Privacy is not a crime.
Yet when it comes to the crypto industry, projects and coins that enable users to tread lightly on-chain are facing higher levels of scrutiny than ever before.
In 2024, government-led efforts to combat the use of coin-mixing services continued apace as developers behind Bitcoin Fog, Tornado Cash, and Samouri Wallet all faced challenges in court. Meanwhile, so-called privacy coins faced hurdles as some exchanges stopped supporting them.
With Bitcoin’s pioneers drawing inspiration from the Cypherpunk movement, privacy and crypto have been intertwined since the industry’s beginnings as a means of internet-based resistance.
But that link, rooted in skepticism of governments and big banks, showed signs of fraying this year as exchanges navigated a maturing industry and developers faced prosecution.
As a layer-1 network, Midnight uses zero-knowledge proofs to preserve metadata associated with users, businesses, and transactions.
While it’s far different from the privacy tools the government has cracked down on, CEO Eran Barak said he’s observed a growing sense of unease among developers working on solutions that help preserve privacy on-chain.
“I think there’s definitely nervousness around the topic of privacy,” Barak told Decrypt. “People saw the hammer being thrown down on [industry] players.”
Privacy Projects
Pioneered over a decade ago, privacy coins have shielded users from prying eyes on-chain for much of the crypto industry’s existence. But this year, several exchanges distanced themselves from coins that help preserve the anonymity of their users, such as Monero (XMR).
After warning that it would delist Monero in February, Binance began converting customers’ XMR to stablecoins as part of its delisting process in September. At the beginning of this year, Binance also hit Monero competitors with a “monitoring tag” on its platform, including Zcash (ZEC) and Firo (FIRO). Still, those cryptocurrencies have yet to be delisted.
Citing regulatory changes in the European Economic Area (EEA), Monero was dealt another blow in October as Kraken said it would delist the coin on its platform for European users. Meanwhile, other cryptocurrency projects have been navigating privacy-focused scrutiny.
Secret Network, launched in 2020, is a blockchain featuring private smart contracts. Far from supporting a token that’s difficult to trace, Secret Network allows developers to build applications that support encrypted data on-chain, effectively providing a form of confidential computing.
According to SCRT Labs CEO Alex Zaidelson, multiple exchanges warned his team that Secret Network’s token could be delisted alongside Monero’s troubles. He said it took time and convincing, but eventually, the exchanges found that Secret Network was fine to offer from the perspective of anti-money laundering (AML) rules that regulated exchanges are subject to.
“We’ve seen a bunch of regulated players distancing themselves from anything related to privacy,” Zaidelson told Decrypt. “It took us work and explanation to make sure that people understand the difference between privacy coins. That and confidential computing chains.”
Zaidelson also said there’s a real need for privacy in the crypto industry if the tech has any chance of making it to the mainstream. Common examples include a hedge fund not willing to reveal its positions, he said, or a healthcare application that wants to put patient data on-chain.
“We cannot expect everybody to live in a glass house,” Zaidelson said. “You cannot build technology rails to run everything without protecting the data. It’s unimaginable.”
Coin Mixers
While privacy advocates say coin mixers can help users preserve their anonymity, the government has targeted them for years as a common tool for money launderers. Allowing users to obfuscate the source and destination of crypto transactions, the government’s crackdown on coin mixers continued this year, whether it was tied to Bitcoin or Ethereum.
Even though Tornado Cash was sanctioned by the U.S. Treasury’s Office of Foreign Asset Control in 2022—effectively blacklisting the tool for Americans—charges against the mixer’s developers wouldn’t be filed until a year later. Meanwhile, privacy advocates like whistleblower Edward Snowden decried the government’s move 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. According to U.S. law enforcement, Semenov remains at large, while Storm was arrested and faces prosecution in the Southern District of New York.
In September, a federal judge in New York denied Storm’s motion to dismiss his three charges, ruling the case could proceed. Even though Storm’s legal fight has been portrayed within the crypto industry as a matter of free speech, the judge found that Storm’s invocation of First Amendment rights had little bearing against the legal statutes under which he was charged. Effectively, the court found that free speech protections were irrelevant at that stage in the trial.
Those attached to Tornado Cash faced legal trouble elsewhere this year. In May, a Dutch judge at s-Hertogenbosch court found Tornado Cash developer Alexey Pertsev guilty of money laundering, stating that the privacy-preserving tool was “intended for criminals,” handing down a 64-month prison sentence. While Perstev has since appealed the ruling, Ethereum co-founder Vitalik Buterin described Perstev’s prosecution as downright chilling.
“The Alexei thing is definitely really unfortunate,” Buterin said at a Berlin conference. “I think a lot of people have been going under the assumption […] that just building software is something that’s okay and is a totally legal and legit way to fight for privacy.”
In late November, a glimmer of hope for Tornado Cash emerged. The U.S. Fifth Circuit Court ruled that the Department of the Treasury had overstepped its authority in sanctioning Tornado Cash’s smart contracts, finding autonomous software can’t be considered property.
“No one wants criminals to use crypto protocols,” Coinbase’s Chief Legal Officer Paul Grewal wrote in a post on X (formerly known as Twitter). “Blocking open source technology entirely because a small portion of users are bad actors is not what Congress authorized.
A litany of cases
Though Storm’s case in a federal New York court has captivated corners of the crypto industry, he isn’t the only developer of privacy-focused crypto tools facing legal pressure there.
In April, the Department of Justice arrested and charged the developers of Saumouri Wallet with operating an unlicensed money transmitter. Allowing users to obfuscate Bitcoin transactions by combining them, prosecutors described the product as a coin mixer that had “executed over $2 billion in unlawful transactions” while facilitating $100 million in money laundering.
Rodriguez, who faces prosecution in the Southern District of New York, was denied bail in September because of “bug out prep” notes. Though Hill was released on bail, Wyoming’s Republican Senator Cynthia Lummis vocalized criticism against the overall case.
“The DOJ’s unprecedented and unlawful change in interpretation of the law threatens to criminalize core elements of Bitcoin,” she wrote in a May letter. “Wallet software is no more to blame for illicit finance than a highway is responsible for a bank robber’s getaway car.”
Roman Sterlingov, who was found guilty of money laundering charges earlier this year, operated the cryptocurrency mixer Bitcoin Fog over a decade ago. Through his maintenance of the tool, federal prosecutors alleged that he laundered over $400 million in criminal proceeds.
While the developer was arrested in 2021, he wasn’t sentenced until November. Representing one of the industry’s most notable cases involving a coin mixer, a federal judge in Washington, D.C., sentenced Sterlingov to 12 years in prison.
Ultimately, the regulatory heat for some projects with coin mixing services in the U.S. grew too intense this year. Following the arrest of Samouri Wallet developers, projects like Wasabi Wallet and Phoenix Wallet closed their doors to American users rather quickly, placing their privacy tools out of reach for the foreseeable future.
A group of lawmakers on Capitol Hill, who view coin mixers’ use as a national security concern, requested an update from the U.S. Treasury Department on Tornado Cash in November.
In a letter, they expressed concern that North Korean-linked hackers are still using the service to launder funds among a litany of elicit actors like child abusers and human traffickers.
“Despite sanctions, Tornado Cash has remained online and continues to function,” the lawmakers wrote. “This problem shows zero signs of going away anytime soon.”
Edited by Sebastian Sinclair
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Source: https://decrypt.co/295929/year-in-crypto-war-privacy
