Disclaimer: The opinions expressed in this article are the author’s own and do not necessarily reflect the views of the editorial team at crypto.news.
Attention, developers of decentralized finance applications. Federal agencies are not concerned with whether you currently control or plan to control user funds. You could still be held accountable under the Bank Secrecy Act (BSA). The Department of Justice (DoJ), Office of Foreign Asset Control (OFAC), and Securities and Exchange Commission (SEC) have taken action against decentralized service providers like Samourai, Tornado Cash, ConsenSys, and others, prompting two companies—Phoenix Wallet and Wasabi Wallet—to withdraw from the US market.
For instance, under the leadership of Chairman Gary Gensler, the SEC has extended its reach to target individual developers working for startups that are developing decentralized technologies. The Commission has even requested a list of names of ConsenSys developers who contributed code, whether publicly or privately, to the Ethereum merge in September 2022, which transitioned the network’s consensus mechanism from proof-of-work to proof-of-stake.
Such measures undeniably have a dampening effect on decentralized and privacy-preserving technologies. Regulators now seem to perceive developers as financial professionals, or perhaps as rivals to traditional bankers.
In April 2024, the DoJ brought charges against Keonne Rodriguez and William Lonergan, the founders of the non-custodial Samourai Wallet, for alleged conspiracy to commit money laundering and operate an unlicensed money services business. Despite Samourai not being a bank, it provided software that automated financial processes.
Rodriguez’s attorney intends to file a motion to dismiss the case and will reference a letter sent by US Senators Cynthia Lummis (R-WY) and Ron Wyden (D-OR) to Attorney General Merrick Garland, arguing that non-custodial crypto software does not constitute a money-transmitting service. The Senators stressed that users retain exclusive control over their crypto assets, with all transactions being signed and processed on the user’s local device without third-party involvement.
In the case of Tornado Cash, in addition to facing charges like Samourai, developer Alexey Pertsev has encountered legal challenges across multiple jurisdictions. Despite these legal issues, Ethereum founder Vitalik Buterin supported Pertsev by donating 30 ETH to his legal defense fund. Tornado Cash faced sanctions from the US Department of the Treasury’s OFAC in August 2022 for allegedly facilitating money laundering. Later, in August 2023, US law enforcement accused Tornado Cash of laundering over $1 billion in illicit funds, including funds for North Korean hackers, leading to charges being filed in the Southern District of New York. Pertsev also faces legal troubles in the Netherlands for allegedly laundering $1.2 billion, a verdict he is appealing.
Cryptocurrency founders have expressed disappointment with the outcomes of Pertsev’s case as it challenges the notion that developers releasing decentralized applications shouldn’t be held responsible for their users’ actions.
Crypto enthusiasts have long argued that developers of open-source financial software should not be held legally liable for user behavior. However, recent legal developments indicate a different stance by the court system, setting a concerning precedent regarding the criminal liability of decentralized application developers. Attorney General Merrick Garland emphasized the significance of these legal actions.
Furthermore, Uniswap, a decentralized crypto exchange, received a Wells notice from the SEC, indicating potential enforcement action against the company. Uniswap intends to vigorously contest the accusations against it, stating that the protocol is compliant with US laws and the SEC is overstepping its jurisdiction.
Consensys, a major Ethereum technology conglomerate, also received a Wells notice from the SEC related to its MetaMask Swaps and MetaMask Staking products. In response, Consensys filed a lawsuit against the SEC in Texas, challenging what they view as an unwarranted overreach by the regulatory body.
As regulatory pressure mounts on developers of decentralized technologies, Phoenix Wallet and Wasabi Wallet ceased their services for US customers due to SEC scrutiny. This may lead to further exits from the market. The uncertain regulatory landscape casts doubts on the ability of self-custodial wallet providers, including technologies like Lightning Network nodes, to operate in the US. The industry faces prolonged legal battles that may eventually reach the Supreme Court.
Major banks and influential figures in the US government are wary of decentralized financial technology disrupting the status quo and are working covertly to stifle its growth without allowing the industry to be duly regulated by elected representatives. The crypto industry’s only recourse is to fight for its survival in the face of escalating regulatory challenges.
For more insights on the shifting landscape of web3 projects and the challenges faced by the crypto industry, read the full article by blockchain developer and Komodo Platform’s Chief Technology Officer, Kadan Stadelmann. Stadelmann brings a wealth of experience in blockchain technology, operations security, and cryptography, offering a unique perspective on the evolving crypto ecosystem.