A coalition of crypto firms has urged Congress to press the Department of Justice to amend an “unprecedented and overly expansive” interpretation of laws that were used to charge the developers of the crypto mixer Tornado Cash.

A March 26 letter signed by 34 crypto companies and advocate groups sent to the Senate Banking Committee, House Financial Services Committee and the House and Senate judiciary committees said the DOJ’s take on unlicensed money-transmitting business means “essentially every blockchain developer could be prosecuted as a criminal.”

The letter — led by the DeFi Education Fund and signed by the likes of Kraken and Coinbase — added that the Justice Department’s interpretation “creates confusion and ambiguity” and “threatens the viability of U.S.-based software development in the digital asset industry.”

The group said the DOJ debuted its position “in August 2023 via criminal indictment” — the same time it charged Tornado Cash developers Roman Storm and Roman Semenov with money laundering.

Storm has been released on bail, has pleaded not guilty and wants the charges dropped. Semenov, a Russian national, is at large.

Source: DeFi Education Fund

The DOJ has filed similar charges against Samourai Wallet co-founders Keonne Rodriguez and William Lonergan Hill, who have both pleaded not guilty.

The crypto group’s letter argued that two sections of the US Code define a “money transmitting business” — Title 31 section 5330, defining who must be licensed and Title 18 section 1960, which criminalizes operating unlicensed.

It added that 2019 guidance from the Treasury’s Financial Crimes Enforcement Network (FinCEN) gave examples of what money-transmitting activities and said that “if a software developer never obtains possession or control over customer funds, that developer is not operating a ‘money transmitting business.’”

The letter argued that the DOJ had taken a position that the definition of a money transmitting business under section 5330 “is not relevant to determining whether someone is operating an unlicensed ‘money transmitting business’ under Section 1960” despite the “intentional similarity” in both sections and FinCEN’s guidance.

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The group accused the DOJ of ignoring both FinCEN’s guidance and parts of the law to pursue its own interpretation of a money-transmitting business when it charged Storm and Semenov.

They said the result had seen “two separate US government agencies with conflicting interpretations of ‘money transmission’ — an unclear, unfair position for law-abiding industry participants and innovators.”

The letter said that if not addressed, the Justice Department’s interpretation would expose non-custodial software developers “within the reach of the U.S. to criminal liability.”

“The resulting, and very rational, fear among developers would effectively end the development of these technologies in the United States.”

In January, Michael Lewellen, a fellow of the crypto advocacy group Coin Center, sued Attorney General Merrick Garland to have his planned release of non-custodial software declared legal and to block the DOJ from using money transmitting laws to prosecute him.

Lewellen said the DOJ “has begun criminally prosecuting people for publishing similar cryptocurrency software,” which he claims extended the interpretation of money-transmitting laws “beyond what the Constitution allows.”

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The trader behind recent “suspicious market activity” on Hyperliquid that led to the freeze and delisting of the Jelly my Jelly (JELLY) memecoin is potentially down almost $1 million from their actions. 

Blockchain analytics firm Arkham Intelligence said in a March 26 post to X that the trader attempted to manipulate the system to profit from price movements, withdrawing collateral before Hyperliquid’s liquidation system could catch up.

The trader opened three accounts within five minutes of each other, two with $2.15 million and $1.9 million long positions, and the third a $4.1 million short, to cancel out the long positions, according to Arkham in a post-mortem report. 

“This allowed him to build up leverage in an attempt to drain funds from Hyperliquid,” Arkham said.

Source: Arkham

When the price of Jelly pumped by over 400%, the $4 million short position entered liquidation, but the open short didn’t liquidate immediately because it was too large and instead passed to the Hyperliquidity Provider Vault (HLP), which is supposed to liquidate the position.

At the same time, the trader withdrew collateral from the other two accounts while having a “7-figure positive PnL to withdraw from,” Arkham said.

However, the “exploiter” quickly hit a wall when the accounts, which still had millions in unrealized profit and loss, were restricted to reduce-only orders, forcing them to sell the tokens in the first account on the market to recoup some of the funds.

Source: Arkham

Hyperliquid eventually closed the Jelly token market at a price of 0.0095, the same price as the trader’s short trade, which “zeroed out all floating PnL on the first two exploiter accounts.”

In total, Arkham says the trader withdrew $6.26 million, but at least $1 million is still in the accounts.

“Assuming he can withdraw this at some point in the future, his actions on Hyperliquid have cost him a total of $4,000. If he is unable to, he faces a loss of almost $1 million,” the blockchain analytics firm said.

Hyperliquid has since delisted perpetual futures tied to the JELLY token, citing evidence of suspicious market activity. 

Other traders have been using similar tactics 

This isn’t the first time Hyperliquid has had issues like this. On March 14, Hyperliquid increased margin requirements for traders after its liquidity pool lost millions of dollars during a massive Ether (ETH) liquidation.

Related: Bitget CEO slams Hyperliquid’s handling of “suspicious” incident involving JELLY token

A whale trader intentionally liquidated a roughly $200 million Ether long position on March 12, causing HLP to lose $4 million while unwinding the trade. 

Traders have also begun hunting whales on the platform, targeting prominent leveraged positions in a “democratized” attempt to liquidate them.

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The US Senate has passed a resolution to kill a Biden administration-era rule to require decentralized finance (DeFi) protocols to report to the Internal Revenue Service, which will now head to US President Donald Trump’s desk.

On March 26, the Senate voted 70-28 to pass a motion repealing the so-called IRS DeFi broker rule that aimed to expand existing IRS reporting requirements to crypto.

The Senate had voted to pass the resolution earlier in March, which also passed the House, but it was sent back to the Senate for a final vote before it could be sent to Trump.

The White House’s AI and crypto czar, David Sacks, has said Trump supports killing the rule.

This is a developing story, and further information will be added as it becomes available.