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US government wages full-out assault against non-custodial defi | Opinion

Opinion
US government wages full-out assault against non-custodial defi | Opinion

Disclosure: The views and opinions expressed here belong solely to the author and do not represent the views and opinions of crypto.news’ editorial.

Decentralized finance app developers pay heed. Federal agencies don’t care if you control or ever control user funds. You are still liable under the Bank Secrecy Act (BSA). The Department of Justice (DoJ), Office of Foreign Asset Control (OFAC), and Securities and Exchange Commission (SEC) have targeted decentralized service providers Samourai, Tornado Cash, Consensys, and more. The actions led at least two other companies—Phoenix Wallet and Wasabi Wallet—to exit the US market altogether.

Under Chairman Gary Gensler, the SEC has gone so far as to target individual developers employed by startups creating decentralized technology. The Commission asked for a list of the names of Consensys developers who contributed any code—either publicly or privately—to the Ethereum merge, a September 2022 upgrade to the Ethereum blockchain that transitioned the network’s consensus method from proof-of-work to proof-of-stake.

Moves like these undoubtedly have a chilling effect on decentralized and privacy-preserving technology. Effectively, regulators now irrationally view developers as bankers (or maybe competition for bankers).

Samourai Wallet

In April 2024, the DoJ indicted Keonne Rodriguez and William Lonergan, the two founders of the self-custodial Samourai Wallet. The pair faced charges of conspiracy to commit money laundering and conspiracy to operate an unlicensed money service business. This is despite the fact that Samourai was not a bank. It merely provided softwarthatch automated financial processes. 

Rodriguez’s attorney plans to file a motion to dismiss the case against his client and Lonergan. He will include a letter US 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 can’t be a money-transmitting service and that the DoJ threatens to criminalize Americans offering non-custodial crypto asset software services. The representatives went on to explain that “…users of such services retain sole 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 brought against Samourai, Alexey Pertsev, a developer behind Ethereum-based crypto transaction anonymizer Tornado Cash, has faced legal charges on multiple continents. Ethereum inventor Vitalik Buterin empathizes with Pertsev and donated 30 ETH to his legal defense fund

Tornado Cash’s future darkens in August 2022, when the US Department of the Treasury’s OFAC sanctioned it for allegedly facilitating money laundering and serving sanctioned entities. In August 2023, US Federal law enforcement officials accused Tornado Cash of allegedly 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 found guilty of laundering $1.2 billion, a verdict he is appealing. 

To the chagrin of crypto founders everywhere, Pertsev’s failed defense had been one often cited in crypto circles: developers don’t control the dapps they release in the wild, so they shouldn’t bear responsibility.

Crypto enthusiasts have long argued that developers of open-source financial software should not be held liable for user behavior. The early returns suggest that the court system sees it otherwise. The Pertsev ruling therefore sets a chilling precedent about the criminal liability of dapp developers. As Attorney General Merrick Garland stated:

These charges should serve as yet another warning to those who think they can turn to cryptocurrency to conceal their crimes and hide their identities, including cryptocurrency mixers: it does not matter how sophisticated your scheme is 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 they may take enforcement action against them. In its April 2024 letter, the SEC accused Uniswap of acting as an unregistered securities broker and securities exchange. Uniswap appears poised to aggressively fight the charges.

“The Uniswap protocol is also in full compliance with US law. An SEC action would primarily affect activity clearly beyond their authority,” argued Uniswap’s chief legal officer, Marvin Ammori.

MetaMask

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

Fed up with the SEC’s regulation by enforcement approach to the crypto industry, Consensys sued the US Securities and Exchange Commission in Texas for what it calls an “unlawful seizure of authority.” 

American crypto exodus

With the SEC going after developers of decentralized technologies, Phoenix Wallet and Wasabi Wallet both discontinued services for United States customers, citing the SEC’s targeting of the two major self-custodial cryptocurrency wallet providers. More exoduses are likely to follow.

If regulators view self-custodial wallet providers as money service businesses, then it’s unclear whether self-custodial wallet providers—including innovations currently taken for granted such as Lightning Network nodes—can operate in the country at all. The SEC is waging lawfare against non-custodial services, and it could influence partners of the US to also pursue draconian policies, as well. Unfortunately, there won’t be a resolution for the crypto industry for years to come, and one or several of the cases could make its way to the Supreme Court. 

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

Kadan Stadelmann
Kadan Stadelmann

Kadan Stadelmann is a blockchain developer, operations security expert, and Komodo Platform’s chief technology officer. His experience ranges from working in operations security in the government sector and launching technology startups to application development and cryptography. Kadan started his journey into blockchain technology in 2011 and joined the Komodo team in 2016.