prominence after MicroStrategy’s 2020 pivot, when it converted $250 million of corporate cash into Bitcoin, dramatically boosting its stock price and inspiring others. By September 2025, public DATCOs collectively held over $100 billion in digital assets, and more than 200 U.S. companies had announced “digital asset treasury” strategies, seeking to raise an estimated $102 billion to buy crypto for their balance sheets. 

This report covers two key aspects of the U.S. legal landscape for DATCOs:

1. Formation Structures: How DATCOs are formed or taken public – including traditional IPOs, SPAC mergers, reverse mergers, PIPE financing, and emerging techniques like “phased” acquisitions.
2. Securities Law Issues: Core U.S. legal considerations in forming a DATCO, covering Securities Act of 1933 (“Securities Act”) registration requirements, exemptive relief and lawful avoidance of classification as an investment company under the Investment Company Act of 1940 (the “Investment Company Act”).

We will focus exclusively on U.S. federal securities law and regulatory developments and will not cover state law or non-U.S. legal regimes in this report. We also will ignore issues arising under the Commodity Exchange Act of 1936 after noting in passing that a properly structured DATCO can lawfully avoid regulation as a “commodity pool,” a “commodity pool operator” or a “commodity trading advisor” under that Act.

I. Formation Structures for DATCOs: IPOs, ETPs, SPACs, PIPEs, Reverse Mergers, and Phased Acquisitions

DATCOs are emerging through various transaction structures that bring a crypto-focused company into the public markets or repurpose an existing public company into a crypto asset vehicle. Each path has distinctive legal implications. Here is an overview of common formation structures for DATCOs, with recent examples of each:

The table above demonstrates that no path to becoming a DATCO is “low-regulation.” A traditional IPO offers the most transparency and market rigor, but requires the company to already have a compelling track record or narrative. ETPs must navigate the listing requirements of exchanges and SEC requirements peculiar ti crypto assets. SPAC mergers soared in popularity for crypto firms in 2020–2021 as they provided a faster, story-driven route to public markets. By early 2022, various crypto-focused SPAC deals had closed (e.g., Diginex/Eqonex, Cipher Mining via Good Works, Bakkt via VPC, Core Scientific via PDAC), and many more were announced (Circle, eToro, Bullish, etc.). But SPACs faced high redemption rates and, as the SEC tightened rules (proposed in March 2022) to curb rosy projections and sponsor conflicts, several planned crypto SPACs were delayed or canceled. 

The SEC issued accounting bulletins and exchanges issued seasoning requirements after a wave of Chinese company completed reverse mergers a decade ago. The SEC again warned in early 2018 that it would scrutinize companies that suddenly pivot to blockchain through business combinations or name changes. While a reverse merger can be executed quickly, it will not avoid SEC scrutiny. Indeed, a “Super 8-K” filing with full Form 10 information is required within four business days of closing, assuring that the combined entity will disclose essentially the same information as in a registered offering. 

PIPEs are more of a financing tool for public companies than a standalone path to going public, but they have been critical for DATCOs. Many companies adopted the “MicroStrategy playbook.” That playbook is to go public or use an existing public vehicle; next, raise additional funds through PIPE or debt offerings; then buy large amounts of crypto. Strategy’s use of convertible note PIPEs allowed it to buy billions of dollars of Bitcoin quickly, effectively leveraging public markets to create a crypto investment fund within a corporation. Other companies, like Marathon Digital Holdings, similarly sold shares “at-the-market” to fund Bitcoin accumulation. 

These transactions are lawful if properly exempt or registered, assuming the disclosure is materially accurate and complete, but they underscore how a publicly traded stock can be a continuous capital machine for crypto purchases. In late 2024 and 2025, the SEC reportedly sent letters to more than 200 companies that had jumped on the crypto treasury bandwagon, reminding them of Regulation FD obligations, after suspicious trading patterns suggested that some PIPE investors might have traded on advance knowledge of forthcoming Bitcoin purchases. 

