The U.S. Department of Justice pushed back against Tornado Cash developer Roman Storm's motion to dismiss a criminal indictment against him.

Tornado Cash was a money transmitting business, and the DOJ said it expects its evidence to support the charges, a Friday filing said.

The U.S. Department of Justice rebuffed Tornado Cash developer Roman Storm's motion to dismiss criminal charges on Friday, saying the defense filing presented disputed facts that a jury should weigh in on, rather than arguments that fit an early-stage motion.

The DOJ charged Storm, alongside fellow developer Roman Semenov, with conspiring to commit money laundering, conspiring to operate an unlicensed money transmitter and conspiring to violate sanctions law by creating and operating Tornado Cash, a crypto mixing service designed to anonymize transactions. North Korea's Lazarus Group and other criminal entities have laundered funds through Tornado Cash, U.S. authorities have alleged.

Storm's attorneys moved to dismiss the indictment at the end of March, arguing that Tornado Cash is not a custodial mixing service – and doesn't fit the definition of a "financial institution" – and that Storm was not able to control the service or block Lazarus and similar groups from using it.

Merely developing code for the project isn't the same as operating a money laundering entity, the defense argued.

In Friday's filing, the DOJ disputed how the defense characterized Tornado Cash, saying it was announced in 2019 as a mixer and the overall service includes a website, user interface, a combination of smart contracts and a "network of 'relayers.'"

"The defendant cannot obtain dismissal of the Indictment by simply making factual assertions about his own contested view as to how the Tornado Cash service operated and based on his own self-serving version of his intent or lack thereof when taking certain acts," Friday's filing said.

The DOJ also disputed Storm's assertions about how the Tornado Cash interface worked and how much control individual users might have over the deposit and withdrawal process, providing screenshots. The filing also argues that Storm and his co-founders maintained control over the mixer, at least during the time period the DOJ is referring to in its charging document (2019 to August 2022).

The filing makes repeated references to evidence the DOJ expects to introduce during trial, addressing how Storm and other Tornado Cash founders built and developed the system, how people used Tornado Cash and other details.

Storm is set to go on trial this September, while Semenov remains at large.

Read more: Tornado Cash Dev Roman Storm Moves to Dismiss Indictment Over Crypto-Laundering Allegations

The Japanese yen fell Friday to its weakest level against the U.S. dollar since 1990.

Bitcoin remained flat around $64,000 as some altcoins slid lower.

Intervention may follow soon if yen devaluation continues, Lekker Capital's Quinn Thompson said.

Cryptocurrencies, widely known for their often volatile nature, were a sea of calm Friday as the Japanese yen's tumble to a fresh 34-year low against the U.S. dollar left traditional market observers mulling over potential knock-on effects.

Bitcoin {{BTC}} continued its recent choppy action during the day within a tight range around $64,000, down 0.9% over the last 24 hours. The broad-market CoinDesk 20 Index (CD20) fell slightly more with smart contract network tokens solana {{SOL}}, ICP and decentralized exchange Uniswap's UNI declining 2%-4%.

The Japanese yen (JPY) dove another 1.3% during the day – a huge move for a major currency – to its weakest level against the U.S. dollar since 1990 after the Bank of Japan (BOJ) held interest rates at near zero and didn't indicate much concern over the weakening currency. In the U.S., meanwhile, continuing solid economic growth and stubbornly high inflation are snuffing out hopes for perhaps any easing of monetary policy this year.

"Moves of this size and speed in currencies is not normal so I expect some intervention or coordination fairly soon if it continues into the next few weeks," Quinn Thompson, founder of hedge fund Lekker Capital, told CoinDesk.

The yen's devaluation didn't impact crypto markets yet, but this could change if the BOJ steps in to prop up the currency, Noelle Acheson, analyst and author of the Crypto Is Macro Now reports, said in an email interview. A possible intervention would mean the BOJ selling U.S. dollar assets (U.S. Treasuries) to buy yen, and a weaker greenback could in theory help crypto prices, she added.

Another form of intervention could arrive from U.S. policymakers deciding to inject liquidity to the markets, which could support risk assets such as cryptos, Lekker's Thompson said.

Read more: The Key to Reviving Bitcoin Bull Run is the U.S. Treasury’s Refunding Announcement Zooming out, Acheson forecasted that the "currency turmoil won't stop with the yen," as the recent jump in U.S. yields following sticky inflation reports will put a strain on other currencies, perhaps forcing other central banks to take action.

"We could see a collective selling of U.S. treasuries to raise cash to support local currencies, adding further upside pressure to U.S. yields while adding to inflationary pressures elsewhere," Acheson said. "This currency volatility and vulnerability could encourage more corporate and even sovereign holdings of hedges such as gold and bitcoin."

A Republican lawyer and crypto defender who hopes to be Sen. Elizabeth Warren's opponent in the Massachusetts Senate race has filed a supporting brief in a Coinbase clash against the Securities and Exchange Commission.

Coinbase wants to get a higher court to decide whether tokens that trade on secondary markets with no obligations on the tokens' issuers should be considered securities.

Deaton is arguing in favor of the exchange's effort, saying the SEC is taking an unconstitutional shortcut in its accusations that certain token trading violates securities laws.

Lawyer-turned-politician John Deaton further reinforced his credentials as an outspoken crypto ally on Friday, filing a friend-of-the-court brief in Coinbase Inc.'s (COIN) effort to get a higher U.S. court to rule on a central question about when a digital token qualifies as a security.

Deaton, one of several Republican candidates vying for the chance to oppose Sen. Elizabeth Warren (D-Mass.), filed the amicus brief seeking to bolster Coinbase's argument in its fight with the Securities and Exchange Commission (SEC). The exchange filed for a so-called interlocutory appeal earlier this month, seeking permission to get a separate ruling on a narrow legal argument – whether a digital asset transaction that poses no obligation to the original issuer of the asset should be considered an SEC-regulated investment contract.

Deaton contended that the "politically driven, compromised agency" leans on its interpretations of the legal tool known as the Howey test to define tokens permanently as securities, which is beyond its authority.

"The Howey test is a transaction-by-transaction analysis," Deaton argued. "There are thousands of digital assets and thousands, sometimes millions, of transactions occurring on various blockchains. Because of this inconvenient reality, the SEC adopted an unconstitutional shortcut by effectively saying all transactions of the tokens violate securities laws."

The lawyer had similarly weighed in during Ripple Labs' clash with the U.S. securities regulator, establishing his reputation in digital asset circles.

As a Senate candidate, he must still defeat a handful of Republican candidates in the September primaries before he can face Warren in the November general election. Even if he gets that chance, polling in the state suggests Warren is highly likely to retain her Senate seat.

Deaton is scheduled to be among the speakers next month at Consensus 2024 in Austin, Texas.

