By Tom Blitzer
Key Insights
- The shutdown of Samourai Wallet highlights potential future regulatory requirements for non-custodial cryptocurrency tools.
- Samourai Wallet’s privacy features, such as Ricochet and Whirlpool, set it apart but also drew legal attention.
- The case signals a broader regulatory crackdown on privacy-preserving cryptocurrency tools involving centralized infrastructure.
The recent shutdown of Samourai Wallet and the indictment of its co-founders have raised significant concerns within the cryptocurrency community. On April 24, Keonne Rodriguez and William Lonergan Hill, the co-founders of Samourai Wallet, were arrested on charges of money laundering and operating an unlicensed money-transmitting business. Rodriguez, the CEO, has pleaded not guilty and was released on a $1 million bond, while Hill, the Chief Technology Officer, awaits extradition from Portugal.
The Federal Bureau of Investigation has issued warnings to Americans about using unregistered cryptocurrency money-transmitting services, hinting at future regulatory measures. This has implications for other privacy and self-custodial cryptocurrency tools, which may face increased scrutiny and regulatory pressure.
Understanding Samourai Wallet’s Privacy Features
Samourai Wallet differentiated itself through advanced privacy-enhancing features. These included Ricochet, which added intermediary transactions to obscure the trail between sender and recipient, and Whirlpool, an implementation of CoinJoin. CoinJoin transactions pool inputs and outputs from multiple users, making it difficult to trace the ownership of funds.
Whirlpool relied on a coordinator server to facilitate these transactions. Users would initially submit an input address and a blinded output address to the server. Reconnecting through a fresh Tor circuit, they would then reveal the unblinded output address anonymously. This method allowed the server to verify participation without identifying specific inputs. Samourai Wallet had plans to decentralize this process further.
Legal Interpretations and Money Transmitter Status
Under 18 U.S. Code § 1960, operating an unlicensed money-transmitting business is a criminal offense. The statute does not clearly define what constitutes a money transmitter, focusing instead on the control over the money transmission process. Samourai Wallet, being self-custodial, did not control user funds directly. However, the legal argument hinges on whether the service facilitated transactions in a way that qualifies as money transmission.
The court’s definition of a money transmitter includes anyone engaged in the transfer of funds, not necessarily those with direct control over the funds. This interpretation could apply to CoinJoin transactions, despite the lack of direct fund transfers between participants. Samourai Wallet’s profit from operating Whirlpool may be a critical factor in this determination, as profiting from facilitating transactions could be seen as operating a money-transmitting business.
Money Laundering Allegations and Technical Misconceptions
Both founders face money laundering charges, which carry severe penalties. To be charged with money laundering, a person must knowingly conduct a financial transaction with proceeds from unlawful activities. The indictment suggests that Samourai Wallet was marketed to “Dark/Grey market participants,” implying knowledge of illicit uses. However, the platform itself did not control the transactions.
The indictment inaccurately claims that Samourai Wallet operated a centralized server creating new BTC addresses, when in reality, users’ wallets generated these addresses independently. The server’s role was limited to verifying that submitted addresses belonged to transaction participants, without matching sending and receiving wallets.
The prosecution aims to extend legal responsibility to non-custodial products with server infrastructure. The case against Tornado Cash cited ongoing payments for hosting services and transaction processing as evidence of conspiracy to commit money laundering. This suggests that running a node and hosting a front end, while aware of illicit activities, could lead to legal culpability.
The shutdown of Samourai Wallet has broad implications for other privacy-focused, self-custodial cryptocurrency tools. As regulatory bodies increase scrutiny, these tools may face similar legal challenges. The Financial Crimes Enforcement Network (FinCEN) guidance distinguishes between software providers and businesses that use software for financial gain. This distinction is crucial for developers of privacy tools.
Non-custodial Bitcoin wallet providers must navigate complex legal landscapes to avoid similar indictments. Projects that remain purely code-based and distributed, such as those hosted on Git repositories, may be protected under the First Amendment, as established in the Bernstein v. U.S. Dept. of State case. This precedent affirms that computer code is a form of expressive speech.
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