Finally, “phased acquisitions” or minority investment strategies for DATCO formation gained traction in 2025 as crypto investors sought faster deals amid SPAC fatigue. Taking a non-controlling stake in a public company can be faster and less expensive than a traditional reverse merger since it avoids an immediate shareholder vote and extensive SEC review. The public company can effectively become a crypto ETF in corporate form. It can raise cash via PIPE and deploy it into crypto assets without the regulatory approval that an ETF would require. 

This innovative approach hinges on trust and contractual right, because the crypto investor must be comfortable that the public company’s board will cooperate in executing the treasury strategy and potentially, down the line, approve a merger or other change of control. It also raises unique fiduciary questions. Specifically, the public company board must determine that concentrating treasury assets in crypto assets is in the best interest of all shareholders, not just the new PIPE investors. 

In sum, U.S. securities laws do not provide any shortcut around disclosure and investor protection simply because the asset involved is crypto. Whether a DATCO goes public via IPO, SPAC, or stealthy PIPE, the SEC mandates robust, truthful disclosure at each step.

II. Key Securities Law Issues in Forming and Operating a DATCO

Forming a DATCO implicates several areas of U.S. securities law beyond the basic mechanics of selling stock to investors. Prominent legal considerations include: (A) Securities Act registration vs. exemption for crypto-centric offerings; (B) the Investment Company Act and the need to avoid inadvertently becoming an unregistered investment fund; and (C) broker-dealer or exchange regulatory issues if the DATCO’s activities go beyond passive holding. 

A. Securities Act Registration and Exemptions

Under the Securities Act, any offer or sale of securities (company stock, security tokens, etc.) must either be registered with the SEC or qualify for an exemption. When creating a DATCO, this issue arises in multiple contexts:

• IPO or Direct Listing: A full registration statement (Form S-1) is required, with all the attendant disclosures (business description, risk factors, MD&A, audited financials, etc.). For a crypto-focused company, this means up-front scrutiny by the SEC of its business and any token holdings. ETPs need support at the SEC and otherwise from the stock exchange targeted for listing.
• SPAC Mergers: SPAC deals use a Form S-4 (or F-4) registration statement for the issuance of new shares to the target’s owners and a proxy solicitation for the SPAC’s shareholders. Thus, even though the target company (the crypto business) doesn’t do an IPO, it effectively undergoes an SEC review via the S-4 filing. Material information about the target must be disclosed. Notably, financial projections included in de-SPAC proxy filings are not sheltered by the Private Securities Litigation Reform Act safe harbor if the SPAC is considered a “blank check company” which historically enjoyed a safe harbor for forward-looking statements. The SEC’s 2022 proposal would explicitly remove safe harbor protection for SPAC merger projections, treating the de-SPAC akin to an IPO. In practice, crypto companies attempting to go public via SPAC found themselves having to extensively register and justify their business models.
• Reverse Mergers and Phased/PIPE Deals: These typically rely on exempt offerings. In a reverse merger, the issuance of shares by the public shell to the private company’s shareholders is usually accomplished under Section 4(a)(2) (a non-public offering) or Rule 506 of Regulation D, since the recipients are a small group of sophisticated insiders (the private company owners). Likewise, a PIPE sale of shares to institutional investors will rely on one of those exemptions. Therefore, at the moment of the transaction, no Securities Act registration is filed. But the combined or recapitalized company often files a Form S-3 or S-1 for resale registration soon after, in order to register resale of the restricted shares by those investors. For example, if a DATCO raises capital via PIPE to buy Bitcoin, the PIPE investors will insist on registration covenants so they can eventually resell their shares in the open market.

