This article is included in Bitcoin Magazine’s “The Privacy Issue”. Subscribe to receive your edition.
First they ignore you, then they laugh at you, then they fight you, then you win.
This quote—often incorrectly attributed to Mahatma Gandhi—has been stated so frequently in the Bitcoin community that its impact has diminished. Typically, it conveys the notion that the laughter has ended. However, any implications that the fighting phase has truly commenced have often been exaggerated, possibly inspired by mere remarks from a politician or financial expert.
But on April 24 of this year, the quote resonated with undeniable truth.
On that day, the US Department of Justice (DoJ), via the District Court of the Southern District of New York, revealed the indictment of Samourai Wallet co-founders Keonne Rodriguez and William Hill. Rodriguez, the CEO of Samourai Wallet who operated under the @SamouraiWallet pseudonym on Twitter/X, was arrested early that morning at his home in Pennsylvania. Hill (also known as TDev, or @SamouraiDev on Twitter) was arrested in Lisbon, Portugal, where he lived; as of this article’s writing, the DoJ aims to extradite him to the US.
Both are charged with operating an unlicensed money transmission business and reportedly earning millions of dollars in fees. For this offense, Rodriguez and Hill each face a potential prison term of up to five years.
Additionally, they are charged with money laundering. According to the DoJ, Samourai Wallet was allegedly utilized to launder over $100 million in unlawful proceeds from dark net marketplaces, fraudulent schemes, and other illicit activities. This could mean an additional maximum of 20 years to their sentences.
Samourai Wallet’s web servers and domain (samourai.io) were also confiscated, making the wallet mostly inoperable. (Users could still retrieve their bitcoin via other wallets using their backup seeds.)
Around the same time as the arrests of the Samourai Wallet developers, the FBI issued a public alert to cryptocurrency holders, warning that they could lose their funds due to criminal seizures unless they transferred their assets to regulated entities. Although Samourai Wallet was not specifically mentioned, the timing of the announcement implies that it was not coincidental.
Collectively, these events appeared to signify a transformative shift for Bitcoin and its development.
Bitcoin Privacy
Bitcoin is rooted in a rich tradition of privacy advocacy. In an increasingly digital monetary world, Cypherpunks have been striving since the 1990s to construct a form of electronic cash to avert an Orwellian future where every transaction can be surveilled and possibly censored. Likewise, Douglas Jackson, around the dawn of the millennium, introduced eGold, a gold-backed digital payment system featuring privacy options, which ultimately ceased operations due to Jackson’s failure to register his entity as a money transmitter.
eGold required a money transmitter license because it maintained gold reserves on behalf of its users; however, it has generally been assumed since then that developers of non-custodial wallet software did not need to register as money transmitters. As long as developers had no control over user funds, they were not obligated to register with the United States Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), and thus wouldn’t need to implement anti-money laundering (AML) and Know Your Customer (KYC) protocols on their users—at least that was the prevailing belief.
This assumption was largely based on guidance from FinCEN itself, published in 2013.
Consequently, many thought that developers wouldn’t be liable for the use of their software. If non-custodial Bitcoin wallets were misused for money laundering, those partaking in the activity would be the ones breaking the law, but it was generally not believed that the wallet creators had a responsibility to prevent this misuse at the outset.
Samourai Wallet was indeed a non-custodial wallet. Users managed their own private keys within their wallet software, meaning Rodriguez or Hill never had control over these bitcoins. By default, the Samourai Wallet application did connect with a central server for transaction handling, but users could bypass this by connecting to Samourai Dojo: a personal, internet-connected device hosting a Bitcoin node.
Crucially, Samourai Wallet was promoted as a privacy wallet, and its primary privacy feature—Whirlpool—did indeed rely on the Samourai server. Specifically, Samourai Wallet users could work together, coordinated through this central server, to execute CoinJoin transactions. In groups of five, participants would contribute an equal amount of bitcoin (e.g., 0.01 BTC) to a transaction, which returned the same amount to each member.
