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Decentralized finance app developers should be aware that federal agencies hold them liable under the Bank Secrecy Act (BSA), regardless of whether they control user funds. The Department of Justice (DoJ), Office of Foreign Asset Control (OFAC), and Securities and Exchange Commission (SEC) have targeted decentralized service providers like Samourai, Tornado Cash, and Consensys, prompting companies such as Phoenix Wallet and Wasabi Wallet to exit the US market.

SEC’s Actions Under Gary Gensler

Under Chairman Gary Gensler, the SEC has even targeted individual developers at startups focused on decentralized technology. The Commission requested a list of Consensys developers involved in the Ethereum merge, a significant upgrade to the Ethereum blockchain that transitioned from proof-of-work to proof-of-stake.

These regulatory moves have a chilling effect on decentralized and privacy-preserving technology. Developers are now being viewed as potential threats to traditional banking systems.

Samourai Wallet

In April 2024, the DoJ indicted Keonne Rodriguez and William Lonergan, founders of the self-custodial Samourai Wallet, on charges of conspiracy to commit money laundering and operating an unlicensed money service business. Despite Samourai not being a bank, the charges were levied for providing software that automated financial processes.

Rodriguez’s attorney plans to file a motion to dismiss the case, supported by a letter from Senators Cynthia Lummis and Ron Wyden arguing that non-custodial crypto software shouldn’t be classified as a money-transmitting service. They emphasized that users retain sole possession and control of their crypto assets, with transactions processed on the user’s local device without third-party access.

Tornado Cash

Alexey Pertsev, a developer behind Ethereum-based transaction anonymizer Tornado Cash, has faced legal charges on multiple continents. Ethereum inventor Vitalik Buterin has shown support by donating 30 ETH to Pertsev’s legal defense fund.

In August 2022, OFAC sanctioned Tornado Cash for allegedly facilitating money laundering. By August 2023, US Federal law enforcement accused Tornado Cash of laundering over $1 billion in illicit funds, including hundreds of millions for North Korean hackers. Pertsev was also found guilty in the Netherlands of laundering $1.2 billion, a verdict he is appealing.

Regulators argue that developers are responsible for the decentralized applications (dApps) they release, despite developers’ claims to the contrary. According to Attorney General Merrick Garland:

“These charges should serve as yet another warning to those who think they can turn to cryptocurrency to conceal their crimes and hide their identities, including cryptocurrency mixers: it does not matter how sophisticated your scheme is or how many attempts you have made to anonymize yourself, the Justice Department will find you.”

Uniswap

Uniswap, a decentralized crypto exchange, received a Wells notice from the SEC in April 2024, accusing it of acting as an unregistered securities broker and exchange. Uniswap plans to aggressively fight these charges, arguing that their protocol complies with US law and offers secure, intermediary-free trading of assets.

MetaMask

Consensys, the company behind MetaMask, also received a Wells notice from the SEC in April 2024. The SEC accused MetaMask of being an unlicensed broker-dealer. In response, Consensys has sued the SEC for what it calls an “unlawful seizure of authority.”

Impact on the Crypto Industry

With the SEC targeting decentralized technology developers, companies like Phoenix Wallet and Wasabi Wallet have discontinued services for US customers. This raises questions about the viability of self-custodial wallet providers in the US.

If self-custodial wallet providers are classified as money service businesses, innovations like Lightning Network nodes may struggle to operate in the country. The SEC’s actions could also influence other countries to adopt similar policies.

The fight for the crypto industry’s future may take years, with some cases potentially reaching the Supreme Court. Traditional financial institutions and government entities seem determined to stifle decentralized financial technology.

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