Importantly, even when initial issuance is exempt, anti-fraud provisions still fully apply (SEC Rule 10b-5). The company must not make materially false or misleading statements in offering documents or press releases about the transaction. In the rush of 2021’s crypto pivot trend, the SEC was concerned that some companies might tout plans to purchase digital assets without robust disclosure, purely to spike the stock. The SEC has authority to police securities fraud even if no registration statement is filed.

In summary, most DATCO formations eventually involve an SEC registration, either directly (on an S-1 or an S-4) or indirectly (Super 8-K plus resale S-3). Even novel routes like phased acquisitions do not fully escape the SEC’s reach. They simply postpone it. Regulators have signaled that the substance, not the form, governs. As former SEC Chair Gensler put it in a 2023 speech: “When investors put their money at risk, it’s the economic realities of the investment that matter,” not what jargon or structure is used. Current SEC Chairman Atkins also has warned market participants that the SEC will continue to scrutinize the economic realities of crypto assets. If a DATCO raises money by selling stock to to invest in crypto, then the SEC expects compliance with the spirit of the securities laws, meaning full and fair disclosure to investors about the risks of that investment. 

B. Investment Company Act Considerations

One trap for unwary DATCOs is the Investment Company Act, which regulates companies engaged primarily in the business of investing, reinvesting or trading in securities. A company that falls within the Act’s definition of “investment company” must either register as an investment company (subject to onerous regulation) or else fit within an exemption. Traditional operating companies generally avoid Investment Company Act issues because they are primarily engaged in some business other than investing, reinvesting or trading in securities. This can be determined by examining the sources and amounts of their income and assets. 

A company that holds itself out as being primarily engaged in a business whose assets are, and whose income is derived from, non-security commodities (such as BTC or ETH) is not an investment company unless it is an inadvertent investment company. An inadvertent investment company is a company that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities worth at least 40% of its total assets (excluding government securities and cash) on an unconsolidated basis. Two examples will illustrate the application of this test to DATCOs: 

• In the first case, consider a DATCO 35% of whose treasury holdings are treasury assets that are correctly classified as investment contracts or other securities. That DATCO is not an inadvertent investment company. Its management has nothing to be concerned about relative to the Investment Company Act as long as the amount of treasury holdings that are securities stays below 40%. Again, this assumes that it is not holding itself out as an investment company or that it has an operating business other than securities investment in which it is primarily engaged – ideally, both assumptions will be correct.
• In the second case, consider a DATCO 45% of whose treasury holdings are digital assets that are correctly classified as investment contracts or other securities. That DATCO is required to register with the SEC as an investment company regardless of how it holds itself out to the public, unless an exemption applies. Possible exemptions are beyond the scope of this report. Failure to register with the SEC as an investment company when required to do so has onerous consequences, including SEC enforcement action and the voiding of contracts. The classification of a given digital asset as a security, or not, is a case-by-case determination, and the SEC has been reluctant to make determinations with respect to most digital assets. Thus, a DATCO must carefully monitor its asset composition and obtain competent legal advice regarding the classification of its digital assets.

To address these concerns, DATCOs can employ these strategies:

• Retain some operational business: Many a high-profile DATCO has an operating segment alongside its treasury. Strategy still runs an enterprise software business, for example, albeit one now dwarfed by its Bitcoin holdings in terms of the value of its assets. This enables Strategy to assert correctly that it is an operating company, not an investment company. This is analogous to how some companies in the past maintained a small operating business so as to avoid being deemed an investment trust.
• Rely on Rule 3a-2 for Transient Status: In case a company finds itself over the 40% threshold temporarily, the Investment Company Act does provide a one-year safe harbor  under Rule 3a-2 for transient investment companies, allowing them a grace period within which to return to compliance. A company could invoke this rule if, for example, a spike in the market price of its treasury holdings that are securities (including crypto assets that are securities) suddenly drives the value of those holdings above 40% of its total assets. In such a case, it then has a year to rebalance or change its business mix.
• Pursue an Exemption or No-Action Relief: In theory, a company could seek SEC exemptive relief to operate as a hybrid special-purpose vehicle. This would be a complex and novel application. To date, no public DATCO has gone this route. But the Atkins SEC is open for business and we expect applications for novel arrangements to be made. They would entail conditions akin to an ETF, like secure custody, independent directors, limits on leverage, etc.
• Own Digital Assets That Are Highly Likely to Be Correctly Classified as Non-Security Commodities: There are thousands of digital assets. We have studied and expressed legal conclusions about nearly 100 of them. Some are securities. Others are not. Many are somewhere in-between. That determination is fact-intensive, and the result can vary over time. A DATCO with savvy management will only invest in digital assets in which it has a high level of confidence that less than 40% of the total assets of the company are securities (crypto assets or otherwise). Expert legal counsel can help management make that determination. 

