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Н News

Samourai Wallet Charges Raise Existential Questions for Privacy Tech

The U.S. government has put to rest any doubts that any involvement in or profiting from privacy tools beyond authoring code for crypto mixers is off limits.Call it an assault on privacy or attack on free speech, but the reality on the ground is that any money that flows into an application designed to mix funds to shield user addresses is being treated as laundered funds, no matter the purpose or destination.Bitcoin Fog. Tornado Cash. Now Samourai Wallet.Samourai Wallet was (its servers have been seized) a bitcoin wallet that promised to "keep your transactions private and your identity masked” through a privacy-preserving service called "Whirlpool."Authorities say the wallet processed over $2 billion in unlawful transactions, including at least $100 million via illegal dark web marketplaces like the Silk Road and Hydra Market. Similar arguments were made about Tornado Cash, when it was sanctioned by the U.S. Treasury, which essentially counted every dollar that flowed through it as criminal in nature.“Together with our law enforcement partners, we will continue to relentlessly pursue and dismantle criminal organizations that use cryptocurrency to hide illicit conduct," U.S. Attorney Damian Williams said in a statement on Wednesday.Op-secThere is much to say about Samourai Wallet’s co-founders Keonne Rodriguez, 35, and William Lonergan Hill’s, 65, op-sec (i.e. “operational security), or apparent lack thereof. Rodriguez was arrested in Pennsylvania and will be arraigned this week, while the U.S. is still working to extradite Hill from Portugal.See also: Privacy Isn't Just an Edge Case for Crypto“I don’t know how they thought they wouldn’t get arrested and prosecuted for this. It sounds like the DOJ has direct evidence of them saying they knew they were helping people conceal illegal transactions and charging for the service,” University of Kentucky law professor Brian Frye told CoinDesk in an interview.The DOJ alleges that Rodriguez and Hill actively solicited criminal customers in their marketing and social media posts. Hill, for instance, reportedly said "At Samourai we are entirely focused on the censorship resistance and black/grey circular economy. This implies no foreseeable mass adoption,” in an intercepted internal message.“Ultimately if you’re knowingly facilitating illicit finance and profiting from it, which is alleged in the complaint, the outlook is bleak,” venture capitalist Nic Carter said in a direct message. “Nevertheless it’s disturbing the extent to which the Biden Admin[istration] is attempting to criminalize privacy.”The Biden Administration has seemingly ramped up efforts to knock down mixing services. That includes arresting Russian-Swedish national, and Bitcoin Fog operator, Roman Sterlingov in April 2021 and participating in the arrest of the co-founders of Tornado Cash in 2023. However, crypto mixers have long been in the sights of criminal prosecutors. In Sterlingov’s case, investigators worked to establish evidence over a period of years.See also: How a Bitcoin Mixer Laundering Conviction Might Be Appealed As far back as May 2019, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has been concerned about cryptocurrency “tumblers,” finding that that “persons who accept and transmit value in a way ostensibly designed to protect the privacy of the transmittor [sic] are providers of secure money transmission services and are not eligible for the integral exemption.”In other words, mixers are money transmitters, even though a person is generally only transmitting funds between two addresses they control to anonymize their funds. And if you’re deemed a money transmitter, FinCEN noted, you’re expected to comply with the Bank Secrecy Act.“My opinion is that the crypto industry should treat regulation as 'de force majeure' and adjust to it,” Tal Be’ery, co-founder and chief technology officer of the ZenGo wallet, said. [Force majeure is a common legal clause absolving parties from liability.] “The U.S. government made it very clear that operating a mixer is unacceptable with the prosecution of Tornado Cash operators and therefore going after other mixers could be very much expected.”Privacy dragnet?Others are concerned that it isn’t just mixing services being targeted, but all privacy-preserving blockchain tech.“From the cases against Tornado Cash to the IRS 'broker rule' to the arrest of Samourai Wallet's founders, it's clear that the U.S. government is moving aggressively against privacy tools in crypto,” Galaxy Digital head of research Alex Thorn told CoinDesk.It’s worth noting that, while Rodriguez and Hill remained active in overseeing the protocol since it launched over a decade ago, the Samourai wallet was non-custodial and open-source. The code was "self-hosted” on the company’s open source GitLab repository, although the provided link no longer appears to be working. The Samourai apps have also been removed from the Google and Apple app stores, though theoretically the software can be built, run and hosted by anyone.Some experts contacted by CoinDesk, including Frye, believe that crypto mixers could theoretically be legal to code, but likely not to market or maintain. Releasing software is generally protected by the First Amendment in the United States, because code is a language and language is speech.“While crypto mixers might in theory be legal, if used only for protecting the privacy of legal transactions, using them to conceal illegal transactions is definitely illegal,” Frye said.“It's clear that if developers maintain any involvement in privacy tools beyond authoring code – whether that be operating front-ends, facilitating any kind of money movement or taking fees – they will be targeted. For on-chain privacy to succeed in the future, tools must be completely decentralized,” Thorn echoed.Others, like TradeLayer founder Patrick Dugan, noted that it also matters whether authors of crypto mixer code profit from their inventions. Samourai allegedly earned at least $4.5 million in fees from its wallet and mixer services, according to the indictment.See also: Privacy-Preserving Payments Shouldn't Be 'Niche', Monero Dev Says“The case will ultimately come down to any revenue mechanism the developers may have used that might constitute an operating enterprise in the eyes of prosecutors, making them culpable for money laundering done by proxy,” Dugan said, mentioning that, unlike Tornado Cash, Samourai did not have a token.Fighting for privacyDespite the realpolitik of the situation, many in the crypto community see the targeting of crypto mixers as an infringement of the basic human right to privacy.“The government's seizure of Samurai and the arrest of the folks running it is troubling. It feels more like what an authoritarian regime would do rather than a free country. I think people have a fundamental right to privacy in their financial transactions, whether digital or physical,” crypto sleuth Ogle told CoinDesk in an interview.See also: Calling a Hack an Exploit Minimizes Human Error“I'm a big fan of privacy services so I have no moral concerns about what was happening,” said one Bitcoin Lightning developer, who asked to remain anonymous in order to discuss the situation more candidly. “But it seems a bit silly on their part. If I understand the situation correctly these are two American citizens who didn't even do that great a job of covering their tracks. So an arrest is pretty unsurprising.”Others noted that despite the increased heat on privacy services, there will always be demand for these protocols – from legitimate and criminal users.“Given how easy it is to spin up or use another mixer, this doesn't solve the problem of illicit funds being washed," Ogle said. "It just pushes it to another service.” Dugan noted that there are also privacy coins already in circulation for "for those seeking pure Exit via cryptocurrency privacy," though "it ain't easy." He added, "use monero, it's been delisted almost everywhere, so you know it's legit."Zooko WIlcox, founder of privacy coin Zcash, told CoinDesk: “It’s legal to create privacy technology in the USA, and we’re going to keep doing it, because privacy and freedom are core parts of American civilization.”Additional reporting contributed by Cheyenne Ligon and Nikhilesh De.Edited by Benjamin Schiller, Marc Hochstein and Bradley Keoun.

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Samourai Wallet Charges Raise Existential Questions for Privacy Tech

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