Tech
The Samourai wallet allegations raise existential questions for privacy technology
The US government has put to rest any doubts that any involvement in or profit from privacy tools beyond the creation of code for crypto mixers is prohibited.
Call it an assault on privacy or an attack on free speech, but the reality is that any money that flows into an application designed to shuffle funds to protect users’ addresses is treated as laundered funds, regardless of purpose or destination.
Bitcoin fog. Tornado cash. Now Samourai wallet.
Samourai Wallet was (its servers were 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 more than $2 billion in illegal transactions, including at least $100 million through illegal dark web marketplaces such as Silk Road and Hydra Market. Similar arguments were made regarding Tornado Cash when it was sanctioned by the US Treasury, which essentially deemed 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 conceal illicit behavior,” U.S. Attorney Damian Williams said in a statement Wednesday.
There’s a lot to be said about Samourai Wallet co-founders Keonne Rodriguez, 35, and William Lonergan Hill, 65, about op-sec (i.e. “operational security), or apparent lack thereof. Rodriguez was arrested in Pennsylvania and will be arraigned this week, while the United States is still working to extradite Hill from Portugal.
“I don’t know how they thought they wouldn’t be arrested and prosecuted for this. It appears that the Department of Justice has direct evidence that they said they knew they were helping people hide illegal transactions and charge for the service,” University of Kentucky law professor Brian Frye told CoinDesk in an interview .
The Justice Department alleges that Rodriguez and Hill actively solicited criminal clients in their marketing and social media posts. Hill, for example, reportedly said: “At Samourai we are entirely focused on censorship resistance and the black/grey circular economy. This does not imply any foreseeable mass adoption,” in an intercepted internal message.
“Ultimately, if you knowingly facilitate illicit finance and profit from it, as you allege in the complaint, the outlook is bleak,” venture capitalist Nic Carter said in a direct message. “However, it is disturbing the extent to which the Biden administration[istration] is trying to criminalize privacy.”
The Biden administration appears to have stepped up efforts to eliminate mixing services. This includes the arrest of Roman Sterlingov, a Russian-Swedish citizen and operator of Bitcoin Fog in April 2021 and participation in the arrest of Tornado Cash cofounders in 2023. However, cryptocurrency mixers have long been in the crosshairs of prosecutors. In Sterlingov’s case, investigators worked to establish evidence over a period of years.
Already in the distant past May 2019The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has become concerned about cryptocurrency “tumblers,” finding that “people who accept and transmit value in a manner apparently designed to protect the privacy of those transmitting value [sic] are providers of secure money transmission services and are not entitled to full exemption.”
In other words, mixers are money transmitters, although a person generally only transfers funds between them two addresses that control anonymize their funds. And if you are considered a money transmitter, FinCEN noted, you are required to comply with the regulations Banking secrecy law.
“My view is that the cryptocurrency industry should view regulation as ‘force majeure’ and adapt to it,” Tal Be’ery, co-founder and chief technology officer of ZenGo wallet, he said. [Force majeure is a common legal clause absolving parties from liability.] “The US government has made it very clear that the use of a mixer is unacceptable with the prosecution of Tornado Cash operators and therefore it was foreseeable that other mixers would be attacked.”
Others fear that it is not just mixed services that are being targeted, but all privacy-preserving blockchain technology.
“From the cases against Tornado Cash to the The IRS “Broker Rule.” upon the arrest of the founders of Samourai Wallet, it is clear that the US government is moving aggressively against privacy tools in cryptocurrencies,” Alex Thorn, head of research at Galaxy Digital, told CoinDesk.
It’s worth noting that while Rodriguez and Hill have remained active in overseeing the protocol since its launch 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, even though the link provided appears to no longer work. The Samourai apps have also been removed from the Google and Apple app stores, even though the software can theoretically be created, run and hosted by anyone.
Some experts contacted by CoinDesk, including Frye, believe that crypto mixers theoretically could be legal to code, but probably not to market or maintain. The software release is generally protected by the First Amendment in the United States, because code is a language and language is a speech.
“While crypto mixers might in theory be legal, if used only to protect the privacy of legal transactions, using them to hide illegal transactions is downright illegal,” Frye said.
“It’s clear that if developers maintain any involvement in privacy tools beyond creating code – whether managing front-ends, facilitating any kind of money movement, or accepting commissions – they will be targeted. For on-chain privacy to succeed in the future, the tools must be fully decentralized,” Thorn echoed.
Others, like TradeLayer founder Patrick Dugan, have noted that it also matters whether the authors of the crypto mixer code profit from their inventions. According to the indictment, Samourai earned at least $4.5 million in commissions from his wallet and mixer services.
“The case will ultimately come down to any revenue mechanism used by the developers that might constitute an operating enterprise in the eyes of prosecutors, making them guilty of money laundering by proxy,” Dugan said, mentioning that, unlike Tornado Cash, Samourai didn’t have a token.
Despite the realpolitik of the situation, many in the crypto community see the targeting of crypto mixers as a violation of the fundamental human right to privacy.
“The government’s seizure of Samurai and the arrest of the people who run it is worrying. It seems 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,” the crypto investigator said Eye CoinDesk said in an interview.
“I’m a big believer in privacy services, so I have no moral concerns about what’s happening,” said a Bitcoin Lightning developer, who asked to remain anonymous to discuss the situation more candidly. “But it seems a bit silly of them. If I understand the situation correctly, these are two American citizens who didn’t even do a great job of covering their tracks. So an arrest is not at all surprising.”
Others have noted that despite the increased heat on privacy services, there will always be demand for these protocols – from legitimate users and criminals.
“Considering how easy it is to start or use another mixer, this does not solve the problem of laundering illicit funds,” Ogle said. “It just moves them to another service.” Dugan noted that there are also privacy coins already in circulation for “those seeking pure exit via cryptocurrency privacy,” although “it’s not easy.” He added: “he uses monero, it’s been deleted almost everywhere, so you know it’s legit.”
Zooko WIlcox, founder of privacy coin Zcashtold CoinDesk: “It is legal to create privacy technology in the United States and we will continue to do so, because privacy and freedom are fundamental parts of American civilization.”
Additional reporting provided by Cheyenne Ligon and Nikhilesh De.