Because there is no method to link specific transaction inputs to specific transaction outputs, this effectively “mixed” their coins. Analysts examining the blockchain would be unable to trace back the pathways of these coins, except to the extent that they’d know they must have originated from one of these five contributors. Furthermore, Whirlpool users could opt for automated mixes, further obscuring their transaction histories.
Moreover, Samourai Wallet provided a feature called Ricochet, allowing users to send bitcoin to newly created addresses they controlled multiple times, thereby complicating blockchain analysis too. (While this is achievable with any Bitcoin wallet, Samourai Wallet automated this procedure.)
The DoJ’s allegation is that these tools were indeed misused for money laundering. Furthermore, the federal department contends that the Samourai Wallet co-founders intended for this to occur. This assertion is largely based on both public and private communications about their service, including some public remarks made by Rodriguez and Hill on Twitter and in pitch decks aimed at investors, which indicated that individuals involved in “illicit activity” on “restricted” or “dark/grey” markets would be part of their user demographic.
Whether these comments genuinely suggest that Rodriguez and Hill purposely designed their software for illicit activities—rather than being mere “tough marketing talk” from developers aiming to offer financial privacy tools—will need to be established in a court of law.
Importantly, the Samourai Wallet arrests challenge the long-held notion that developers are exempt from registering as money transmitters and conducting the corresponding AML and KYC checks.
This assumption, however, had already been questioned in a different segment of the cryptocurrency landscape…
Tornado Cash
In August 2022, the US Treasury’s Office of Foreign Assets Control (OFAC) added Tornado Cash, an Ethereum blockchain smart contract, to its sanctions list, making interaction with the smart contract illegal under US law.
Later that same month, Dutch police arrested Alexey Pertsev. In prior years, Pertsev, along with Roman Storm and Roman Semenov, co-founded and operated the software development company PepperSec. Central to their work had been creating Tornado Cash and its supportive infrastructure.
As a smart contract, Tornado Cash functions autonomously. Although Pertsev assisted in developing the tool, it operates across thousands of Ethereum nodes globally. After its release, Pertsev had no means to govern its use or the users engaging with it. Anyone could transfer an amount of ETH to the smart contract, which—via a cryptographic technique known as zero-knowledge proofs—allowed them to withdraw an equivalent amount from the contract, but to a different address. Here, again, there was no way to connect the ETH entering Tornado Cash with the ETH exiting, effectively turning the smart contract into a “mixing” service.
To facilitate this feature, PepperSec developed additional infrastructure, which partly relied on relayers: Ethereum users would be engaged to cover the Tornado Cash fee, for which they would receive TORN tokens as compensation. This element of the design—the relayers and the TORN tokens—was associated with another smart contract on the Ethereum blockchain, designed to function as a decentralized autonomous organization (DAO).
Moreover, PepperSec operated a service that provided an accessible graphical user interface (GUI) for the smart contract and its supporting framework.
Crucially, Tornado Cash and the associated infrastructure consisted entirely of non-custodial software. Pertsev, Storm, and Semenov crafted code, but they never controlled any ETH moving into the smart contract. While they couldn’t dictate how Tornado Cash was utilized, it was less clear how much they could control the supportive infrastructure. (As with many Ethereum applications, claims of “decentralization” were often more based on marketing than technical realities.)
Regardless, for the Dutch prosecutor, the fact that Pertsev and his colleagues never held any ETH did not matter significantly. In her opinion, PepperSec operated as a business and—indirectly through the TORN token—derived income from Tornado Cash and its infrastructure. She argued that, as a result, Pertsev should be held accountable for the software’s usage and by whom it was employed.
Specifically, she highlighted that Tornado Cash had been employed in laundering over a billion US dollars, including by North Korean state-backed hackers known as the Lazarus Group. Pertsev knowingly facilitated such activities through his software, she claimed, and took no action to prevent it. Accountability was necessary.
And as it became evident, the Dutch prosecutor was not alone in this belief. About a year after Pertsev’s arrest in the Netherlands, his fellow PepperSec founders Storm and Semenov were indicted in the United States, with Storm (living in the US) taken into custody. (Semenov, at the time of this article’s writing, was unaccounted for, likely residing in a nation without an extradition treaty with the US.)