The CLARITY Act that is pending in the Senate will, if and when enacted, help clarify which digital assets are, and which are not, securities. Until then, and even afterward, DATCOs will need to be structured and operated within the bounds of existing case law, authoritative interpretations and regulatory guidance. 

On August 6, 2025, after a four-week trial in the Southern District of New York (S.D.N.Y.), the jury in the Tornado Cash case reached an impasse. While it found Roman Storm, the founder of a crypto mixing service known as “Tornado Cash,” guilty of conspiracy to operate an unlicensed money transmitting business, it was unable to reach a verdict on the more serious counts — conspiracy to commit money laundering and conspiracy to violate sanctions. The split verdict has received a lot of press coverage, but questions remain as to what any of this really means.

What are Mixers?

There are often discussions about the appeal of anonymity in cryptoassets associated with public blockchains because the assets are transferred on-chain from one pseudonymous address to another. This is unlike bank and brokerage accounts, which are tied to real names. As a result, many people mistakenly think that cryptoasset transactions are private, missing that, for Bitcoin or Ethereum, for example, all transactions are logged on a public blockchain ledger, where anyone with internet access can see the history. Even without names, it is possible to identify the individuals tied to many cryptoasset transactions because of information like IP addresses and exchange data. But mixers are designed to prevent identification.

The purpose of a cryptoasset mixer is to obscure the origin and destination of cryptoassets, assuring privacy and anonymity. A mixer pools cryptoassets sourced from multiple users’ wallets, employing an algorithm to randomly redistribute the assets over a period of time in non-uniform amounts and unpredictable intervals to new wallet addresses. In essence, a variety of cryptoassets sent by many sellers are delivered to many buyers, but no one is certain who sold what to whom because the assets were pooled before they were delivered.

Tornado Cash is a mixer developed in 2019, with the project touting its ability to provide financial privacy to digital asset users and their transactions. It is an open-source, decentralized protocol that utilizes zero-knowledge proofs (also known as ZK proofs or ZKPs) to allow for the verification of transactions without revealing the underlying data (i.e., who the sender and recipient are). It relies on immutable smart contracts, which are essentially one-party contracts between users and the platform, for the movement of assets. As a result, and as part of its model as an intermediary, Tornado Cash does not take custody of any funds. When a user deposits a cryptoasset, Tornado Cash generates a cryptographic note that can later be used to withdraw the same amount of value to a different address, which effectively breaks the traceable link between the sender and the recipient. Put another way, Tornado Cash has no control over the process.

Can Mixers Be Regulated? 

With the privacy and anonymity that mixers like Tornado Cash provide, there are significant regulatory questions as to how mixers fit into existing anti-money laundering (AML) and know-your-customer (KYC) rules. These rules are important safeguards against sanctions violations — a matter of national security. Tornado Cash quickly got regulatory attention. 