Read More: Coinbase Seeks to Take Core Question in U.S. SEC Case to Higher Court

CoinDesk Indices (CDI) presents its bi-weekly market update, highlighting the performance of leaders and laggards in the benchmark CoinDesk 20 Index (CD20) and the broad CoinDesk Market Index (CMI).

The majority of assets within the Index closed Thursday higher than they did a week earlier despite choppy price action. Just five tokens closed lower. Overall, the CoinDesk 20 gained 2.1% on the week.

Near Protocol {{NEAR}} continued to outperform the rest of the CoinDesk 20 with a 24% advance. The protocol has recently been making moves in the decentralized AI space, which has coincided with an outsized move higher over the past few weeks.

Aptos ({{APT}}) was among the undeperformers, losing 5.1% of its value last week. Filecoin ({{FIL}} and bitcoin cash ({{BCH}} were the only other assets to see meaningful moves lower.

CoinDesk 20 tracks top digital assets and is investible on multiple platforms. The broader CMI comprises approximately 180 tokens and seven crypto sectors: currency, smart contract platforms, DeFi, culture & entertainment, computing, and digitization.

Custodia, a Wyoming-based aspiring crypto bank, filed a notice of appeal against a court ruling that affirmed the Federal Reserve's rejection of its bid for a master account and membership.

A federal judge ruled last month that the Kansas City Fed had the discretion to reject Custodia's bid for membership. Custodia, according to the court, had not provided sufficient evidence to back up accusations that the Fed's Board of Governors was illegally leaning on the Kansas City branch to reject the bank's bid for a master account. A master account would let Custodia directly access the Fed and not need intermediary banks.

The ruling came years after Custodia first filed suit, alleging the Fed had taken too long to make a decision. The company helmed by Caitlin Long, who helped draft Wyoming's special purpose depository institution law, later refiled the suit after the Fed formally denied its master account application.

"Unless Federal Reserve Banks possess discretion to deny or reject a master account application, state chartering laws would be the only layer of insulation for the U.S. financial system," Judge Scott Skavdahl wrote last month. "And in that scenario, one can readily foresee a 'race to the bottom' among states and politicians to attract business by reducing state chartering burdens through lax legislation, allowing minimally regulated institutions to gain ready access to the central bank's balances and Federal Reserve services."

At the time, a Custodia spokesperson said the company was reviewing the ruling. Custodia also filed an objection to the Fed's attempt at collecting legal fees, arguing both that the case was ongoing due to the appeal and that granting the fees might "chill" future lawsuits by companies against government or quasi-government entities.

The bipartisan pair of U.S. senators underlined crypto's history as a mainstay of transactions to purchase illegal pornography featuring children.

Their letter to U.S. Attorney General Merrick Garland and the secretary of the Department of Homeland Security noted the difficulties in heading off these crimes and asked the top law-enforcement officials what more can be done.

Leading crypto critic U.S. Sen. Elizabeth Warren (D-Mass.) has asked U.S. Attorney General Merrick Garland what tools the federal government needs to crack down on the use of digital assets to perpetrate child sexual exploitation, according to a letter she sent to the top U.S. law-enforcement official.

Warren and Sen. Bill Cassidy (R-La.) flagged cryptocurrencies as a significant tool supporting child sexual abuse materials in a letter the senators sent this week to Garland and Alejandro Mayorkas, the chief of the U.S. Department of Homeland Security.

Cryptocurrency has become "the payment of choice for perpetrators of child sexual abuse and exploitation," the lawmakers noted, citing a February FinCEN Trend Analysis from transactions in 2020 and 2021 and a Chainalysis report from this past January. "Existing anti-money laundering rules and law enforcement methods face challenges in effectively detecting and preventing these crimes – and we seek to ensure that Congress and the administration are doing their part to address these challenges."

The letter asked the agencies to detail the "additional tools and resources" they need to deal with the problem.

The use of digital tokens to fund the abuse of children rose to prominence years ago, such as in the 2019 bust of the Welcome to Video pornography site run by a South Korean national and, a year later, when authorities pursued a Dutch national who ran a rape and child porn site on the darkweb and made $1.6 million in bitcoin {{BTC}}.

Crypto became a favorite form of payment due to perceptions that it offered anonymity for the transactions, though analytic tools and law-enforcement strategies have since cast some doubt on that. Much of the data on crypto use cited by the lawmakers is several years old. Still, the Chainalysis review earlier this year noted it as "a growing problem." Read More: Bitcoin Favored in Human Trafficking, Child Exploitation: FinCEN Report

As the crypto industry enters a new phase of adoption, many will be wondering which narratives will win this market cycle. Will it be meme coins, scene coins, or AI (vapor)ware? Or perhaps liquid re-staking, ordinals, or maybe doginals, or is it Base? The crypto space is swirling with hot narratives, and even hotter money.

With some luck, this cycle won’t be remembered for any of those narratives. Instead, it will be known for remaking what I will call the “operator economy” (what is more commonly called the “gig” or “sharing” economy). That would spell victory for anyone who has ever overpaid for an Uber or sacrificed health benefits to take on that freelancer gig. And it would be a vindication of crypto itself.

Ivo Entchev is a partner with Youbi Capital, a digital asset VC and accelerator since 2017.

Companies like Uber and Airbnb pioneered the operator economy when they started delivering valuable services using crowdsourced infrastructure and labor. In the process, they proved that this relatively decentralized business model could compete with, and even outperform, traditional businesses. Today, the United States is home to more operating platforms than anywhere in the world, with apps for food delivery, haircuts, babysitters, car sharing, and many more. The U.S. operator economy has produced a stable of unicorns and is on track to be valued in the trillions by 2031. In a sense, the operator economy is becoming The Economy.

From the standpoint of market efficiency and social fairness, the operator economy is a failed experiment. Operator “ecosystems” are rife with monopolistic platforms, predatory pricing (subsidized by venture funds) and supported by an expanding underclass of economically precarious “gig” workers. Gig workers receive piecemeal wages and no overtime, are denied employee benefits like Social Security and health coverage, and must pay out-of-pocket to cover costs of doing their jobs. They are also subjected to various forms of wage theft or discrimination by opaque algorithms that orchestrate their work.

Building equity

Decentralized Physical Infrastructure, or DePIN, promises operator ecosystems that are both more efficient and more equitable. DePIN describes community-driven protocol networks that coordinate hardware-based services with tokens, and its underlying logic is as old as crypto itself. Bitcoin is the prototypical DePIN network allowing anyone in the world to contribute computing hardware towards securing an open distributed ledger in exchange for token rewards. This basic logic informs all subsequent DePIN networks.

