US government launches full-scale attack on non-custodial financial institutions

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Developers of decentralized financial applications pay attention to this. Federal agencies don’t care whether you control or ever control user funds. You are still liable under the Bank Secrecy Act (BSA). The Department of Justice (DoJ), the Office of Foreign Asset Control (OFAC), and the Securities and Exchange Commission (SEC) have targeted decentralized service providers SamuraiTornado Cash, Consensys and more. Stocks directed at least two other companies—Phoenix Wallet And Wasabi wallet…to leave the American market completely.

Under the leadership of Gary Gensler, the SEC went so far as to target individual developers employed by startups creating decentralized technologies. request for a list of the names of Consensys developers who contributed any code, publicly or privately, to the Ethereum Merger, a September 2022 upgrade to the Ethereum blockchain that moved the network’s consensus method from proof-of-work to proof of participation. .

Such measures undoubtedly have a chilling effect on decentralized and privacy-friendly technologies. Indeed, regulators now irrationally view developers as bankers (or perhaps as competitors of bankers).

Samurai Wallet

In April 2024, the DoJ indicted Keonne Rodriguez and William Lonergan, both Founders of the self-custodial Samurai Portfolio. The couple was charged with conspiracy to commit money laundering and conspiracy to operate an unlicensed money services business. And this, despite the fact that Samourai was not a bank. It was content to provide software for automated processing of financial processes.

Rodriguez’s lawyer plans to file a motion to dismiss the charges against his client and Lonergan. It will include a letter from U.S. Senators Cynthia Lummis (R-WY) and Ron Wyden (D-OR) sent to Attorney General Merrick Garland in which the two argue that non-custodial crypto software cannot be a money transfer service and that the DoJ is threatening to criminalize Americans offering non-custodial crypto asset software services. The representatives then went explain that “…users of these services retain exclusive possession and control of their crypto assets” and “…all transactions are signed and processed on the user’s local device without third-party access.”

Tornado Cash

In addition to the allegations against Samourai, Alexey Pertsev, developer behind Ethereum-based crypto transaction anonymizer Tornado Cash, faced legal action on several continents. Ethereum inventor Vitalik Buterin sympathizes with Pertsev and donated 30 ETH to his legal defense fund.

Tornado Cash’s future darkens in August 2022, when the US Treasury Department’s OFAC sanctioned for allegedly facilitating money laundering and serving sanctioned entities. In August 2023, U.S. federal law enforcement officials accused Tornado Cash, accused of laundering more than $1 billion in illicit funds, including hundreds of millions for North Korean hackers. The charges were filed in the Southern District of New York. Pertsev’s problems are international in scope. In the Netherlands, the developer was find guilty of laundering $1.2 billion, a verdict he is appealing.

Much to the dismay of crypto founders everywhere, the failure of Pertsev’s defense has been cited often in crypto circles: developers don’t control the dapps they release into the wild, so they shouldn’t. take responsibility.

Cryptocurrency enthusiasts have long argued that developers of open source financial software should not be held responsible for user behavior. The first results suggest that the judicial system sees things differently. Pertsev’s decision therefore sets a frightening precedent regarding the criminal liability of developers of decentralized applications. As Attorney General Merrick Garland stated declared:

“These charges should serve as a further warning to those who think they can turn to cryptocurrency to cover up their crimes and hide their identities, including cryptocurrency mixers: No matter how sophisticated your scheme or how many attempts you have made to anonymize yourself, the Justice Department will find you.

Uniswap

Along with many other crypto companies, Uniswap, a decentralized crypto exchange, received a Wells Notice from the SEC. A Wells Notice is a letter from the SEC informing a company that it may take enforcement action against it. In its April 2024 letter, the SEC accused Uniswap of acting as an unregistered broker-dealer and securities exchange. Uniswap appears poised to aggressively fight the accusations.

“The Uniswap protocol is also fully compliant with U.S. law. An SEC action would primarily affect activities that clearly exceed its authority. argued Marvin Ammori, Legal Director of Uniswap.

MetaMask

Ethereum tech conglomerate Consensys received a well notice from April 2024 from the SEC as well, warning of potential enforcement actions related to its MetaMask Swaps and MetaMask Staking products. The SEC accused MetaMask of being an unlicensed broker-dealer.

Fed up with the SEC’s approach to regulating the crypto industry, Consensys sued the U.S. Securities and Exchange Commission in Texas for what it had done. calls an “illegal seizure of authority”.

The exodus of American cryptocurrencies

As the SEC goes after decentralized technology developers, Phoenix Wallet and Wasabi Wallet have both discontinued their services for US customers, citing the SEC’s targeting of the two major self-custodial cryptocurrency wallet providers. Other exoduses are likely to follow.

If regulators consider self-custodial wallet providers to be money services businesses, it is unclear whether self-custodial wallet providers, including innovations currently taken for granted, such as Lightning Network nodes , can operate in the country. The SEC is waging a legal battle against non-custodial services and could prompt the United States’ partners to pursue draconian policies as well. Unfortunately, there will be no resolution for the crypto industry in the coming years, and one or more cases may make it to the Supreme Court.

Big banks and powerful players in the US government don’t want decentralized financial technology to change the way the world runs. So they seek to destroy it clandestinely, without giving the industry a chance to be properly regulated by the elected legislature. The only crypto option? Fight for his life.

Kadan Stadelmann

Kadan Stadelmann is a blockchain developer, operations security expert and Komodo Platform Chief Technology Officer. His experience ranges from working in government operations security and launching tech startups to application development and cryptography. Kadan began his journey in blockchain technology in 2011 and joined the Komodo team in 2016.

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