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The first thing they do is ignore you. Next, they make fun of you. Finally, they will fight with you.
The quote—commonly misattributed to Mahatma Gandhi—has been overused to the point of exhaustion in the Bitcoin space, typically invoking the suggestion that the laughing stage is over. The insinuation of the beginning of the fight stage was often overblown. Perhaps it came from a simple comment made by a politician or finance expert.
On April 24, this quote became true.
The US Department of Justice announced the arrest of Samourai Wallet founders Keonne Rodriquez and William Hill on that date, via the District Court of the Southern District of New York. Rodriguez, Samourai Wallet CEO, who operated under the pseudonym @SamouraiWallet on Twitter/X was arrested in Pennsylvania early one morning. Hill, a.k.a. TDev or @SamouraiDev (on Twitter), was also arrested. He lived in Lisbon, Portugal. At the time this article was written, the DoJ intended to extradite Hill to the US.
The two are accused of having run an illegal money transmitter and generating millions in fees. Rodriguez and Hill both face up to five years of prison.
The two were charged also with money laundering. The DoJ claims that Samourai Wallet has been used to wash over $100,000,000 in proceeds of criminal activity from black net markets, fraud schemes, and illicit activities. The maximum sentence could be increased by 20 years.
Samourai Wallet web servers (domain) and Samourai Wallet domain.samourai.ioThe wallet was rendered largely inoperable. Users could recover bitcoins by using backup seed in other wallets.
The FBI warned cryptocurrency holders that they could lose funds if their assets are not moved to regulated institutions. This warning was issued around the time of the arrests of the Samourai Wallet developer. The FBI did not mention Samourai Wallet, but the timing suggests that the warning is no accident.
The two events seemed to be a significant step in the development of Bitcoin.
Bitcoin Privacy
Bitcoin is a product of a tradition in privacy activism. Cypherpunks created electronic cash since the 90s to combat an Orwellian society where all transactions could be monitored or censored. Douglas Jackson, around the turn-of-the millennium, offered a digital payment system backed by gold with privacy features, called eGold. However, the company had to close its doors because Jackson failed to register the business as a money transmitter.
eGold needed a money transmitting license, because the company held gold as a reserve for its customers. However, since that time it was assumed by most people that developers of software which does not hold user funds themselves did qualify to be money transmitters. As long as developers never took control of user funds themselves, they did not need to register with the United States Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), and therefore also wouldn’t need to apply anti-money laundering (AML) and Know Your Customer (KYC) checks on their users— or so it was thought.
This assumption is based in part on FinCEN’s own guidance, which was published in 2013.
Many assumed that software developers would not be responsible for the use of their products. The law would apply to those who use non-custodial Bitcoin Wallets for money laundering. However, the wallet creators were not held responsible.
Samourai wallet was indeed a non-custodial one. Rodriguez or Hill did not control the bitcoins because users stored their private keys within their wallet software. Samourai Wallet, by default, communicates with a central server for sending and receiving transactions. But this communication can be avoided if you connect to Samourai Dojo – a portable, internet connected device embedded with a Bitcoin Node.
Importantly, Samourai Wallet was marketed as a privacy wallet, and its main privacy feature—Whirlpool—did fully depend on the Samourai server. Samourai Wallet was able to coordinate users’ efforts through a central server in order to complete CoinJoin-type transactions. The users in five-person groups would each contribute the exact same amount (for instance, 0.01 BTC), to a single transaction. This sent out exactly that amount.
There is currently no way of linking specific transaction inputs with specific transaction outputs. “mixed” They can trace the history of their coins. The blockchain analysts wouldn’t be able trace the back history of their coins, other than to say that one of those five inputs must have been the source. Users of Whirlpool could also choose to have their mixes repeated automatically. This would further obscure the history of transactions.
Samourai Wallet offers a Ricochet feature. It allowed users to repeatedly send bitcoins to addresses that they created themselves, which was frustrating for blockchain analyses. Samourai Wallet automates the process. (This is true for any Bitcoin wallet.
According to the DoJ’s allegations, these tools have been used in fact, to launder cash. The DoJ claims the Samourai Wallet founders were aware of this. The federal department bases this accusation on both public and private communications about the service. This includes statements made by Rodriguez and Hill in tweets and pitch decks for investors that mentioned individuals who participated in “illicit activity” The following are some of the most effective ways to improve your own effectiveness. “restricted” The following are some examples of how to use “dark/grey” Their user base would include markets.
Whether these statements truly indicate that Rodriguez and Hill intended their software to be used for illicit purposes—as opposed to it just being “tough marketing talk” from developers who ultimately wanted to offer financial privacy tools—will have to be proven in court.
Samourai Wallet arrests are a major challenge to long-held assumptions that developers do not have to perform AML and KYC checks and register as money transmitters.
Though, this assumption had already been put to question in a different corner of the cryptocurrency space…
Tornado Cash
The Office of Foreign Assets Control of the US Treasury (OFAC), in August 2022 added Tornado Cash to the OFAC list. Tornado Cash is a smartcontract on the Ethereum Blockchain. The US made it illegal to interact with the smart contracts.
Alexey Pertsev, who was detained by Dutch police in the same month. Pertsev founded PepperSec in 2003, with Roman Storm, Roman Semenov and Roman Storm. Tornado Cash and supporting infrastructure were key to the success of their effort.
Tornado Cash is a smartcontract that technically operates autonomously. Pertsev may have helped to develop this tool, but thousands of Ethereum nodes exist around the world. Pertsev was unable to monitor how or by whom the tool was being used. Anyone could send an amount of ETH to the smart contract, which—utilizing a cryptographic trick called Proof of zero knowledge—enabled them to withdraw that same amount from the smart contract, but to a different account. There was also no way to connect the ETH that went into Tornado Cash with the ETH that left, so the smart contract essentially worked as a “mixing” service.