Much like DeFi, DePIN’s leading economic benefit is that it dissolves rent-seeking intermediaries and re-distributes their rents to a range of stakeholders. Take Teleport, a DePIN ride hailing app. Teleport coordinates its ride hailing community using its protocol and token incentives, eliminating the need for any corporate, like Uber or Lyft. This returns extractive margins and fees back to drivers and riders in the form of higher wages and lower prices.

Another major improvement is that operators earn an economic stake in the network through the token they accumulate in wages and rewards. As the network expands, these tokens expose operators to pre-IPO venture returns, much like the early miners of the Bitcoin network. In contrast, today’s gig workers don’t receive even basic employee benefits. Tokenization separately benefits the network because it incentivizes early adopters and evangelists, helping to bootstrap the next wave of operators and users.

Read more: 'DePIN' Is Venture Capitalists' Latest Crypto Obsession. Can It Match the Hype?

There are other notable benefits. DePIN is permissionless, meaning that it reduces barriers to entry, draws in a broader range of participants, and expands geographic reach, making it ideal for edge cases. DePIN networks are also transparent and provide more protection against discrimination by algorithm. And because code is harder to halt or censor than a central actor, they can be more difficult to disrupt for political or other illegitimate reasons.

In this cycle, Web3 operators are emerging in a range of industries, signaling that DePIN is expanding and maturing. They include:

Computing operators. Computing operators provide essential processing and communication services. Projects like Aethir Cloud showcase the potential of decentralized cloud rendering networks, allowing developers to build a range of decentralized consumer applications and users to tap into a collective pool of computational power. Similarly, Akash offers a marketplace for cloud services, challenging traditional providers like AWS and GCP with a decentralized alternative.

Data operators. Data operators transform raw data into valuable assets. They deploy hardware to collect and process data, creating datasets and APIs for commercial use. Examples like DIMO and Hivemapper illustrate this trend, with operators gathering vehicle data for insurers or capturing street images for real-time street-level mapping. Beyond mere collection, these operators often enhance data before it’s wrapped into marketable products.

Storage operators. Storage operators ensure data permanence in the Web3 operator economy. Projects like Arweave and Filecoin are offering decentralized solutions for file storage. They ensure that data is not just saved but also remains accessible for future use. These platforms are crucial as they safeguard information against loss and obsolescence, enabling a reliable digital legacy.

Hardware operators. Hardware operators match physical assets with user demand. Take io.net, which connects companies needing AI processing power with a network of GPU providers. Helium operates similarly, linking small cell hardware owners with those requiring 5G connectivity. In the Web3 operator economy, hardware becomes a shared commodity while every participant plays the dual role of consumer and provider.

Growing pains

Despite its recent rise and immense potential, DePIN faces material challenges. Most notably, DePIN networks must navigate the complex regulatory landscape of the real world while remaining committed to decentralization. For example, the mapping service Hivemapper is required to juggle a patchwork of governance, data management, and safety regulations, each with its own set of stringent compliance requirements. These hurdles introduce significant friction, which slows progress towards the desired end state of autonomous protocols.

Finally, if they are to succeed, DePIN network must find ways to protect vulnerable operators from the token volatility and crashes that can accompany a bootstrapped network economy. Ethereum cofounder Vitalik Buterin recently wrote of the moral imperative to protect vulnerable crypto users from token collapses and scams. But his argument is even stronger when applied to projects that purport to empower economically disenfranchised groups, such as gig workers, artists and users in the developing world.

DePIN is a natural place to begin stretching crypto’s social safety net. Assuming that DePIN can solve those challenges, it will revolutionize the operator economy and put crypto’s value, as well as its values, beyond doubt.

This article originally appeared in First Mover, CoinDesk’s daily newsletter, putting the latest moves in crypto markets in context. Subscribe to get it in your inbox every day.

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Bitcoin (BTC) traded above $64K even as outflows from bitcoin exchange-traded funds (ETFs) picked up. Market data shows that the U.S.-listed ETFs had a daily total net outflow of $217 million. This brings the total outflow this week to $244.49 million. In comparison, bitcoin is up around 3.7% in the past seven days. According to JPMorgan, the correlation between bitcoin ETF prices and inflows has weakened, dropping from a high of 0.84 in January to 0.60 in recent assessments.

Cathie Wood's ARK Invest offloaded the last of its shares in ProShares Bitcoin Strategy ETF (BITO) on Thursday. The investment firm sold 237,983 BITO shares worth $6.7 million at Thursday's closing price of $28.22 from its Next Generation Internet ETF (ARKW). ARK bought over 4 million of the shares late last year as a short-term play in anticipation of the approval of spot bitcoin ETFs in the U.S., with plans to swap them once the approval came. Following consistent sales in January, ARK has sold the rest of its BITO shares in the past week.

The European Parliament voted to adopt a new package of laws tightening money laundering and terrorist financing measures across the EU. The laws target large cash payments, crypto firms and football clubs, among others. In addition to creating a single rulebook for the 27 nations that make up the European Union, the package approved on Thursday sets up an anti-money laundering authority based in Frankfurt to oversee the implementation of the relevant frameworks – particularly those the bloc deems as the "riskiest entities." The new laws include "enhanced due diligence measures and checks on customers’ identity, after which so-called obliged entities (e.g. banks, assets and crypto assets managers or real and virtual estate agents) have to report suspicious activities to [Financial Intelligence Units] and other competent authorities," a press statement on the vote said.

Chart of the Day

The chart shows that the crypto exchange Deribit's bitcoin volatility index (DVOL), an options-based measure of expected price volatility over the next 30 days, has collapsed from an annualized 72% to 55% in five days.

"This is the result of spot [price] being stuck in a tight range and the basis yield drying up. The desk has seen many customers pivot to option selling strategies," Singapore-based QCP Capital said in a market update.

Selling or writing options represent a bearish view of volatility or a degree of price turbulence.

Source: TradingView.

Trending Posts

Consensys, a Target for the SEC’s Assault on ETH, Is Fighting Back

Franklin Templeton Upgrades $380M Tokenized Treasury Fund to Enable Peer-to-Peer Transfers

Movement Labs Raises $38M for Rollup Based on Facebook's Move Language

Bitcoin-centric stablecoin company OpenDelta raised $2.15 million in a pre-seed round led by 6th Man Ventures, CEO Konstantin Wünscher told CoinDesk.

“We want to use bitcoin to create stable value in a fiat-denominated currency," Wünscher said in an interview.

OpenDelta will plant itself in the newest greenfield for decentralized finance (DeFi) atop the newest trend in Bitcoin, Runes.

During the Bitcoin halving on April 19, developer Casey Rodarmor created Runes, a way for people to etch fungible tokens onto satoshis, the smallest unit of bitcoin {{BTC}}. The DeFi-enabling novelty has since exploded into a behemoth for Bitcoin transactions, per a Dune dashboard from Crypto Koryo.