In August 2022, the Office of Foreign Assets Control (OFAC) of the U.S. Department of Treasury designated Tornado Cash, itself, as a sanctioned entity, alleging it helped launder US$7 billion worth of crypto assets in three years (2019 – 2022).[1] As part of its designation, OFAC alleged that North Korea’s state-funded hacking organization, the “Lazarus Group,” used the platform to launder US$600 million that it stole by hacking Axie Infinity. OFAC’s designation prohibited transactions to or from Tornado Cash, froze all Tornado Cash assets, and banned the mixer’s code. 

But Tornado Cash alleged that OFAC exceeded its statutory authority. Lawsuits followed from Tornado Cash investors and crypto industry advocacy groups in multiple circuits, challenging the foundation of the designation and sanctions based on the U.S. Constitution and the Administrative Procedure Act. 

In November 2024, the U.S. Court of Appeals for the Fifth Circuit (Fifth Circuit) found in favor of Tornado Cash.[2] It held that “Tornado Cash’s immutable smart contracts (the lines of privacy-enabling software code) are not the ‘property’ of a foreign national or entity.” The court concluded that the plain meaning of the term “property” requires something “capable of being owned.” In this case, the smart contracts at issue are “just code software” deployed by individuals without contractual counterparties. Hence, they are not controlled by anyone and cannot be blocked under the International Emergency Economic Powers Act.

In March 2025, in an early administrative action by the strongly pro-crypto Trump Administration, OFAC officially removed Tornado Cash from its economic sanctions list based on an administrative “review of the novel legal and policy issues raised by use of financial sanctions against financial and commercial activity occurring within technology and legal environments.”[3] 

At the time, litigation was still pending in the U.S. Court of Appeals for Eleventh Circuit (Eleventh Circuit) in a case brought by crypto industry advocacy groups.[4] The parties recognized that the removal of Tornado Cash from the sanctions list rendered the litigation moot. The Eleventh Circuit granted a joint motion to dismiss the litigation between the advocacy groups and OFAC in July. 

As the Fifth Circuit held, OFAC “overstepped its congressionally defined authority” when it listed Tornado Cash as a sanctioned entity. 

This is consistent with the April 7, 2025, Department of Justice (DOJ) Memorandum from Deputy Attorney General Todd Blanche (Blanche Memorandum), which set forth an end to the “regulation by prosecution” strategy of the prior administration, acknowledged that the DOJ is not a digital assets regulator, and set forth a list of charging considerations for matters involving digital assets.[5] That list included holding accountable individuals who “use digital assets in furtherance of other criminal conduct…”

This approach was further confirmed in a speech given on August 21, 2025, by Matthew Galeotti, Acting Assistant Attorney General of the DOJ’s Criminal Division at a crypto lobbyist meeting, the American Innovation Project Summit in Jackson, Wyoming.[6] There, Galeotti confirmed that federal prosecutors will no longer pursue regulatory violations in cases involving digital assets — like unlicensed money transmitting under 1960(b)(1)(A) or (B) — in the absence of evidence that a defendant knew of the specific legal requirement and willfully violated it. In limited circumstances, he acknowledged that cases may be brought under Section 1960(b)(1)(C), which prohibits the transmission of funds that the defendant knows are derived from a criminal offense or are intended to be used to support unlawful activity. As Galeotti summarized, “developers of neutral tools, with no criminal intent, should not be held responsible for someone else’s misuse of those tools.” 

What Were the Tornado Cash Criminal Charges?

On August 23, 2023, S.D.N.Y. announced an indictment against Roman Storm and Roman Semenov, two of the three founders of Tornado Cash, with charges for conspiracy to commit money laundering, conspiracy to commit sanctions violations, and conspiracy to operate an unlicensed money transmitting business.[7] The charges were announced when Tornado Cash was an OFAC-sanctioned entity and prior to the Blanche Memorandum. Prior to this indictment, there was a general market view that non-custodial platforms would not trigger U.S. Treasury Financial Crimes Enforcement (FinCEN) registration and compliance obligations. This 2023 indictment called that view into question. 

