Mises Wire

The Arrest of Samourai Wallet Developers Shows the US Government Hates Privacy and Freedom

On April 24, two lead developers of Samourai Wallet (SW), the most-advanced privacy-centric wallet in the bitcoin ecosystem, were arrested and charged with money laundering and money transmitters offenses by order of the United States Department of Justice (DOJ). This is just the latest assault of an escalating war waged by US regulators on financial privacy and freedom.

Other examples are the arrest of Tornado Cash developers—a privacy protocol developed for Ethereum and other blockchains—and the pressure exerted by three-letter agencies on centralized exchanges to delist privacy-centric cryptocurrencies such as monero. Regulation by arrest and intimidation is the strategy deployed by the US government to drain liquidity from privacy-preserving money, which is perceived as a threat to the hypersurveilled fiat monetary system.

Regulation by Arrest: The Case of Samourai Wallet

Bitcoin is a transparent monetary system because the sender, the receiver, and the amount of any transaction are visible on-chain. Pseudonymity is the most basic privacy protection available to bitcoiners: addresses and transactions are strings of alphanumeric characters that are not directly related to real-world persons. Traditional finance practices such as Know Your Customer (KYC) requirements destroy bitcoin privacy because they tie pseudonymous on-chain information to actual identities, making on-chain activity traceable. It comes as no surprise, then, that governments worldwide are exerting pressure on centralized intermediaries to enforce these practices on their customers.

To maintain pseudonymity, privacy-conscious cryptocurrency users should avoid interacting with regulated intermediaries and with anyone who enforces KYC measures. Moreover, a number of privacy techniques have been developed to help individuals keep their possessions private. One of the most effective privacy techniques is coinjoin, which “is a trustless method for combining multiple Bitcoin payments from multiple spenders into a single transaction to make it more difficult for outside parties to determine which spender paid which recipient or recipients.” SW developed Whirlpool, which “is the only true zerolink coinjoin implementation in existence. Each Whirlpool mix is a 5 person coinjoin facilitated by our chaumian blinded co-ordinator. Every transaction has 1496 possible interpretations and breaks all deterministic links between inputs and outputs, providing the user with market leading transaction level privacy.” The US DOJ sees the development of Whirlpool and other privacy techniques as an attack against the surveillance apparatus of the fiat system: the arrest of the SW developers is a message to anyone who dares to threaten it.

The arguments outlined in the indictment sound like sophistry. First, SW developers are charged with conspiracy to operate an unlicensed money transmission business because they did not register their software with the Financial Crimes Enforcement Network (FinCEN). However, FinCEN guidance FIN-2019-G001 states unequivocally that “suppliers of tools (communications, hardware, or software) that may be utilized in money transmission, like anonymizing software, are engaged in trade and not money transmission.”

Given that all SW tools are noncustodial and that users at no point give up control over their funds, these tools are just software and not a centralized service that must be granted a license. It is true that users pay fees to SW to coinjoin their funds and that the SW blind coordinator constructs coinjoin transactions; nevertheless, users alone—not SW developers—control their coins and transmit them.

Second, the indictment claims that $100 million in criminal proceedings were laundered through SW privacy tools; however, it also claims that SW “incentivizes users to keep their crypto in the Whirlpool (and therefore generate additional liquidity in the pool) by making subsequent remixes free.” This explains why criminals rarely use Whirlpool to launder funds: they usually want to cash out their money as soon possible, but Whirlpool incentivizes users to do just the opposite so that their privacy is increased. In fact, if the numbers mentioned in the indictment are correct, 95 percent of the $2 billion that went through SW privacy tools are licit. By taking Whirlpool down, the DOJ is forbidding a significant number of law-abiding individuals from protecting their financial privacy. Moreover, the indictment does not take into account the obvious fact that money laundering is committed by money launderers and not by developers who write software.

Third, the US government’s position on the nature of bitcoin is obscure. On the one hand, the Internal Revenue Service claims that bitcoin is not money but a speculative asset; this is why US citizens must pay capital gains taxes on their cryptocurrency holdings. On the other hand, the DOJ claims that coinjoin software makes it possible to launder money. It is important to note that Whirlpool allows individuals to pseudonymize their coins but not to convert them to dollars. How can coinjoins constitute money laundering if bitcoin is not money and is never converted to fiat?

Fourth, the indictment mentions some tweets and marketing materials from SW developers as evidence of criminal intent. Most of the “evidence,” however, are just provocative comments or statements of obvious truths like SW being KYC-free. The DOJ takes the state monopoly on money so seriously that it cannot even distinguish provocative speech from criminal acts.

Fifth, on April 25, the day after the arrest of the SW developers, the FBI issued a threatening public service announcement: “People who use unlicensed cryptocurrency money transmitting services may encounter financial disruptions during law enforcement actions, especially if their cryptocurrency is intermingled with funds obtained through illegal means.” The announcement also urges law-abiding citizens to avoid any KYC-free software or service that escapes the surveillance apparatus of the state and of the banking system. We are at that stage of the descent into tyranny where the government threatens law-abiding citizens with “financial disruption” if they use software the FBI does not like.

The Connection between the Arrest of SW Developers and Bitcoin ETFs

The intimidating actions of the US government are creating a chilling effect in the crypto ecosystem. Sparrow Wallet, a major bitcoin wallet that implemented Whirlpool, removed it from its last release following the arrest of the SW developers. Similarly, Wasabi Wallet, which implements a different coinjoin protocol, announced that it “is now blocking US residents and citizens from using its coinjoin service.” Phoenix Wallet, one of the most popular bitcoin Lightning Network wallets, announced that its app will be removed from US app stores because “recent announcements from US authorities cast a doubt on whether self-custodial wallet providers, Lightning service providers, or even Lightning nodes could be considered Money Services Businesses and be regulated as such.” In principle, even miners and self-hosted wallets may be viewed as money transmitters under the arbitrary interpretation of the law by US authorities, meaning that no business, developer, or user is safe from regulatory overreach.

The actions of the DOJ are not by chance but by design: the objective is not to combat crime but to drain liquidity from crypto tools that make it possible for individuals to escape the traditional financial system. The events discussed in this article cannot but be linked to the approval of bitcoin exchange-traded funds (ETFs) earlier this year. ETFs are custodial and regulated instruments that allow a few powerful cronies to bring as much bitcoin as possible under their custody and the scrutiny of the state. Owning shares in bitcoin ETFs is not owning bitcoin but a promise to redeem bitcoin. ETFs are traditional fiat tools that empower regulated intermediaries and disincentivize self-custody and privacy practices. Intermediation and surveillance provided by ETFs are a net positive for the government; instead, self-custody and privacy are a threat to the ability of the state to control the economy and extract resources from it. The arrest of the SW developers and the approval of the bitcoin ETFs are meant to drain liquidity from privately held bitcoin and trap people into the fiat-KYC system.

From a historical perspective, the US government’s erratic behavior should not come as a surprise: when the economy is plagued by unbearable debt and wars spread like fire, authorities tend to tighten financial controls. The US is no exception. In the distorted minds of tyrants, nobody must be allowed to preserve their wealth by exiting the incumbent financial and institutional system: the ship must sink with everyone onboard.

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