OpenDelta’s flagship token, USDO, will retain its dollar value by hedging bitcoin {{BTC}} deposited by users as collateral. The token won’t go live till May, and even then, it will only be open to waitlisters in a closed beta. But the company behind it plans to bring Runes to other Bitcoin layers as well.

The product will be yield-bearing for its holders, Wünscher said. It will generate this upside from the funding rates in derivatives markets that it trades in to retain its dollar value. To mint USDO, users will deposit bitcoin as collateral into a wallet that will be controlled by "institutional-grade custodians,” according to a press release.

OpenDelta is among the first companies building the new face of DeFi for Bitcoin in the Runes era. As Wünscher sees it, the kind of people who are deeply into Bitcoin (he counts himself as one) aren’t necessarily attuned to the norms and nonsense of Ethereum DeFi, he said.

“We can create new experiences on Bitcoin because people have not been pre-exposed to any other things than Bitcoin,” he said.

Consensys, one of the main supporters of the Ethereum network, claims the U.S. Securities and Exchange Commission (SEC) is attempting a power grab over Ethereum {{ETH}}, the second-largest blockchain by market capitalization. And so, as natural, the Ethereum development company is suing, citing regulatory overreach.

This is an excerpt from The Node newsletter, a daily roundup of the most pivotal crypto news on CoinDesk and beyond. You can subscribe to get the full newsletter here.

“The U.S. Securities and Exchange Commission seeks to regulate ETH as a security, even though ETH bears none of the attributes of a security – and even though the SEC has previously told the world that ETH is not a security, and not within the SEC’s statutory jurisdiction,” according to the lawsuit filed in a Texas court on Thursday.

Over-and-above Consensys’ lawsuit is the growing trend of U.S. crypto companies and organizations willing to fight back against what they see as overzealous regulation. There are many unsettled questions regarding crypto law, and going on the offensive – possibly even bringing a case before the Supreme Court – would be one way to get answers.

See also: Consensys Sues SEC Over ‘Unlawful Seizure Of Authority’ Over Ethereum

Coinbase, for instance, is spending big to challenge a case brought by the SEC, and itself went to the courts to sue the agency seeking to get clarity on key questions of crypto law. Kraken and Uniswap, also facing SEC suits, vowed to fight back – and LBRY, now defunct, literally fought until the end.

Then there are the lobbyist organizations like the Blockchain Association, which this week sued the SEC over a narrow point of law, the definition of a “broker” that, if the agency had its way, would have broad impact over the crypto industry. In 2022, Coin Center sued the U.S. Treasury Department (and lost) for sanctioning crypto mixer Tornado Cash.

“Consensys is joining some of the leading companies in the space in a broad industry pushback against regulation by enforcement that is destructive to the future of the internet. This is the responsibility of every Web3 company that has the capital and expertise to navigate the U.S. power structures,” Lex Sokolin, founder of Generative Ventures and a former Consensys employee, told CoinDesk in an interview.

"It's invigorating to witness top actors in our field engaging with regulators to seek clarity in our exponentially growing industry,” CEO of the dYdX Foundation and former Consensys lawyer Charles d'Haussy told CoinDesk.

About face

A key argument of Consensys’ suit is that the SEC had already declared that ETH is not a security, all the way back in 2018 when then SEC Director William Hinman gave a speech stating as much. It confirmed this position in 2021, when the first ETH futures launched in the U.S., putting the asset under the purview of the Commodities Futures Trading Commission (CFTC).

There’s an argument to be made that the SEC had a fresh start to reevaluate Ethereum after it dropped mining for proof-of-stake. However, some experts note the SEC approved additional futures products after that happened, again dampening the argument that ETH is a security.

When news first dropped that the SEC was possibly investigating the non-profit Ethereum Foundation and subpoenaing firms for information related to Ethereum’s development, many experts interviewed by CoinDesk agreed that it would be illegal to reverse course after so much time. An entire multi-billion dollar industry has already been built on the understanding that ETH is a commodity.

It’s “the whole ‘you can't just arbitrarily change your mind and damage people for hundreds of billions of dollars after a decade’ and also by the way the CFTC will likely fight back” argument, Austin Campbell, a Columbia Business School assistant professor and former adviser to stablecoin issuer Paxos, told CoinDesk in an interview at the time.

See also: Why the SEC Shouldn't Classify ETH as a Security

"The case we have filed today is intended to preserve access for the thousands of developers, market participants, and institutions who have a stake in the world's second largest blockchain," Joe Lubin, Ethereum co-founder and Consensys CEO, said in a statement. "The SEC cannot be allowed to arbitrarily expand its jurisdiction.”

According to the complaint, Consensys is looking to clarify three particular points: first, that ETH is a commodity; second, that the most popular Ethereum wallet, developed by Consensys, is not a broker; and lastly to get an injunction to leave developers alone and preemptively prevent the SEC from suing the company.

In addition to receiving multiple subpoenas in 2023 and in recent weeks, Consensys’ court filing also disclosed that the company received a Wells Notice on April 10, or an indication that the SEC is working to build a case. According to Consensys Senior Counsel and Director of Global Regulatory Bill Hughes the company complied with the “voluntary” requests for information.

Notably, the SEC asked for information not only about Consensys itself – including questions about its ETH holdings and treasury sales, and whether it contributed to the Ethereum Improvement Proposals (EIP) that led to Ethereum’s switch to proof-of-stake – but also questions about open source developers.

“The fact that they're looking at open source protocol developers, certainly with an eye on building a case to enforce, really struck us as way out of bounds,” Hughes said, adding that Consensys was asked to provide lists of coders and their GitHub repositories. “To some degree, they are redefining their regulatory purview and becoming an internet regulator.

“This is not something we necessarily enjoy doing or want to do. But to a large extent it's necessary to defend the use of and building upon Ethereum and really all programmable blockchains in the United States,” he added.

‘Remarkable acceleration’

While standing up for open source development may be motivating factor, Hughes suggested that the company was forced to move by what they saw as a “remarkable acceleration in their aggressiveness with respect to Ethereum” and their interactions with the agency that “made it clear that they viewed [Consensys] as the target for an Ethereum enforcement action.”

“Should they be left unopposed they could do meaningful harm to our company in particular and the broader ecosystem. It comes to a point where you just can't wait any longer,” he said.

In particular, the SEC appears to be building a case that MetaMask Swaps, a decentralized exchange aggregator for swapping tokens that charges a 0.875% transaction fee, and MetaMask Staking, a relatively recent product essentially limited to users with 32 ETH to spare to become an Ethereum validator that takes a 10% cut of staking rewards, are in violation of securities or brokerage laws. (Several state regulators have also challenged the legal ground of staking.)

