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Controlling interest

The narrative

The US government’s apprehensions regarding cryptocurrency mixing, as evidenced by last week’s Department of Justice filing against Roman Storm and the recent indictment of Keonne Rodriguez and William Hill, are coming into focus – shedding light on the DOJ’s strategy in handling these cases.

Why it matters

One potential way of paraphrasing your question could be: “Does writing code equate to spoken language? If so, am I accountable if someone else misuses my code for money laundering criminal activities? Is this an oversimplification or a valid exploration of the complex ethical dilemma surrounding programmers’ responsibilities in the face of potential misuse of their creations?”

In the ongoing criminal case against Tornado Cash developer Roman Storm, the U.S. Department of Justice and the crypto industry are currently engaged in a series of pressing questions. The significance of these issues escalated last week with the arrest and charging of Rodriguez and Hill, the founders of Samourai Wallet.

Breaking it down

There are essentially four primary lines of thought. The initial argument centers around the principle of privacy. Individuals should be allowed to transfer funds to another person without being traced by others. While this isn’t exclusive to cryptocurrency, given crypto’s nature, there exist numerous mixing tools specifically designed for it, as most digital assets lack inherent privacy features (and those that do, have limited adoption).

The second freedom pertains to the ability to write code. While coding smart contracts alone does not constitute a criminal offense, it’s important to note that this capability can unfortunately be misused by malevolent actors for nefarious purposes such as money laundering using those very smart contracts.

The third aspect revolves around safeguarding national security interests. The U.S. dollar serves as a means for the federal government to intervene and halt economic engagements by entities designated as threats by both U.S. and international authorities. These sanctions have targeted individuals, such as private citizens involved in laundering ransomware earnings; organizations, like Russia’s Sovcomflot and Suex; and even nations, including the governments of Iran and North Korea. Studies indicate their effectiveness.

As a crypto investor, I strongly believe that the practice of crypto mixers welcoming users from sanctioned entities or regions is a clear warning sign. It’s not only questionable but also potentially risky for those involved in such activities. The possibility of criminal indictments following this behavior is a natural progression in upholding the law and maintaining the integrity of the crypto market.

The crux of the debate lies in understanding the actions taken by the developers. Is their mixer service considered a money transmitter and able to adhere to anti-money laundering regulations?

As a researcher, I’ve come across intriguing information regarding Tornado Cash and its legal status according to the Department of Justice (DOJ). Contrary to being merely developers of open-source software, they are believed to have established a business facilitating transactions that the federal government considers illegal. This assertion was made in an indictment last year and more recently in a filing on Friday.

The debate over privacy rights often takes the spotlight in these cases, yet it may not be the central issue. Privacy is undeniably significant, but the crux of the legal disputes likely lies elsewhere. Regardless of the court’s decision, the primary focus will not be on whether individuals possess a right to confidential transactions or if computer code equates to speech. Instead, the concern revolves around the actions and methods employed by entities offering privacy services.

In other words, just what in the world is a money transmitter, anyway?

Clues have surfaced in a recent legal victory. The Department of Justice (DOJ) managed to prove charges against Roman Sterlingov, the mastermind behind Bitcoin Fog, alleging money laundering activities, running an unlicensed money transfer business, and related offenses.

As a crypto investor following the Tornado Cash case, I’ve noticed some similarities with past legal disputes, but the specific facts at hand are distinct. In this instance, the interpretation of the facts is a contentious issue between the prosecution and the defense. Storm, one of the developers of Tornado Cash, argued in his defense that he had limited involvement during the time period under investigation. However, the Department of Justice (DOJ) takes a different stance, stating in their recent filing that the Financial Crimes Enforcement Network (FinCEN) guidance does not consider the concept of “control” in this context.

The Department of Justice (DOJ) contended that money-transmitting activities encompass intermediaries such as Tornado Cash pools, in addition to relayers and commercial enterprises. Furthermore, the DOJ’s position that anything capable of transferring value functions as a money transmitter has faced significant criticism online.

In essence, the upcoming trial is expected to focus on the definition of a money transmitter in relation to smart contracts that transfer value. If these contracts are classified as money transmitters, it could potentially apply to other decentralized autonomous organizations or similar entities. However, determining what constitutes a money transmitter and when registration and implementation of KYC/AML rules are necessary in the U.S. is a complex issue. The outcome of this case could significantly impact the crypto industry, with potential implications for how these organizations operate.

The way this line of questioning recalls the unhosted wallet proposition put forward by FinCEN towards the end of 2020 is quite striking. Interestingly, the FBI issued a cautionary statement regarding unhosted wallets not long ago as well.

Last week saw the unveiling of money laundering conspiracy charges against Keonne Rodriguez and William Lonergan Hill, the creators of Samourai Wallet, by the prosecution.

As an industry analyst, I’ve observed that this latest move by the federal government represents a heightened approach towards regulating private transactions and coding activities. However, it’s essential to revert back to the fundamental queries: What exactly constitute those non-negotiable boundaries? Did the Samourai Wallet team develop a wallet they could fully manage, and if so, did they merely add privacy mixing features on top of it?

In the indictment filed by the Department of Justice, it was claimed that Samurai, similar to a tornado, received compensation for the services they provided, while the defendants acknowledgementally constructed tools with potential misuse in mind.

It remains to be seen how far the comparisons extend, but the core arguments seem to be similar.

Certain platforms are imposing restrictions on American clients in response, but merely implementing know-your-customer policies might not fully address the Department of Justice’s apprehensions if they don’t actually set up such programs.

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