Crypto Privacy Legalized? Tornado Cash and Samourai Cases Suggest Uncertainty Remains

Last week, Deputy Attorney General (DAG) Todd Blanche sent a memo to employees of the Department of Justice, directing the agency to stop prosecuting mixers, exchanges, and “offline wallets” for the criminal conduct of their users.

Understandably, the community broke out in celebration. Privacy is now legal again! Some proclaimed. #FreeSamourai! Others demanded. DOJ ends “regulation by prosecution”, media outlets headlined, referring to the memo’s title, as companies who had previously left the US due to regulatory uncertainty announced plans to return. This will change everything, appeared to be the general tenor.

But does the DAG’s memo actually change anything? Scholars are not so sure.

“Did DOJ Bless A Crypto Free-For-All? Think Again,” writes the industry publication Law360, read by over 2 million legal professionals around the world. “The platforms could still face enforcement actions if investigators uncover evidence that they knew customers were using digital assets to further transnational crime.” 

Namely, the memo instructs the DOJ to focus less on regulatory violations, and more on “those who use digital assets in furtherance of criminal offenses”, such as terrorism, organized crime, and hacking, as well as narcotics- and human trafficking. 

While the memo reads that “the Department will no longer target virtual currency exchanges, mixing and tumbling services, and offline wallets for the acts of their end users or unwitting violations of regulations,” there appears to be very little clarity as to whom the DOJ considers to “use digital assets in furtherance of criminal offenses” – individuals thereby excluded by the DAG’s statements.

“A handful of pending, high-profile prosecutions could soon offer clues on the DOJ’s approach. They include a money laundering case against Roman Storm,” Law360 writes.

Both in the prosecution of Storm, as well as in the prosecution of Samourai Wallet developers Keonne Rodriguez and William Hill, the agency is currently claiming that the entire point of developing their respected privacy services was to enrich themselves on criminal activity, placing them well within frame of the memo’s exceptions.

Notably, the DAG’s memo specifically excludes a subsection of USC 18 §1960, which is “at the heart of the Storm and Samourai Wallet cases,” posted CEO of the DeFi Education Fund Amanda Tuminelli on X. 

Due to this exclusion, the prosecution of both Tornado Cash and Samourai Wallet developers will continue to set precedent over whether developers of non-custodial services can be held liable for the actions of their users, and must further deploy comprehensive anti-money laundering frameworks as required of any money service business, including know-your customer checks.

“We will wait to see what happens with the Tornado Cash and Samourai Wallet prosecutions,” writes CoinCenter’s Peter van Valkenburgh on X. The memo is “great news, but important not to over read this,” writes Bitcoin Policy Institute fellow Zack Shapiro similarly.

Both prosecutions effectively focus on the obligations software developers face when having no control over the funds their software transmits, into which the DAG’s memo appears to give no insight. In fact, the DAG appears to have intentionally avoided the terms “non-custodial” or “unhosted,” as non-custodial wallets are commonly referred to in Government circles, instead referring to “offline wallets” in its statements. 

Many in return are now wondering how software developers may implement KYC checks when dealing with non-custodial wallets if the prosecution of either developers is successful, and non-custodial services like Samourai and Tornado Cash are deemed to fall under money service business licensing requirements.

Former CFTC chair Timothy Massad gave some insight into how the KYC of the future may look when applied to Bitcoin in an interview with Bitcoin Magazine last week, stating that he believes ensuring that Bitcoin is not used for illicit purposes will probably involved some form of “digital identity,” as well as “smart contracts” which “wouldn’t process a transaction unless you could provide that [digital identity].”

What may sound like a distant dystopian future is currently being mandated in the US, which will require US Americans to present a Real ID compatible drivers license for domestic air travel starting May 7th, which is intended to be expanded into a fully fledged digital identity once the document is widely enough adopted.

This is a guest post by L0la L33tz. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

Pro Crypto, Anti Privacy: Will Trump Free Samourai?

Last month, the Treasury lifted sanctions on Tornado Cash. In response, many rekindled their calls for the Trump administration to drop the charges against Keonne Rodriguez and William Lonergan Hill, the developers of Samourai Wallet who are currently being prosecuted in the Southern District of New York.

What many appear to have missed is that the Treasury’s sanctions reversal for Tornado Cash also revealed the Treasury’s stance on privacy services. And it isn’t looking good.

Tornado Cash’s removal from OFAC’s SDN list followed a lawsuit by Tornado Cash users in a Texas District Court case that has become known as Van Loon v. US Department of the Treasury, in which it was argued that the sanctioning of the software was unlawful and violated the right to free speech.

The lawsuit went to appeal in the Fifth Circuit, where three judges ruled that sanctioning a software like Tornado Cash was indeed unlawful, as OFAC’s SDN list was reserved for businesses, foreign nationals, and property – of which Tornado Cash is neither.

The Fifth Circuit, in turn, directed the Texas District Court to grant the plaintiff’s motion for partial summary judgement, which would constitute a binding court order that software like Tornado Cash cannot be sanctioned by the U.S. government under current sanction laws.

Now the Treasury is fighting back, in attempts to avert the judgement that would strip the agency of its powers to sanction immutable privacy software, by arguing that a judgement is not needed because Tornado Cash has been removed from the OFAC list. But without the judgement, the agency could continue to sanction software that works like Tornado Cash, and even re-sanction Tornado Cash itself.