“The end goal of the suit is to get the judge to agree and issue an order finding that Ethereum is a commodity, that the SEC has been acting beyond its statutory authority and in violation of procedures it's required to comply with, and that peer to peer software that people use to read and transact with themselves on the blockchain is not a broker,” Hughes said.

But other experts CoinDesk spoke to say the case may have an even loftier vision.

“This Consensys lawsuit is a really big deal. They’re positioning themselves to challenge the SEC’s authority to regulate crypto,” University of Kentucky law professor Brian Frye said in an interview, noting the case was filed it in the 5th Circuit — which is “notoriously anti-government and anti-regulatory.”

See also: ‘It Can Be Said With Confidence the SEC Is Investigating Ethereum’: Consensys’ Bill Hughes Talks Crypto Law

In other words, Consensys may be trying to build a case worthy of taking before the Supreme Court. Frye noted that this particular SCOTUS would likely be willing to “revisit and narrow” the scope of the Howey test, one of the ways the SEC determines whether something is a security, and the basis for the majority of its litigation against crypto firms.

“Consensys hired Wachtell, which is the most expensive law firm in the world. That means they are really, really serious,” Frye said. It’s worth noting that Consensys recently relocated to Texas (its new listed address is a WeWork) from New York, which would make establishing jurisdiction in the 5th Circuit easier. “If that happens, there’s just no way SCOTUS doesn’t take the case,” Frye added.

For his part, Hughes denied the claim, saying that Texas is business-friendly and home to a burgeoning crypto scene. (CoinDesk’s Consensus 2024 conference will be held in Austin in May, for instance.) “By contrast, New York was getting a little chillier,” he said.

In any case, Consensys’ legal maneuver certainly changes the dynamic between the firm and would-be regulator. Its lawsuit doesn’t necessarily preclude the SEC from filing its own case, or unilaterally declaring ETH a security (which it has been reluctant to do so far), which would essentially make it illegal to spend ETH in the U.S.

But the situation is “meaningfully different” now that Consensys is a plaintiff rather than just a target. At the very least it’s one way to show the world that the SEC’s Enforcement Division, and likely leadership, “considers Ethereum security” without having the gall to state it directly.

“We think our action is appropriate because we think that the right answer needs to be gotten to and we're happy to call the question,” Hughes said.

See also: Samourai Wallet Charges Raise Existential Questions About Crypto Privacy

The European Parliament has approved a broad package of anti-money laundering laws targeting various financial services and entities, including crypto.

In addition to enhanced due diligence, the measures will give journalists and other interested entities free and direct access "to beneficial ownership information" in national registries.

The European Parliament voted to adopt a new package of laws tightening money laundering and terrorist financing measures across the EU. The laws target large cash payments, crypto firms and football clubs, among others.

In addition to creating a single rulebook for the 27 nations that make up the European Union, the package approved on Thursday sets up an anti-money laundering authority based in Frankfurt to oversee the implementation of the relevant frameworks – particularly those the bloc deems as the "riskiest entities."

"The new laws include enhanced due diligence measures and checks on customers’ identity, after which so-called obliged entities (e.g. banks, assets and crypto assets managers or real and virtual estate agents) have to report suspicious activities to [Financial Intelligence Units] and other competent authorities," a press statement on the vote said.

Crypto policy watchers in the EU raised concerns that the requirements imposed on digital assets may be unfairly strict compared to other financial sectors when the bloc struck a political deal on the package back in January.

The new measures also seek to give people or entities with "legitimate interest," including journalists, media professionals, civil society organizations and other competent authorities, "immediate, unfiltered, direct and free access to beneficial ownership information held in national registries and interconnected at EU level." Beneficial ownership information refers to identifying information about entities or people that own or control companies.

A joint parliamentary committee voted on texts of the package in March, ahead of the plenary vote on Thursday.

To become law, the EU Council, which groups lawmakers from member states, still needs to formally adopt the package.

ARK bought over 4 million BITO shares late last year as a short-term play in anticipation of the approval of spot bitcoin ETFs in the U.S., with plans to swap them once the approval came.

Following consistent sales in January, ARK has sold the last of its BITO shares in the past week.

Cathie Wood's ARK Invest offloaded the last of its shares in ProShares Bitcoin Strategy ETF (BITO) on Thursday.

The investment firm sold 237,983 BITO shares worth $6.7 million at Thursday's closing price of $28.22 from its Next Generation Internet ETF (ARKW).

ARK bought over 4 million of the shares late last year as a short-term play in anticipation of the approval of spot bitcoin ETFs in the U.S., with plans to swap them once the approval came.

Following consistent sales in January, ARK has sold the rest of its BITO shares in the past week.

Meanwhile, its own ARK 21Shares Bitcoin ETF (ARKB) is now the fund's largest holding with 2,480,644 shares, worth $160.6 million at Thursday's closing price of $64.76. This constitutes a 10.4% weighting of the fund's total value.

Read More: Morgan Stanley May Soon Allow Brokers to Pitch Bitcoin ETFs to Customers: Report

BTC is trading above $64K even as outflows accelerate.

The correlation between ETF outflows and BTC’s price is weakening.

Bitcoin {{BTC}} is trading above $64K in the early afternoon of East Asia’s trading day, even as outflows from bitcoin exchange-traded funds (ETFs) pick up significantly.

Market data shows that the U.S.-listed ETFs had a daily total net outflow of $217 million. This brings the total outflow so far this week to $244.49 million.

In comparison, bitcoin is up around 3.7% in the last week.

According to JPMorgan, the correlation between bitcoin ETF prices and inflows has weakened, dropping from a high of 0.84 in January to 0.60 in recent assessments. This indicates a decrease in the alignment between BTC prices and spot ETF flows, CoinDesk reported in February.

Given its size, the outflow from Grayscale’s converted bitcoin ETF (GBTC) is of particular interest to traders. Data from SoSoValue shows that since Monday, GBTC has experienced an outflow of $417 million during the last week—yet BTC prices still increased in the face of it.

Liquidation data is also fairly flat, according to GoinGlass, with $60 million in liquidations in the last 24 hours. Of this $60 million, BTC made up $13.48 million worth, and $6.17 million longs were liquidated against roughly $7 million in shorts.

Meanwhile, the CoinDesk 20 (CD20), a measure of the largest digital assets, is flat, trading at 2,246.

Stripe will reintroduce crypto payments later this year, initially only for Circle's USDC stablecoin, on the Solana, Ethereum and Polygon blockchains.

The fintech giant stopped supporting bitcoin in 2018 during the first crypto winter.

Six years after dropping support for bitcoin {{BTC}} and, thus, crypto payments altogether, Stripe is bringing back the service later this summer, though initially only for Circle’s USDC stablecoin.