On May 15, 2025, following the Blanche Memorandum, the U.S. Attorney’s Office filed a letter in the United States v. Storm case, trimming the charges. In the letter, the prosecutors announced that they would not proceed with the charge that Storm conspired to operate a money transmitting business while failing to register as a money service business with FinCEN, in violation of 18 U.S.C. § 1960(b)(1)(B). The same letter confirmed, consistent with the Blanche Memorandum, that the U.S. Attorney’s Office would proceed to trial on the claim that Storm conspired to violate 18 U.S.C. § 1960(b)(1)(C) by operating an unlicensed money transmitting business in a manner that “otherwise involves the transportation or transmission of funds that are known to the defendant to have been derived from a criminal offense or are intended to be used to promote or support unlawful activity….”

Hence, prior to trial, the trimmed charges made clear to the market that the lack of registration as a money service business is effectively decriminalized. However, any effort by a non-custodial platform to facilitate the movement of criminal proceeds is not and will not be prosecuted. 

What Happened at Trial?

The case then proceeded to trial this past summer. The government focused its case on the purported knowledge that, as a founder of Tornado Cash, Storm knew or should have known that the platform was being used by criminals to conceal their illegal gains (promoting or supporting unlawful activity). Prosecutors questioned why Tornado Cash failed to implement certain safeguards in order to deter criminals and instead leaned into the idea that Tornado Cash could be used for money laundering purposes. The theme of the prosecution was consistent with the tone of the Blanche Memorandum — that there is a need to protect digital assets and their owners and to prevent criminal activity and cyber-terrorism.

The defense focused on Tornado Cash as a privacy tool with a legitimate market purpose, contending that most of the funds that passed through the Tornado Cash platform were unrelated to alleged criminal activity. Emphasizing the elements of the charges, defense counsel attacked the intent requirement — merely because a platform could be used to launder money does not mean that Storm willfully conspired to commit a crime, analogizing it to an ephemeral messaging application. There was also, unsurprisingly, a dispute about the nature and effectiveness of the safeguards that were implemented by Tornado Cash. 

The jury deliberated for almost a week after the four-week trial concluded. It ultimately deadlocked on the two more significant charges, resulting in a partial mistrial. There is no resolution to the question of criminal liability for the creators and developers of privacy-preserving technologies whose platforms are utilized by third-parties who separately conduct illicit activities. The jury did convict Storm on one count of conspiracy to operate an unlicensed money transmitting business in connection with Tornado Cash. 

Judge Polk Failla, who presided over the case, has noted that “the stability of the [guilty] verdict” is in question. An appeal to the U.S. Court of Appeals for the Second Circuit will most certainly follow pending resolution of post-trial motions.

What Does This Mean?

The Blanche Memorandum and the trimmed charges in the Storm case clarify DOJ’s enforcement priorities, but the verdict provides no clear guidance on how the digital assets community should proceed. Mixers can be abused by terrorists and other outlaws, but they also have benign uses, such as disguising the delivery of financial assistance to Ukrainians under siege. Financial privacy is neither invariably good nor invariably bad. There are bills coursing through Congress that could expressly protect the creators and users of decentralized asset infrastructure, such as ZKPs and mixers, in the name of financial privacy. 

Until Congress acts to clarify the law, however, there is still regulatory and criminal exposure for developers and operators of decentralized protocols and other digital asset companies. We recommend consultation with counsel on how to best address AML, KYC, and licensing risks through appropriate compliance programs and implementation of other safeguards. 

[1] https://home.treasury.gov/news/press-releases/jy0916

[2]Van Loon v. Dept of Treasury, No. 23-50669 (5th Cir. 2024).

[3] https://home.treasury.gov/news/press-releases/sb0057

[4]Coin Center, et al. v. Secretary, U.S. Dept of Treasury, No. 23-13698 (11th Cir. 2024). 