The sanctions reversal on Tornado Cash has little to do with the prosecution of Samourai Wallet developers, as neither are charged with sanctions evasion.

But the criminal prosecution of Tornado Cash developer Roman Storm is extremely important to their case, as it may set a precedent for the prosecution of Rodriguez and Hill, who have been charged with conspiracy to operate an unlicensed money transmitter and conspiracy to commit money laundering.

Both Tornado Cash and Samourai Wallet are purely non-custodial software projects, which have long been understood to be exempt from falling under anti-money laundering frameworks usually applied to banks. If Storm is found guilty in July, the government would have a much easier time to successfully prosecute the two Bitcoin developers as well. 

While many were hopeful that the new administration would put an end to the former administration’s witch hunt on cryptocurrency developers, it seems that Trump’s Treasury is just as unfavorable to the development of privacy code. 

As CoinCenter pointed out at the end of last year, a pro-crypto administration does not necessarily equal a pro-privacy and pro-financial freedom administration. It seems that we are now witnessing what this means: while lawsuits are being dropped against “crypto casinos” like Coinbase and Uniswap, privacy software developers like Rodriguez and Hill continue to face the threat of decades in jail. 

The Treasury appears to reason these prosecutions with their hardline stance against terrorist financing and cybercrime. As the agency wrote in the announcement of Tornado Cash’s sanctions reversal: 

“Treasury remains committed to using our authorities to expose and disrupt the ability of malicious cyber actors to profit from their criminal activities through the exploitation of digital assets and the digital assets ecosystem.”

In what appears to be a first, the Treasury also issued a warning for users of privacy services, stating that “U.S. persons should exercise caution before engaging in transactions that present such risks.”

In an email addressing the reversal of sanctions against Tornado Cash, blockchain surveillance firm Chainalysis appears to echo the Treasury’s sentiment, writing that “organizations with exposure to [mixer] addresses should seek legal counsel on their responses and obligations to OFAC.”

The messaging seems clear: while it is not officially illegal to use or deal with mixing services, the Treasury appears to attempt to keep all options open to pursue charges against persons involved with privacy services in the future.

As I have argued in several Bitcoin Magazine print articles, this stance should not be a surprise, and is rather an immediate consequence of integrating digital assets into US regulatory frameworks. The more important Bitcoin becomes for the government, the more important it will be to root out any conduct deemed illicit or criminal.

Treasury Secretary Scott Bessent has now argued as much in Tornado Cash’s sanctions reversal, stating that “securing the digital asset industry from abuse by North Korea and other illicit actors is essential to establishing U.S. leadership and ensuring that the American people can benefit from financial innovation and inclusion.”

While North Korea allegedly relies on cryptocurrency financing for its operations, the overall share of illicit funds within the cryptocurrency space is minimal, placed at a mere 0.14% of all on-chain transactions by Chainalysis itself.

At the same time, the reasons for people to use privacy services are numerous. As every transaction is visible on-chain, privacy services help people keep their transaction histories and net worth private, which in turn protects their physical security.

As Jameson Lopp regularly highlights in his physical Bitcoin attacks repository, having information about your Bitcoin public may result in violent home invasions, kidnappings, and in some cases, murder. 

The government’s continued crackdown on privacy services does not seem proportionate to eliminating 0.14% illicit actors, but it seems that the Trump administration is in no hurry to do the right thing to protect Americans and #FreeSamourai.

This is a guest post by L0la L33tz. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

Samourai Developer and Bitcoin Privacy Activist Appears In Court Ahead of Bail Release

Today marked the first public court hearing in the US Department of Justice’s (DoJ) case against Samourai Wallet developers William Lonergan Hill and Keonne Rodriguez since May 28, 2024, when Rodriguez appeared in court for the first hearing on the case.

I attended the hearing for William Lonergan Hill (TDevD/@SamouraiDev) in the Southern District of New York on behalf of @BitcoinMagazine today.

Here's what I learned: #FreeSamourai#WhereIsTDevD#SamouraiWalletpic.twitter.com/VtZdQd4IJu

— Frank Corva (@frankcorva) July 10, 2024

Hill appeared in the courtroom after his uncontested extradition from Lisbon, Portugal, where he currently resides.

The prosecution did most of the talking in the hearing.

It shared the following information:

• Hill had been arraigned the day before, on July 9, 2024

• It had seized 27 electronic devices from Hill in Portugal

• It will produce discovery to Hill once the FBI has extracted and reviewed the information on said devices

• It has already produced discovery to Rodriguez, Hill’s former partner at Samourai and co-defendant in the case

• Hill will be released on bail, though no dollar amount for the bail was mentioned

The main point that the defense, composed of attorneys Roger Burlingame and Jeffrey Brown, made in the hearing was that Hill waived his right to extradition before he was arraigned on extradition charges.

Key Terms Of Hill’s Bail

The first key term of Hill’s bail is that he will be permitted to live in Lisbon, Portugal as the case proceeds. Burlingame requested this in a letter he submitted to the court on July 3, 2024. Hill will have to return to New York when he’s required to be in court.

A second key term of Hill’s bail is that he will be required to wear an ankle bracelet while living in Portugal on bail. The prosecution noted that the FBI would monitor the ankle bracelet in a discussion between the prosecution and defense after the official hearing had ended.

The Next Hearing

The case will proceed on September 10, 2024 at 12:00 PM ET, rescheduled from September 4, 2024.

The prosecution said it plans to produce discovery by the next court date.