“We’re excited to announce that we’re bringing back crypto as a way to accept payments, but this time with a much better experience,” Stripe co-founder and President John Collison said Thursday in a keynote address at the company’s Global Internet Economy conference.

The payments processor has a long history in crypto, first tapping the bitcoin ecosystem in 2014. Four years later, in 2018, it discontinued all of those efforts, arguing that bitcoin was too volatile and would function as an asset rather than a medium of exchange. It had also criticized its lengthy transaction times and growing fees at the time.

That year saw bitcoin’s first “crypto winter” with the token dropping from a high of $19,650 in December 2017 to $3,401 at the end of 2018.

The fintech giant took a step toward re-entering the market the following year by becoming a co-founder of Facebook’s Libra project, but it stepped away later that year and Libra never got off the ground. In 2022, Stripe introduced a project to facilitate fiat-to-crypto payments.

“Crypto is finding real utility,” Collison said in his keynote Thursday. “With transaction speeds increasing and costs coming down, we’re seeing crypto finally making sense as a means of exchange.”

Payments will be available on the Solana {{SOL}}, Ethereum {{ETH}} and Polygon {{MATIC}} blockchains, Stripe said.

The company is currently valued at $65 billion, according to Bloomberg, and is one of the biggest payments providers in the world with over $1 trillion in transactions in 2023.

Ethereum developer Consensys has filed a lawsuit against the U.S. Securities and Exchange Commission, striking back against what the company calls an “unlawful seizure of authority” over Ethereum by the federal regulator.

The company wants a federal court to declare that ETH {{ETH}} is not a security, any investigation of ConsenSys based on the idea that ETH is a security "would violate" the company's fifth amendment rights and the Administrative Procedures Act, that MetaMask is not a broker under federal law, that MetaMask's staking service does not violate securities law and an injunction against the SEC investigating or bringing an enforcement action tied to MetaMask's Swaps or Staking functions.

In the complaint filed Thursday against the SEC and all five of its commissioners, Consensys revealed it received a Wells notice from the SEC on April 10, indicating its intention to bring an enforcement action against the company for violating securities laws via its MetaMask wallet product. Consensys denies that it acts as a broker, stating that the wallet is “simply and interface” and “neither holds customers’ digital assets nor carries out any transaction functions.”

The complaint adds that the SEC’s encroaching authority over Ethereum goes against its own past statements that the cryptocurrency is a commodity, not a security (citing former director Bill Hinman's 2018 speech), as well as the SEC’s sister regulatory agency, the Commodities Futures Trading Commission (CFTC), own authority over Ethereum, which oversees derivative products tied to ether.

In its suit, Consensys claims that it “built its business against the backdrop of this regulatory consensus”, and the SEC’s new grab for power – which it calls an “about-face” – over Ethereum would therefore “violate the Constitutional requirement of fair notice under the Due Process Clause.”

"The SEC’s unlawful seizure of authority over ETH would spell disaster for the Ethereum network, and for Consensys," the suit claims.

The suit also leans on the "major questions doctrine," a Supreme Court ruling barring federal regulators from dramatically exceeding the scope of their Congressional mandates. Two judges have already rejected the idea that crypto falls under the doctrine during arguments brought by Terraform Labs and Coinbase.

ConsenSys filed the suit in the District Court for the Northern District of Texas, joining groups like the Blockchain Association and companies like Legit Exchange, which filed similar preemptive suits seeking to block the SEC from treating certain crypto companies or assets as securities.

In recent months, the SEC has also brought suits against crypto exchanges like Binance.US, Binance and Kraken. Uniswap Labs revealed earlier this month it had also received a Wells Notice from the regulator.

Asset manager Franklin Templeton said Thursday that it has enabled peer-to-peer token transfers for its $380 million tokenized money market fund, a key step to make the offering more interconnected to the broader digital asset economy similar to rivals.

The move allows investors of the Franklin OnChain U.S. Government Money Fund (FOBXX) to transfer the fund's BENJI token between each other without any intermediary. The BENJI token, available on the Stellar {{XLM}} and Polygon {{MATIC}} blockchains, represents shares in the fund that holds government securities, cash and repurchase agreements and pays out a steady yield to token holders.

"Allowing fund shares to be transferred peer-to-peer puts Franklin Templeton on the cutting edge of the financial sector where tokenized real-world assets are an industry staple and more open, transparent, and accessible," Jason Chlipala, chief business officer of Stellar Development Foundation, said in an email.

The development is important because transferability allows to expand the token's utility in the future such as trading on secondary markets or using it as collateral for loans in the decentralized finance (DeFi) platforms.

"Eventually, we hope for assets built on blockchain rails [...] to work seamlessly with the rest of the digital asset ecosystem," Roger Bayston, head of digital assets at Franklin Templeton, said in a press release.

Tokenized U.S. Treasuries are at the forefront of the race to bring traditional financial assets such as bonds to blockchain rails – also known as tokenization of real-world assets. The market for tokenized Treasuries have mushroomed to $1.2 billion, growing tenfold since early 2023, as digital asset investors have been seeking safe yields for their blockchain-based cash holdings.

BENJI, launched in 2021, is the largest and oldest of them with a $380 million market capitalization, rwa.xyz data shows. Newcomers like Ondo Finance's tokens and BlackRock's new BUIDL fund with Securitize, which have already allowed peer-to-peer token transfers, carved out a significant market share and are closing in on Franklin Templeton's offering.

Tech journalist and author Kara Swisher downplayed crypto's transformative potential, comparing it to a minor eruption versus the internet's major explosion.

Swisher criticized crypto's hype and "scammery," predicting digital assets will settle as a niche within the broader tech landscape.

AI is now the focus, attracting major tech interest and investment, though it faces its own inflated hype cycle.

In an interview with CoinDesk's First Mover, technology journalist Kara Swisher, author of the New York Times bestseller "Burn Book," said that she is skeptical that cryptocurrencies have transformative potential, calling digital assets important but not world-changing.

"The internet was a major Cambrian explosion. This is a tiny one. I guess a volcanic eruption on Indonesia," she said on First Mover. "It's a very important area of technology, but it's not the most important. It's not the center of everything."

Swisher argued that the cryptocurrency sector has been caught up in a "huge hype cycle" with a considerable amount of "scammery" involved.

"Crypto people really overplayed their hand in that regard, saying it's going to change everything," she said. "This is a typical thing of technologists … [saying] that it's going to change the whole world."

Swisher believes crypto will ultimately settle into being just another niche within the broader tech landscape, comparing it to many other technological innovations that have come and gone without reshaping the world.

"It needs to replace something that's better. Digital downloads of books, for instance, aren't necessarily better than physical books, but they are very good," she said. "[Crypto] overstepped itself, but it will settle into a nice, small corner."

What follows crypto?

So if crypto is fizzing out, and is yet to fulfill the grand visions of its most ardent supporters, where is the the hype going?