[5] https://www.justice.gov/dag/media/1395781/dl

[6] https://www.justice.gov/opa/speech/acting-assistant-attorney-general-matthew-r-galeotti-delivers-remarks-american

[7] https://www.justice.gov/usao-sdny/pr/tornado-cash-founders-charged-money-laundering-and-sanctions-violations

Charges remain pending against Roman Semenov, who is currently at large. The third co-founder, Alexey Pertsey, was tried and convicted by a Dutch court in May 2024 for his role in Tornado Cash. In February 2025, Pertsey was granted supervised release ahead of his appeal against a 64-month sentence for alleged money laundering linked to the Tornado Cash platform. 

On July 30, 2025, the President’s Working Group on Digital Asset Markets (PWG) released “,” a comprehensive digital asset report (Report) mandated by President Trump shortly after he took office for his second term. The Report addresses market structure, stablecoins, money laundering, sanctions, and taxation, as well as banking and digital assets. The chapter on banking signals how banks may elect to expand into digital asset custody, trading, and related services in the years ahead.

From Executive Order to Blueprint

The PWG was created by executive order to unify the federal government’s approach to digital assets. Unlike an advisory committee, it operates as a high-level interagency council chaired by the Special Advisor to the President for AI and Crypto, David Sacks, with senior leadership from the U.S. Department of the Treasury, Federal Reserve System, Securities and Exchange Commission, Commodity Futures Trading Commission, and other regulators. 

Because it convenes the nation’s top financial regulators, a PWG report functions as a consensus blueprint. It reflects not only regulatory thinking, but also the administration’s broader strategy — guidance that supervisors across the banking system are expected to follow. Unlike other recommendations included in the Report, those concerning banking can be adopted without legislation. They are therefore more likely to occur, and speedily too. For banks, fintechs, and investors, the Report is the clearest signal yet of where digital asset policy is headed.

How We Got Here: Banks and Digital Assets

For much of the past decade, U.S. regulators took an unpredictable — and increasingly hostile — stance toward digital assets that chilled bank participation. Banks that participated in the digital asset industry at all limited themselves to core services for industry participants, avoiding custody, settlement, and execution.

That changed with the beginning of Trump’s second term. The new administration prioritized digital asset reform and installed experienced leadership to overhaul the regulatory framework. Reflecting that shift, financial regulators have rescinded restrictive guidance and jointly affirmed that banks may engage in digital asset custody and related activities, subject to robust risk management. Recent developments include:

• March and May 2025: The Office of the Comptroller of the Currency (OCC) issued interpretive letters rescinding limits imposed by the prior administration and confirming that banks can buy, sell, and outsource crypto assets and cryptoasset activities.[i]
• March 2025: The Federal Deposit Insurance Corporation (FDIC) rescinded previous guidance, clarifying that “FDIC-supervised institutions may engage in permissible activities, including activities involving new and emerging technologies such as crypto-assets and digital assets, provided that they adequately manage the associated risks.”[ii]
• April 2025: The Federal Reserve Board (FRB) removed supervisory guidance that discouraged digital asset activities.[iii]
• July 2025: The FRB, OCC, and FDIC issued a joint statement, entitled “Interagency Guidance on Crypto-Asset Safekeeping,” establishing baseline expectations for custody activities.[iv]

Report Recommendations: Toward a Clearer, Technology-Neutral Framework

The Report urges regulators to evaluate banks based on how they manage risks — not on whether products rely on blockchain, tokenization, or other infrastructure. Treating decentralization or blockchain systems as categorically off-limits, it warns, would stifle innovation. 