PepperSec has also created supporting infrastructure that relies on RelayersThis aspect of the design–the relayers and TORN tokens –centered around a different smart contract on the Ethereum blockchain, which was technically implemented as a decentralized autonomous organization (DAO). This aspect of the design—the relayers and the TORN tokens—centered around a different smart contract on the Ethereum blockchain, which technically was implemented as a decentralized autonomous organization (DAO).
PepperSec offered another service, which provided a graphical user interface for the smart contract infrastructure.
Tornado Cash, as well as its infrastructure supporting it, was non-custodial. Pertsev Storm Semenov all developed the code. However, they never had any control over the ETH used to fund the smart contract. It’s not clear to what degree they could have controlled how Tornado Cash was used. Like many other things, Ethereum claims are a bit misleading. “decentralization” At least some of the reasons for this were based more on marketing than technical realities.
The fact that Pertsev or his associates never possessed any ETH made little difference to the Dutch prosecutor. In her view, PepperSec was de facto ran as a business, which—albeit indirectly through the TORN token—earned an income from Tornado Cash and the supporting infrastructure. Pertsev was therefore held responsible for the use of Tornado Cash and who used it, according to her.
She emphasized that Tornado Cash was used by hackers funded by the North Korean government, known as Lazarus Group, to launder over one billion dollars. She argued that Pertsev had knowingly enabled this type of activity with the software he created and didn’t do anything to stop it. He must be held responsible.
As it turned out, this wasn’t only the Dutch prosecutor. In the United States about a month after Pertsev was arrested, the co-founders of PepperSec, Storm and Semenov (who lived in the US), were both indicted. The former, who resided there, was then taken into custody. Semenov is not a resident of the United States. His whereabouts at the time this article was written are unknown. However, it’s likely that he lives in another country with no extradition agreement to the US.
Pertsev is also charged, along with Storm, for money laundering and running a non-licensed money transfer business. Storm is scheduled to stand trial this September in New York.
Chilling effect
Several arrests appeared to quickly have an effect that frightened other Bitcoin developers.
Even before Pertsev’s arrest, Bitcoin privacy wallet Wasabi Wallet—Samourai Wallet’s main competitor—in March of 2022 decided to implement AML checks in their mixing software, and reject coins that were suspected to have been used for illicit activity. (Although Wasabi Wallet, like Tornado Cash and Samourai Wallet, was fully non-custodial, the company behind the wallet—zkSNACKs—coordinated CoinJoin mixes through a central server.)
This new policy was harshly criticized by—among others—the Samourai Wallet team and other privacy focused bitcoiners. Rodriguez and Hill loudly declared that they were open to doing business with anyone. On social media, however, the pair adopted an aggressive attitude toward regulators and KYC/AML. This attitude may be what got them into legal trouble.
Samourai Wallet was arrested in December, and this prompted other Bitcoin developers also to increase their security measures. Sparrow Wallet for instance, which was compatible with Samourai Wallet Whirlpool’s Whirlpool before the indictment released a software update that removed this feature. ACINQ, a development company, announced shortly after that their Phoenix Wallet, a Lightning wallet, would be taken off US app store, citing Twitter. “[r]ecent 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.”
Wasabi Wallet, in what is arguably the greatest setback in Bitcoin’s history for privacy, announced soon afterwards that they would be discontinuing their mixing service. Whirlpool is already offline, so the CoinJoin Coordinator that was supposed to take over operations on June 1, this year would be shut down.
First Verdict
Pertsev received his sentence on the 14th May, only a few weeks after Samourai Wallet developer’s arrest, and events which followed.
Tornado Cash’s developer was given the bad news in the court of’s Hertogenbosch. This small town is about one hour south of Amsterdam. In many ways, the panel of judges went further than what the prosecutor had been willing to do. Pertsev, the judge ruled, was responsible for the use of the smart contract. “unstoppable”It was not seen as a valid reason.
“Tornado Cash functions in the way the defendant and its co-founders developed Tornado Cash,” The statement was made by the following: “So the operation is completely their responsibility.”
Pertsev was sentenced to 64 months in Dutch prison— though he did file for appeal, which at the time of writing is pending.
Pertsev’s PepperSec Co-Founder Storm is the next Tornado cash defendant to be brought before a court in New York. The Dutch decision should not influence the American case, but the Dutch case and sentence could give an idea of what to expect. Many Dutch prosecutors have shared their files with American counterparts.
In May of last year, Samourai Wallet’s Rodriguez was also given his first hearing in New York. The full trial will take place in Pennsylvania while he is under home detention.
Even so, bitcoin mixing is not dead despite the significant blows to Bitcoin privacy. All American trials still have to happen. Even if Rodriguez and/or Hill or Storm were found guilty, the same can be appealed to higher courts. Meanwhile, JoinMarket—a tool that lets users create CoinJoin transactions without a central coordinator—continues operations uninterrupted. Wasabi wallet has removed its central coordinator, but the wallet will continue to be supported.
Moreover, other Wasabi Wallet Coordinators are already offering their services. While not run by zkSNACKs themselves, they allow users to make CoinJoin Transactions between each other in a similar way. Because such coordinators can even be operated anonymously over Tor, future prosecution of such services may be even harder as well— regardless of the outcome of the upcoming trials.
The fighting stage, indeed, has begun— and the fight is far from over. The adage may be true or not, but the next stage is the one of victory.
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Source: bitcoinmagazine.com
