On Wednesday, the founders of the Bitcoin privacy wallet Samourai Wallet were arrested and charged on behalf of the US government. The indictment could set dangerous precedents beyond Bitcoin privacy services.
“If your government is concerned about its citizens’ control over their money, the most important question you should ask is, ‘What the hell is wrong with my government?’”
–Andreas Antonopoulos
Last Wednesday, Samourai Wallet's founders, Keonne Rodriguez and William Hill, were arrested and charged with conspiracy to launder money and conspiracy to operate an unlicensed financial services business in the Southern District Court of New York. Indictment Allegedly That Samourai Wallet “facilitated more than $100 million in money laundering transactions from illegal dark web markets.”
The definition of a non-custodial wallet as a financial services business and the resulting indictment of wallet administrators could set dangerous precedents for the broader Bitcoin space and may even amount to impacting internet freedom, essentially putting all individuals, organizations and institutions at risk. Techniques used to transmit financial transactions without exercising control over the funds.
Can a non-custodial wallet be a financial services business?
FinCEN Guidelines 2019 For people who manage, exchange, or use virtual currencies, a money transmitter is defined as “a person who provides money transfer services” or “any other person who engages in the transfer of money.” As the guidelines state, “the sender initiates a transaction that is actually executed by the sender of the funds.”
The guidance further states that “the term ‘money transfer services’ is defined to mean the acceptance of currency, money or other value that substitutes for currency from one person and
Transferring currency, money, or any other value that replaces currency to another place or person by any means.
As a non-custodial Bitcoin wallet, Samourai wallet operators are not custodial of user funds, and are therefore technically unable to “accept” deposits or “execute” money transfers, contrary to what prosecutors allege, noting that “Samurai engaged in unauthorized receipt.”
and the transfer of funds, including funds deposited in the Samurai Wallet by an undercover law enforcement agent located in the Southern District of New York.”
However, technically, the customer deposited the funds into an application running locally on his device, without any involvement from the Samurai operators – a circumstance that prosecutors correctly noted throughout the indictment, noting that “the private keys to these cryptocurrency addresses are stored in each account.” user”. individual cell phone,” that “these private keys are not shared with Samourai employees,” and that “the Samourai software on the user’s mobile phone will broadcast a transaction to the blockchain.”
The indictment alleges that Samourai Wallet “facilitates transactions between Samourai users” — a claim that seems blatantly untrue in the face of the fact that Join Coin transactions do not facilitate transactions between users at all, but rather create a shared transaction in which each user spends their own funds for themselves.
The indictment also repeatedly alleges that Samurai created “new addresses” that are used during transactions, and that “Samurai's server is responsible” for streaming transactions — which are also technically incorrect claims as transactions are only created on the users' and Samurai's device. Broadcasts transactions on behalf of users if users choose to broadcast their transactions via the Samourai node. For anyone running their own node with Samourai Wallet, known as a “Dojo,” transactions are broadcast by the users themselves.
Figures provided by node provider Ronin Dojo indicate that up to 85% of Whirlpool users run their own Dojo. It is questionable whether organized criminals would rely on nodes provided by Samourai Wallet as their operators would be effectively enabled to anonymize transactions by gaining knowledge of users' extended public keys, an often criticized design choice in the Samourai Wallet architecture. Notably, the indictment did not mention the name “Dojo” at all.
DOJ challenges FinCEN guidelines
The indictment against Samurai appears to indicate that the Department of Justice does not believe FinCEN's guidelines apply as indicated by the language used to describe Samurai's services, as prosecutors note the broadcast of transactions, the operation of a central server, and the subsequent charging of fees for the services provided:
“The Samourai server is responsible for broadcasting Ricochet transactions to the BTC network (…) From Whirlpool and Ricochet, RODRIGUEZ and HILL received fees worth at least $4 million.”
The Justice Department's arguments seem more consistent with what has happened recently Recommendations Issued by the Financial Action Task Force. The Financial Action Task Force, an intergovernmental body established by the G7 in 1989 to combat the risks of money laundering and terrorist financing, is not a regulatory body, but the task force's recommendations are known to form the basis on which anti-money laundering and terrorist financing regulations are based around the world.