Similar to Pertsev, both face charges of money laundering, operating an unlicensed money transmission business, and violating sanctions. Storm’s trial is set for this September in New York.
Chilling Effect
The numerous arrests swiftly appeared to create a chilling atmosphere among other Bitcoin developers.
Even prior to Pertsev’s arrest, in March 2022, Bitcoin privacy wallet Wasabi Wallet—Samourai Wallet’s main rival—opted to implement AML checks in their mixing software, rejecting coins believed to be tied to illicit activities. (Although Wasabi Wallet, like Tornado Cash and Samourai Wallet, was fully non-custodial, the company that developed it—zkSNACKs—coordinated CoinJoin mixes through a central server.)
This new policy was met with significant criticism by—among others—the Samourai Wallet team and other privacy proponents within the Bitcoin community. Rodriguez and Hill vocally and proudly declared that their mixing service was open to all users, taking a much more confrontational stance toward regulators and their KYC/AML structures on social media. It is this adversarial attitude that may have landed them in legal trouble.
More recently, the arrests of the Samourai Wallet developers prompted other Bitcoin programmers to take extra precautions as well. Just one day after the indictment, Sparrow Wallet, which had been compatible with Samourai Wallet’s Whirlpool, released an updated version of its software that disabled this feature. Shortly afterward, development company ACINQ announced that its Phoenix Wallet (a Lightning wallet) would be removed from US app stores, citing that “[r]ecent announcements from US authorities create uncertainty around whether self-custodial wallet providers, Lighting service providers, or even Lightning nodes could qualify as Money Services Businesses and be regulated accordingly.”
In a significant blow to Bitcoin privacy, Wasabi Wallet subsequently announced it would cease its mixing service altogether. With Whirlpool already offline, this key CoinJoin coordinator planned to halt operations as of June 1st of this year.
The First Verdict
Just weeks after the Samourai Wallet developers were arrested and the events that followed, on May 14th of this year, Pertsev faced his sentencing.
In a courtroom in ’s Hertogenbosch, a modest city about an hour south of Amsterdam, the Tornado Cash developer received disappointing news. The panel of judges essentially concurred with the prosecutor on all counts, going further than the prosecutor in some respects. The judges determined that Pertsev bore full responsibility for the smart contract’s use; the argument that parts of the code developed by PepperSec were “unstoppable” was not deemed a valid defense.
“Tornado Cash operates in the manner in which the defendant and its co-founders designed it,” they stated. “Therefore, the operation is entirely their responsibility.”
Pertsev was sentenced to 64 months in Dutch prison—although he has filed for appeal, which is currently pending as of this article’s writing.
The next trial concerning Tornado Cash will take place in New York, where Pertsev’s PepperSec co-founder Storm will be judged. While the Dutch verdict should not formally influence the outcomes of the American trials, the case and sentencing in the Netherlands may serve as a barometer for what to expect: Dutch prosecutors have shared many files with their American counterparts.
Meanwhile, the initial hearing for Samourai Wallet’s Rodriguez also occurred in New York last May. He awaits the full trial under home arrest in Pennsylvania.
Nonetheless, despite these considerable hurdles for Bitcoin privacy, the possibility of bitcoin mixing is far from extinguished. Firstly, all American court cases are yet to occur. (And even if Rodriguez, Hill, or Storm are found guilty, they too can appeal to higher courts.) Simultaneously, JoinMarket—a tool that enables users to create CoinJoin transactions independently—remains operational without interruption. Additionally, while Wasabi Wallet has taken its central coordinator offline, the wallet itself will continue to be maintained.
What’s more, alternative Wasabi Wallet coordinators have already begun offering their services: while not managed by zkSNACKs, this allows users to create CoinJoin transactions among themselves in a very similar manner. Given that such coordinators can even function anonymously over Tor, future prosecutions of such services may prove more challenging—regardless of the outcomes of the pending trials.
The fighting phase has indeed commenced—and this battle is far from finished. Whether this adage will hold true, and lead to the subsequent winning stage, remains to be seen.