Key recommendations include:

• Clarifying permissible digital asset activities such as custody, sub-custody, stablecoin reserves, and deposit tokenization
• Finalizing the removal of “reputation risk” as a basis for supervisory criticism by the banking agencies 
• Providing transparency in the process and timeline for obtaining bank charters and Reserve Bank master accounts
• Encouraging state-chartered bank innovation and pilots
• Reviewing the calibration of capital requirements for credit risk, market risk, operational risk, and liquidity risk to incorporate empirical evidence of recent changes in digital asset performance and risk
• Advocating for Basel Committee standards that better align with digital asset risk profiles

In short, regulators are signaling that banks may go deeper into the digital asset industry, providing additional products and services without asking permission and without fear of adverse regulatory consequences, so long as compliance, capital, and risk management match the rigor expected for traditional financial products.[v]

Opportunities Wrapped in Risk: The Legal & Compliance Challenge

Even with these recommendations, the road ahead remains layered with legal and compliance challenges:

• Custody and Capital Treatment: While agencies reaffirm that custody of digital assets is permissible, rules remain unsettled on structure, fiduciary status, and scope. Capital treatment also remains conservative, often classifying digital assets as “high-risk” regardless of volatility or collateral. Until new standards take hold, banks must engage regulators early and design frameworks that balance profitability with compliance.
• Chartering and Master Accounts: Securing charters and Reserve Bank master accounts remains unpredictable, with opaque approval pathways and inconsistent timelines. While the Report calls for greater transparency, institutions should expect continued friction and additional costs until reforms are implemented.
• Third-Party and Partnership Risks: Banks relying on fintech or vendor partners must carefully allocate anti-money laundering, sanctions compliance, disclosure, and reporting duties. Regulators have emphasized that banks cannot outsource compliance accountability; the chartered institution will always be held responsible. That means tightening oversight of counterparties, strengthening contract provisions, and ensuring that controls match regulatory expectations.
• Cross-Border Complexity: Digital assets are traded globally, but U.S. law is limited to the United States. Divergent standards on classification, taxation, and leverage create legal and operational friction. The Report encourages deeper U.S. engagement with international standard-setters. But, until convergence occurs, U.S. institutions must invest in compliance strategies that can operate across multiple jurisdictions.

Litigation and Enforcement: The Critical Overlay

A friendlier regulatory tone does not eliminate litigation or enforcement risk. Supervisors retain broad authority. Failures in custody, disclosure, or risk management can trigger enforcement actions, shareholder claims, and customer suits. Vendor failures and loss events can quickly escalate into private litigation. Robust documentation, controls, and monitoring remain essential safeguards.

The Road Ahead: Building a Durable Framework

The PWG recommendations are the first coordinated federal digital asset strategy — one that unites regulators, policymakers, and enforcement agencies. Even if a future administration takes a different view, it will be far harder to unwind a coordinated interagency framework once supervisory expectations, market practices, and cross-border commitments have been set.

For financial institutions, that means two things:

• Near-term: The window for innovation has never been clearer. Early movers are likely to shape the standards that regulators will refine.
• Long-term: Success requires building programs resilient enough to withstand both regulatory tightening and loosening — recognizing that supervisory intensity may fluctuate — but that market acceptance and demand for digital assets is persistent and increasing.

�鶹ֱ�� Can Help

�鶹ֱ�� & Lardner LLP’s Blockchain & Digital Assets Group partners with leading banks, fintechs, and investors at the forefront of digital finance. We help clients navigate the intersection of regulation, innovation, and enforcement — structuring products, engaging with regulators, strengthening compliance frameworks, and defending high-stakes disputes. Our integrated approach positions clients to capture opportunities in the digital assets industry while protecting their businesses against regulatory and market risks.

[i]              OCC Interpretive Letter No. (Mar. 15, 2025) & Interpretive Letter No. (May 6, 2025).

[ii]             FDIC Interpretive Letter No. (Mar. 28, 2025).

[iii]             FRB , “Federal Reserve Board Removes Supervisory Guidance on Digital Asset Activities” (Apr. 24, 2025).

[iv]            FRB, OCC, FDIC , “Crypto-Asset Safekeeping by Banking Organizations” (July 14, 2025) at p. 6, n. 8.

[v]             PWG Report at 72.