In recommendations issued in 2021, the FATF expands the definition of virtual asset service providers as “decentralized exchanges or platforms” that “have a central party with some degree of involvement or control,” such as developing “user interfaces for accounts that possess an administrative key.” Or “collect fees.”
By the logic put forward by the FATF, it appears that the development of any individual, organization or technology that interacts with financial transactions may require a financial services business licence. It is worth noting that the new anti-money laundering package adopted by the European Parliament last week aims to update existing anti-money laundering regulations in line with the FATF recommendations, especially exempted self-custodial services.
Similar attempts to circumvent FinCEN guidelines are currently being made in the Tornado Cash case. in opposition Released on April 26, the plaintiffs say the definition of money transfer “does not require the money transferor to have ‘control’ over the funds being transferred,” highlighting that Section 1960 of the United States Code, a codification of permanent federal statutes, expands the definition of transfer Funds to “transfer funds on behalf of the public by any means.”
According to the DOJ's interpretation, AT&T would require a money services business license to allow customers to access their PayPal, an ISP would need a money services business license to allow users to access online banking, and a mailman would need a financial services business to obtain a license to deliver cash. By mail, the grocer will need a money service business license to distribute change, and Telegram, WhatsApp, Signal and
Can the Bitcoin network be KYCed?
The indictment has sent ripples through the Bitcoin ecosystem, leaving anyone involved in broadcasting Bitcoin transactions in limbo, including Bitcoin miners and node operators. The non-custodial Lightning wallet has been owned by Phoenix ever since Announce Suspension of operations in the United States. The first privacy Bitcoin wallet owned by Wasabi Wallet Banned US users Access to its services and programs.
Reading the indictment, it seems as if everything we know about the regulatory aspects of money transfers has been misapplied, as the indictment appears to go so far as to attempt to criminalize self-spending. Self-spending, as seen in the coins and samurai throwbacks, “further obscures the ownership of money,” the indictment said. But any Bitcoin wallet allows users to spend themselves and essentially circumvent the blockchain's monitoring and oversight mechanisms, further muddying the regulatory waters.
The foundations for introducing KYC to the Bitcoin network were researched as early as 2016 with MIT Chen Angkor The project, which explored introducing identities and permission sets to the blockchain, preventing unregistered users from conducting transactions in the blocks.
As miners become more centralized, keeping about 47% of the hashrate's mining rewards By one guard, including AntPool, F2Pool, Binance Pool, Brainins, btcom, SECPOOL, and Poolin, KYC plans for the Bitcoin network may not seem so far-fetched. In 2023, F2Pool has already started Control transactions In line with OFAC sanctions list.
Since the samurai founders were indicted, the FBI has done just that PSA issued Regarding crypto money services companies, alert the public to avoid services that do not require knowledge of your customer information.
If the non-custodial operation of services is classified as money transfer, the doors may be open to Know Your Customer (KYCing) of any communications protocols to operate the service, from Nostr to WiFi hotspots and telecom providers. If spun absurdly, it might be possible to say that it requires KYC registration to use highways or purchase bags.
Online KYC schemes have been around since 2014, when the US government attempted to introduce a “driving license for the internet”, similar to the planned introduction of digital identities around the world.
It should be noted that the treatment of the Samurai founders, who are currently serving pre-trial detention, cannot be compared to the treatment of financial crime allegations around the world. Since 2000, traditional financial institutions, such as UBS, JP Morgan, and Bank of America, have They were fined more than $380 billion. The argument that traditional banks are primarily used for fiat transactions can also be applied to Samourai Wallet, as an indictment It said It only claims illicit money transfer of 3.6% of Samurai's total transaction volume, leaving 96.4% of legitimate use.
The samurai case has been assigned to Judge Richard M. Berman, who previously presided over the Jeffrey Epstein case. In 2005, Berman to rule Random police searches of passengers' bags on the New York City subway do not violate the United States Constitution.
This is a guest post by L0la L33tz. The opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.