2023’s Crypto Clash: Battling for Your Digital Privacy Rights!

Let’s get one thing straight: privacy is not an offense.

Yet in the dynamic realm of crypto, projects and tokens designed to protect user anonymity are under the microscope like never before.

As we step into 2024, government initiatives to curb the use of coin-mixing services are ramping up, putting creators of Bitcoin Fog, Tornado Cash, and Samouri Wallet in the crosshairs of legal battles.

While crypto has its roots entwined with the Cypherpunk movement, advocating for privacy and autonomy against the mighty forces of government and big banks, recent events have left that connection feeling a bit frayed.

As the industry matures, a wave of uncertainty looms over developers dedicated to preserving privacy on-chain. CEO Eran Barak of Midnight, a layer-1 network utilizing zero-knowledge proofs, has witnessed this first-hand.

“There’s definitely a nervousness surrounding privacy,” Barak disclosed to Decrypt, noting how developers are shaken by the heavy-handed actions against their peers.

Privacy Projects

Emerging over a decade ago, privacy coins have served as a shield against prying eyes within the crypto landscape. However, the tides are shifting—many exchanges are now distancing themselves from coins that safeguard user anonymity, such as Monero (XMR).

In February, Binance hinted at delisting Monero, leading to a swift conversion of customers’ XMR into stablecoins in September. Earlier this year, Binance even placed a “monitoring tag” on Monero’s competitors, including Zcash (ZEC) and Firo (FIRO), although none have been delisted yet.

Citing regulatory transformations within the European Economic Area (EEA), Monero faced another setback when Kraken announced it would delist it for European users. This shift reflects broader scrutiny faced by other crypto projects prioritizing privacy.

Launched in 2020, Secret Network showcases a blockchain that accommodates private smart contracts, enabling developers to create applications that support encrypted data on-chain—essentially a form of confidential computing.

CEO Alex Zaidelson of SCRT Labs revealed that several exchanges warned his team about potential delisting of Secret Network’s token due to Monero’s predicament. It took effort and thorough explanations to clarify that their use did not contravene anti-money laundering (AML) regulations.

“We’ve seen a bunch of regulated players distancing themselves from anything related to privacy,” Zaidelson shared with Decrypt. “It took us work and explanation to ensure people understand the difference between privacy coins and confidential computing chains.”

Zaidelson emphasized the critical need for privacy within the crypto ecosystem if it ever hopes to achieve mainstream acceptance. Consider common scenarios, like a hedge fund wanting to conceal its positions or a healthcare app that requires patient data on-chain.

“We cannot expect everybody to live in a glass house,” Zaidelson asserted. “The technology rails must protect data, or it becomes unimaginable.”

Coin Mixers

While advocates champion coin mixers as tools for anonymity, government authorities have long seen them as facilitators for money laundering. This year, the crackdown on coin mixers intensified, impacting both Bitcoin and Ethereum users.

Following the U.S. Treasury’s Office of Foreign Asset Control sanctioning Tornado Cash in 2022—effectively blacklisting it for American users—charges against its developers didn’t come until a year later. Privacy advocates, including whistleblower Edward Snowden, have condemned these government actions as “profoundly authoritarian.”

In 2023, federal prosecutors charged Tornado Cash founders Roman Storm and Roman Semenov with money laundering, sanctions violations, and conspiracy to operate an unlicensed money-transmitting business. While Semenov remains unaccounted for, Storm was arrested, facing prosecution in New York.

In September, a federal judge denied Storm’s motion to dismiss his charges, allowing the case to move forward. Despite portraying his legal battle as a free speech issue, the judge ruled that First Amendment protections didn’t apply at that juncture.

Tornado Cash developers faced additional legal challenges elsewhere this year. In May, a Dutch court found Tornado Cash developer Alexey Pertsev guilty of money laundering, asserting that the privacy tool was “intended for criminals,” ultimately sentencing him to 64 months in prison. Pertsev’s appeal is currently in progress, and Ethereum co-founder Vitalik Buterin described his prosecution as chilling.

“The Alexei situation is truly unfortunate,” Buterin commented at a Berlin conference. “Many have assumed that just by building software, they are acting within legal rights to advocate for privacy.”

A potential breakthrough for Tornado Cash appeared in late November when the U.S. Fifth Circuit Court determined that the Department of the Treasury overstepped its authority in sanctioning Tornado Cash’s smart contracts, ruling that autonomous software cannot be categorized as property.

“No one wants criminals to exploit crypto protocols,” stated Coinbase’s Chief Legal Officer Paul Grewal, emphasizing the importance of not blocking open-source technologies simply because a minority of users are misusing them.

A Litany of Cases

While Storm’s case has garnered attention in the crypto community, he is not alone in facing legal scrutiny for developing privacy-centric tools.

In April, the Department of Justice arrested and charged the developers of Samouri Wallet, accusing them of operating an unlicensed money transmitter. The wallet combined Bitcoin transactions, serving as a coin mixer that allegedly facilitated over $2 billion in unlawful transactions.

Rodriguez, facing prosecution in New York, was denied bail in September due to “bug out prep” notes, while his partner in the venture was released on bail. Wyoming Republican Senator Cynthia Lummis openly criticized the case.

“The DOJ’s unprecedented and unlawful reinterpretation of the law poses a threat to fundamental aspects of Bitcoin,” Lummis expressed in a May letter. “Wallet software is no more responsible for illicit financing than a highway is for a bank robber’s getaway vehicle.”

Roman Sterlingov, found guilty of money laundering earlier this year, operated the cryptocurrency mixer Bitcoin Fog over a decade ago, allegedly laundering over $400 million in criminal proceeds through this tool. After being arrested in 2021, he was sentenced to 12 years in prison in November.

As regulatory pressures mounted for projects involving coin mixing services, several platforms like Wasabi Wallet and Phoenix Wallet swiftly shut down access for American users, denying them critical privacy tools for the foreseeable future.

Lawmakers on Capitol Hill, perceiving the use of coin mixers as a national security threat, requested updates from the U.S. Treasury Department on Tornado Cash in November, emphasizing ongoing concerns.

In a letter, they expressed unease over North Korean-linked hackers exploiting the service for laundering funds along with a range of other illicit activities.

“Despite sanctions, Tornado Cash remains operational and continues to function,” the lawmakers remarked. “This issue shows no signs of abating anytime soon.”

Edited by Sebastian Sinclair