Artificial intelligence, says Swisher.

AI isn't profitable yet because "these ventures are very costly, requiring substantial investment in computing power and development," she said.

"Unlike the early internet era, where anyone could launch ventures like Uber or Airbnb inexpensively, AI requires significant capital," she continued, citing OpenAI's Sam Altman wanting to raise enormous sums for projects like chip manufacturing.

"Only the big companies can afford to lose this money and afford to pay for this," she said.

But AI has captured the interest of the public and major tech companies in a way that's taken some of the momentum away from blockchain and crypto, albeit not without its own hype and exaggerated claims similar to those seen in the crypto space.

"AI is a big deal in comparison," she said. "It's just that everyone has to slap AI onto their company name, and then they're an AI company."

Mining pool ViaBTC won the race to mine the first satoshi after last week's halving, which it has now sold at auction for $2.13 million.

The Ordinals protocol allowed individual satoshis to be identified and traded, attaching value to particularly notable sats for the first time.

ViaBTC, the mining pool that mined the first block after the Bitcoin halving on April 20, sold the "epic" satoshi it contained for 33.3 BTC ($2.13 million).

An auction for the satoshi, or "sat," which has a face value of around $0.0006, ended at 16:00 UTC on crypto exchange CoinEx following a flurry of competing bids during the final few hours.

There was an expectation the first sat produced by the Bitcoin network after its fourth halving event on April 20 would attract considerable interest with some commentators estimating that it could fetch millions of dollars.

In the three previous halvings, there was little up for grabs other than bragging rights for mining the first block. However, the advent of the Ordinals protocol meant sats – the smallest denomination of bitcoin, equal to 0.00000001 BTC – could be identified and traded as if they were unique tokens, similar to non-fungible tokens (NFTs) on other networks.

Casey Rodarmor, the creator of Ordinals, formed a system for categorizing the rarity of sats. These could be "uncommon," the first sat of each block; "rare," the first one after Bitcoin's fortnightly difficulty adjustment; or "epic," the first after a quadrennial halving.

Read More: Bitcoin Transaction Fees Come Crashing Down Post Halving

With so much to learn about in the crypto space and so little time, how do you create investment strategies for your clients? Eric Ervin, CEO of Onramp Invest, provides an overview of crypto investment models that advisors can consider as clients’ interest in crypto investments grows.

Leo Mindyuk, CEO of ML Tech, covers active vs passive bitcoin and crypto investment strategies in Ask an Expert.

–S.M.

You’re reading Crypto for Advisors, CoinDesk’s weekly newsletter that unpacks digital assets for financial advisors. Subscribe here to get it every Thursday.

The Tip of the Iceberg: Building a Crypto Strategy Without Burning Out

My team and I have been talking a lot about the tangible shift in the crypto market. In contrast, a year ago, it felt like everyone was speaking directly to investors, pushing them towards numerous exchange applications and autonomous investing. Now, we’re seeing a focused attempt to empower professionals in the space. Whether it’s tokenized securities, crypto-forward financial products from the world’s largest asset managers, or platforms that help financial advisors access this new market directly, there’s no question that the professionalization of crypto is here.

This is great news for advisors. Not only does it mean broader access to an array of digital assets for clients, but it also means advisors can now build out a new offering in their business, serving clients by giving them what they’re looking for and capturing more assets under management (AUM) along the way. Firms that are equipped with access solutions are set up to thrive. As we’ve clearly seen with the bitcoin ETFs, investor demand for exposure to crypto is palpable, and it’s starting to open the door to the broader world of digital assets for advisors. However, there are a lot of digital assets out there to learn about, and cryptocurrencies are still only estimated at a recommended 1-6% allocation in a portfolio. When you’re managing a book of business that’s 95% traditional market funds, how are you supposed to learn about every coin or every top-mover in a market that moves 24/7?

In the traditional market, there are expert asset managers to do this for you. So why not leverage the same tools for crypto?

Applying the tools you know to the market you don’t know (yet)

Just like in the traditional market, while SMAs are not meant to replace due diligence in practice; they allow advisors to leverage meticulously researched strategies built to cover the best parts of the digital asset market. Let’s break down how RIAs can apply this old tool to the new asset class:

5 ways crypto strategies from asset managers can be useful for advisors

Diversification: Crypto models allow advisors to offer their clients exposure to a diversified portfolio of cryptocurrencies. This diversification can help reduce overall risk by spreading investments across multiple assets with different risk profiles.

Customization: Advisors can tailor crypto models to meet the specific investment goals and risk tolerance of individual clients. They can adjust the portfolio composition based on factors such as market conditions, client preferences, and investment strategies.

Transparency: Many crypto asset managers provide real-time transparency into portfolio holdings and performance. This transparency helps build trust with clients by allowing them to track their investments and understand how their money is being managed.

Professional Management: Advisors can leverage the knowledge and insights of top asset managers to make informed investment decisions on behalf of their clients.

Time savings: Because asset managers provide up-to-the-minute market insights, automatic rebalancing, and thoughtful allocations without the need for hours of research on the advisor's part, they can save a considerable amount of time and let advisors focus on the larger portions of client portfolios.

Making the most of this asset class for clients

I know the saying “your money isn’t working hard enough for you” is cliche at this point, but the truth is that digital asset investing is no exception to the rules of portfolio diversification. Having all of your assets in bitcoin could be considered the same as having all of your funds in one stock. The digital asset market has seasons, meaning sometimes lesser-known cryptocurrencies or altcoins have higher performance than bitcoin or ether. When investors don’t consider a holistic crypto investment strategy, they are neglecting the potential to harness the market in a meaningful way. As a professional, you can now help them make the most of these opportunities by offering access to the larger ecosystem.

Meet demand and build expertise

It’s understandable to feel daunted by the amount of education needed to understand cryptocurrencies truly. Each one has a different purpose and a different value. Through asset manager strategies, you can tackle the market head-on and gain knowledge along the way while still meeting demand and keeping your firm relevant. This market is constantly growing, and leaders in the space, including all of us at Onramp Invest, a Securitize company, are committed to keeping you ahead of the curve.

- Eric Ervin, CEO, Onramp Invest

Ask an Expert

Q. What are the key differences between active and passive crypto investment strategies, and how do they impact risk and potential returns in the volatile cryptocurrency market?

Similar to the traditional markets, active and passive investment strategies in the cryptocurrency market offer contrasting approaches to building and managing a portfolio.

