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

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As an analyst with a background in blockchain technology and experience in both the public and private sectors, I find the current regulatory environment for decentralized finance (DeFi) apps concerning. The recent actions taken by federal agencies against decentralized service providers like Samourai Wallet, Tornado Cash, Consensys, and others, have set a chilling precedent that developers may be held liable under the Bank Secrecy Act and other securities laws, regardless of their role in maintaining decentralized infrastructure.

Attention decentralized finance app developers: Disregarding user fund control does not exempt you from Bank Secrecy Act (BSA) responsibilities. Federal agencies, including the Department of Justice (DoJ), Office of Foreign Asset Control (OFAC), and Securities and Exchange Commission (SEC), have taken enforcement actions against decentralized service providers such as Samourai, Tornado Cash, and Consensys. Consequences for these companies have included the departure of Phoenix Wallet and Wasabi Wallet from the US market.

Under the leadership of Chairman Gary Gensler, the Securities and Exchange Commission (SEC) has taken aggressive steps against individual developers working for startups specializing in decentralized technology. The SEC requested a roster of ConsenSys developers who took part in the creation of code for the Ethereum merge. This upgrade, which took place in September 2022, shifted Ethereum’s consensus mechanism from proof-of-work to proof-of-stake.

These actions are certain to send shivers through the development of decentralized and privacy-focused technologies. Essentially, regulatory bodies seem to be regarding tech developers as if they were bankers, or even competitors to banks.

Samourai Wallet

In April 2024, the Department of Justice (DoJ) accused Keonne Rodriguez and William Lonergan, the co-founders of the self-custodial Samourai Wallet, of conspiring to commit money laundering and operating an unlicensed money service business. This came as a surprise since Samourai was not a bank but rather offered software that facilitated financial transactions.

I will prepare a motion to dismiss the case against my client and Lonergan. In this filing, I will include a letter penned by US Senators Cynthia Lummis and Ron Wyden that they addressed to Attorney General Merrick Garland. In their letter, the senators argue that non-custodial crypto software does not equate to a money-transmitting service. They caution against the Department of Justice’s potential criminalization of Americans who offer such services. The representatives further clarified that users retain full possession and control over their digital assets while employing these services, and all transactions are executed and processed on the user’s local device without any third party intervention.

Tornado Cash

Samourai isn’t the only one facing legal accusations; Alexey Pertsev, a key developer of Ethereum-based cryptocurrency transaction obscurer Tornado Cash, has been charged with law violations in various regions around the world. Vitalik Buterin, Ethereum’s creator, expresses sympathy for Pertsev and contributes 30 ETH towards his legal defense fund.

As a researcher examining the developments surrounding Tornado Cash, I can share that in August 2022, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) imposed sanctions on Tornado Cash due to allegations of money laundering and facilitating transactions for sanctioned entities. In a subsequent turn of events, in August 2023, US federal law enforcement officials accused Tornado Cash of laundering over $1 billion in illicit funds, including substantial amounts linked to North Korean hackers. These charges were filed in the Southern District of New York.

As a researcher studying the complex world of cryptocurrencies, I’ve come across a disappointing defense put forth by Pertsev that has gained notoriety among crypto circles: since developers don’t have ultimate control over the decentralized applications (dapps) they launch into the public sphere, they shouldn’t be held accountable for any potential issues or misuses.

Supporters of cryptocurrency have frequently made the case that creators of open-source financial applications should not be held accountable for the actions of their users. However, initial judgments indicate a different perspective from the legal system. The Pertsev ruling serves as a warning sign regarding the potential criminal responsibility of decentralized application (dApp) developers, according to Attorney General Merrick Garland’s statement.

As a financial analyst, I cannot stress enough that engaging in illicit activities using cryptocurrencies comes with significant risks. Cryptocurrency mixers are not a foolproof method for concealing criminal transactions or maintaining anonymity. The U.S. Department of Justice is relentless in its pursuit of those attempting to evade detection, and it will ultimately uncover your true identity. Regardless of the complexity of your schemes or the number of attempts you’ve made to obscure your trail, rest assured that justice will prevail.

Uniswap

As a crypto investor, I’ve noticed that Uniswap, like several other crypto companies, has received a Wells notice from the SEC. This is a letter from the Securities and Exchange Commission (SEC) indicating they may initiate enforcement actions against us. In their April 2024 correspondence, the SEC alleged that Uniswap operated as an unregistered securities broker and exchange. However, Uniswap seems determined to vigorously challenge these accusations.

As a researcher studying Decentralized Finance (DeFi) platforms, I’d like to highlight that Uniswap adheres strictly to US laws. In the event of any action by the Securities and Exchange Commission (SEC), their primary impact would be on activities clearly falling outside the regulatory body’s jurisdiction.

Today, Uniswap has responded to the SEC’s Wells notice we received in April. Uniswap’s decentralized finance protocol brings a novel approach to commerce, enabling swift, intermediary-free, and secure trading of various assets. It is the pioneering platform in this category, widely utilized.

— Marvin Ammori (@ammori) May 21, 2024

MetaMask

Consensys, the Ethereum tech collective, received a Wells notice from the Securities and Exchange Commission (SEC) in April 2024. This warning signaled potential regulatory actions against MetaMask’s Swaps and Staking features. The SEC alleged that MetaMask was functioning as an unregistered broker-dealer.

As a researcher studying the regulatory landscape of the cryptocurrency industry, I’ve grown frustrated with the US Securities and Exchange Commission’s (SEC) approach of enforcing regulations rather than setting clear guidelines. In response to what I believe is an overreach of authority, Consensys has filed a lawsuit against the SEC in Texas.

American crypto exodus

The SEC’s crackdown on decentralized technology creators has led to Phoenix Wallet and Wasabi Wallet ceasing services for US clients. These two prominent self-managed bitcoin wallets announced the move in response to the SEC’s actions against them. Further departures from the US market are anticipated.

If regulatory bodies classify self-custodial wallet providers as money service businesses, it remains uncertain whether such providers, including advanced solutions like Lightning Network nodes, will be permissible in the country. The Securities and Exchange Commission (SEC) is engaging in legal battles against non-custodial services, which could potentially influence other US entities to adopt stringent policies as well. Unfortunately, it may take several years before the crypto industry experiences any significant resolution, and some of the ongoing cases could eventually reach the Supreme Court.

Powerful entities in the US government and big banks are resistant to the disruptive potential of decentralized financial technology. They covertly attempt to quash it, denying the industry a fair chance at regulation through the democratic process. In response, the crypto sector must vigorously advocate for its survival.

Kadan Stadelmann

Kadan Stadelmann holds the position of chief technology officer at Komodo Platform. He is a seasoned professional with expertise in blockchain development, operations security, and has a diverse background that includes experience in government sector security, launching tech startups, application development, and cryptography. Kadan began his exploration into the realm of blockchain technology back in 2011 and joined the Komodo team in the year 2016.

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2024-06-28 17:34