Samourai Wallet Co-founder Accused of Money Laundering: Should Privacy Technology Continue to Develop?

By Daniel Kuhn, CoinDesk; Compiled by Wuzhu, Golden Finance

The U.S. government has dispelled any concerns that any involvement in or profit from privacy tools beyond writing code for cryptocurrency mixers is prohibited.

Call it an attack on privacy or an attack on free speech, but the reality is that any funds that flow into an application designed to mix funds to protect user addresses will be considered money laundering funds, regardless of their purpose or destination.

Bitcoin Fog, Tornado Cash, and now Samourai Wallet.

Samourai Wallet is a bitcoin wallet (whose servers have been seized) that promises to “keep transactions private and mask identities” through a privacy protection service called “Whirlpool.”

Authorities say the wallet processed more than $2 billion in illicit transactions, at least $100 million of which was routed through illegal darknet markets like Silk Road and Hydra Market. Similar arguments were made when Tornado Cash was sanctioned by the U.S. Treasury, which essentially treated every dollar that flowed through it as criminal in nature.

“Along with our law enforcement partners, we will continue our relentless pursuit and dismantling of criminal organizations that use cryptocurrency to hide their illegal conduct,” U.S. Attorney Damian Williams said in a statement Wednesday.

Operational Security

Samourai Wallet’s co-founders, 35-year-old Keonne Rodriguez and 65-year-old William Lonergan Hill, op-sec, or “operational security,” had a lot to say. Rodriguez was arrested in Pennsylvania and will go on trial this week, while the U.S. is still working to extradite Hill from Portugal.

“I don’t know how they think they won’t be arrested and prosecuted for this. It sounds like the DOJ has direct evidence that they knew they were helping people conceal illegal transactions and charging for services,” Brian Frye, a law professor at the University of Kentucky, said in an interview.

The DOJ accused Rodriguez and Hill of actively soliciting criminal customers in their marketing and social media posts. For example, Hill reportedly said in an intercepted internal message, “At Samourai, we are completely focused on censorship resistance and the dark/gray circular economy. This means there is no foreseeable mass adoption.”

“Ultimately, if you knowingly facilitated and profited from illicit financing, as alleged in the complaint, the outlook is bleak,” venture capitalist Nic Carter said in a direct message. “Nevertheless, the extent to which the Biden administration is trying to criminalize privacy is disturbing.”

The Biden administration appears to have stepped up its crackdown on mixing services. That included the arrest of Russian-Swedish Bitcoin mist operator Roman Sterlingov in April 2021 and the arrest of a Tornado Cash co-founder in 2023. However, cryptocurrency mixers have long been on the radar of criminal prosecutors. In Sterlingov’s case, investigators spent years gathering evidence.

Back in May 2019, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) had been concerned about cryptocurrency “tumblers,” finding that “persons who accept and transmit value in a manner ostensibly designed to protect the privacy of transmitters are providers of secure money transmission services and are not eligible for block exemption.”

In other words, a mixer is a money transmitter, even if a person typically only transmits funds between two addresses they control to keep their funds anonymous. FinCEN noted that if you are considered a money transmitter, you should be subject to the Bank Secrecy Act.

“My view is that the crypto industry should treat regulation as ‘force majeure’ and adjust it,” said Tal Be’ery, co-founder and CTO of ZenGo Wallet. [Force majeure is a common legal clause that exempts parties from liability. ]“The U.S. government has made it very clear that the prosecution of the Tornado Cash operator for operating a mixer is unacceptable, so it’s likely that other mixers will be held accountable.”

Privacy Net?

Others worry that it’s not just mixing services that are being targeted, but all privacy-preserving blockchain technology.

Alex Thorn, head of research at Galaxy Digital, noted:“From the case against Tornado Cash to the IRS’s ‘broker rule’ to the arrest of the founder of Samourai Wallet, it’s clear that the U.S. government is actively campaigning against privacy tools in the cryptocurrency space.”

Notably, Samourai Wallet is non-custodial and open source, despite Rodriguez and Hill having actively overseen the protocol since its launch more than a decade ago. The code is “self-hosted” on the company’s open source GitLab repository, though the link provided no longer appears to be working. The Samourai app has also been removed from the Google and Apple app stores, even though the software could theoretically be built, run and hosted by anyone.

Some experts contacted by CoinDesk, including Frye, believe that cryptocurrency mixers can theoretically be legal to code, but may not be marketed or maintained. In the United States, publishing software is generally protected by the First Amendment because code is a language.

“While cryptocurrency mixers may be legal in theory, if they are only used to protect the privacy of legal transactions, it is absolutely illegal to use them to hide illegal transactions,” Frye said.

“It is clear that if developers continue to participate in privacy tools beyond writing code — whether operating a front end, facilitating any form of money movement or collecting fees — they will become a target. For on-chain privacy to succeed in the future, tools must be fully decentralized,” Thorn responded.

Others, such as TradeLayer founder Patrick Dugan, pointed out that it is also important whether the authors of the cryptocurrency mixer code profit from their inventions. According to the indictment, Samourai allegedly earned at least $4.5 million in fees from its wallet and mixing services.

“The case will ultimately come down to any revenue mechanisms that the developers may have used that could constitute operating an enterprise in the eyes of prosecutors, making them liable for money laundering conducted by their agents,” Dugan said, noting that, unlike Tornado Cash, Samourai does not have a token.

Fighting for privacy

Despite the grim realpolitik situation, many in the crypto community see the attacks on cryptocurrency mixers as an infringement on the fundamental human right to privacy.

“It’s disturbing that the government would seize Samourai and arrest its operators. It feels more like the actions of an authoritarian regime than a free country. I think people have a fundamental right to privacy in their financial transactions, whether they’re digital or physical,” said Ogle, the crypto sleuth, in an interview.

“I’m a big fan of privacy services, so I have no moral concerns about what’s going on,” said one bitcoin lightning developer, who asked to remain anonymous in order to discuss the situation more candidly. “But it seems a little silly on their part. If I understand the situation correctly, these two U.S. citizens didn’t even do a good job of covering their tracks. So the arrests weren’t surprising.”

Others noted that despite the increased attention privacy services are receiving, there will always be demand for these protocols from both legitimate and criminal users.

“This doesn’t solve the problem of illicit funds being laundered, given how easy it is to spin up or use another mixer,” Ogle said. “It just pushes it onto another service.” Dugan noted that there are also privacy coins already in circulation for “people who are looking for a pure exit through crypto privacy,” though “it’s not easy.” He added, “With Monero, it’s been delisted almost everywhere, so you know it’s legal.”

Zooko WIlcox, founder of privacy coin Zcash, noted: “It is legal to create privacy technology in the United States, and we will continue to do so because privacy and freedom are a core part of American civilization.”