Passive crypto investment strategies involve selecting a portfolio of cryptocurrencies and holding them over a long period, regardless of short-term market fluctuations. Passive strategies can be implemented through buying an ETF or holding a diversified portfolio of cryptocurrencies, whether through the fund or an SMA structure. This approach typically requires minimal ongoing management, low transaction costs and simpler tax implications due to infrequent trading. In a successful passive strategy, the returns are generally close to the respective benchmark. For example, for a bitcoin ETF, the returns should be very close to the buy-and-hold strategy. In crypto markets, there are a lot of short-term price fluctuations, so passive strategies are typically associated with higher volatility and higher drawdowns.

Actively managed crypto strategies aim to generate attractive absolute returns or outperform the market by capitalizing on market inefficiencies and utilizing risk-management practices. Typically, an active approach is associated with constant monitoring and active risk management, higher transaction fees and higher performance and management fees paid to a professional asset manager. However, if implemented successfully, an active approach typically mitigates the volatility and drawdowns of the asset class and achieves higher risk-adjusted returns. There are various types of actively managed strategies which suit different investment objectives and risk-return targets.

In the volatile world of cryptocurrencies, the choice between an active and passive approach can significantly impact the results the investor can achieve.

Q. What types of active investment strategies are out there?

There are numerous actively managed strategies with different risk-return profiles for investors. Some actively managed strategies, such as funding rate arbitrage, basis arbitrage, statistical arbitrage, long-short, and short-term directional strategies, aim to achieve absolute returns. Typically, those are sophisticated strategies, involving various quantitative methods, complex and optimized execution as well as advanced risk-management techniques. These strategies are often not highly correlated with cryptocurrency prices and are able to achieve absolute returns with higher Sharpe ratios and lower drawdowns by monetizing the inefficiencies of the nascent asset class.

Another good example of actively managed strategies is strategies that aim to outperform the benchmark, e.g., bitcoin buy-and-hold strategy or market-cap weighted buy-and-hold strategy. Those strategies typically involve some sort of returns prediction, market-timing, and risk-management framework. If successful, an actively managed approach helps to achieve better risk-adjusted returns compared to the respective passive strategy. For example, a properly executed smart risk-managed exposure to bitcoin helps investors achieve higher returns with lower volatility than holding bitcoin ETFs.

Investors can typically get exposure to a variety of actively managed strategies through fund structures or separately managed accounts on spot or futures markets. Over time, I expect actively managed ETFs will be available for investors.

- Leo Mindyuk, CEO, ML Tech

Keep Reading

Bitcoin’s fourth halving occurred Friday, April 20th, 2024, without a hiccup.

BlackRock’s spot bitcoin ETF continues to break records as it reached 70 days of inflows.

Paypal proposed an incentive program to incentivize low-carbon Bitcoin mining.

The U.S. government has put to rest any doubts that any involvement in or profiting from privacy tools beyond authoring code for crypto mixers is off limits.

Call it an assault on privacy or attack on free speech, but the reality on the ground is that any money that flows into an application designed to mix funds to shield user addresses is being treated as laundered funds, no matter the purpose or destination.

Bitcoin Fog. Tornado Cash. Now Samourai Wallet.

Samourai Wallet was (its servers have been seized) a bitcoin wallet that promised to "keep your transactions private and your identity masked” through a privacy-preserving service called "Whirlpool."

Authorities say the wallet processed over $2 billion in unlawful transactions, including at least $100 million via illegal dark web marketplaces like the Silk Road and Hydra Market. Similar arguments were made about Tornado Cash, when it was sanctioned by the U.S. Treasury, which essentially counted every dollar that flowed through it as criminal in nature.

“Together with our law enforcement partners, we will continue to relentlessly pursue and dismantle criminal organizations that use cryptocurrency to hide illicit conduct," U.S. Attorney Damian Williams said in a statement on Wednesday.

See also: Crypto OG Zooko on State of Digital and Financial Privacy

Op-sec

There is much to say about Samourai Wallet’s co-founders Keonne Rodriguez, 35, and William Lonergan Hill’s, 65, op-sec (i.e. “operational security), or apparent lack thereof. Rodriguez was arrested in Pennsylvania and will be arraigned this week, while the U.S. is still working to extradite Hill from Portugal.

“I don’t know how they thought they wouldn’t get arrested and prosecuted for this. It sounds like the DOJ has direct evidence of them saying they knew they were helping people conceal illegal transactions and charging for the service,” University of Kentucky law professor Brian Frye told CoinDesk in an interview.

The DOJ alleges that Rodriguez and Hill actively solicited criminal customers in their marketing and social media posts. Hill, for instance, reportedly said "At Samourai we are entirely focused on the censorship resistance and black/grey circular economy. This implies no foreseeable mass adoption,” in an intercepted internal message.

“Ultimately if you’re knowingly facilitating illicit finance and profiting from it, which is alleged in the complaint, the outlook is bleak,” venture capitalist Nic Carter said in a direct message. “Nevertheless it’s disturbing the extent to which the Biden Admin[istration] is attempting to criminalize privacy.”

The Biden Administration has seemingly ramped up efforts to knock down mixing services. That includes arresting Russian-Swedish national, and Bitcoin Fog operator, Roman Sterlingov in April 2021 and participating in the arrest of the co-founders of Tornado Cash in 2023. However, crypto mixers have long been in the sights of criminal prosecutors. In Sterlingov’s case, investigators worked to establish evidence over a period of years.

See also: How a Bitcoin Mixer Laundering Conviction Might Be Appealed

As far back as May 2019, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has been concerned about cryptocurrency “tumblers,” finding that that “persons who accept and transmit value in a way ostensibly designed to protect the privacy of the transmittor [sic] are providers of secure money transmission services and are not eligible for the integral exemption.”

In other words, mixers are money transmitters, even though a person is generally only transmitting funds between two addresses they control to anonymize their funds. And if you’re deemed a money transmitter, FinCEN noted, you’re expected to comply with the Bank Secrecy Act.

“My opinion is that the crypto industry should treat regulation as 'de force majeure' and adjust to it,” Tal Be’ery, co-founder and chief technology officer of the ZenGo wallet, said. [Force majeure is a common legal clause absolving parties from liability.] “The U.S. government made it very clear that operating a mixer is unacceptable with the prosecution of Tornado Cash operators and therefore going after other mixers could be very much expected.”

Privacy dragnet?

Others are concerned that it isn’t just mixing services being targeted, but all privacy-preserving blockchain tech.

“From the cases against Tornado Cash to the IRS 'broker rule' to the arrest of Samourai Wallet's founders, it's clear that the U.S. government is moving aggressively against privacy tools in crypto,” Galaxy Digital head of research Alex Thorn told CoinDesk.

See also: Privacy Isn't Just an Edge Case for Crypto

It’s worth noting that, while Rodriguez and Hill remained active in overseeing the protocol since it launched over a decade ago, the Samourai wallet was non-custodial and open-source. The code was "self-hosted” on the company’s open source GitLab repository, although the provided link no longer appears to be working. The Samourai apps have also been removed from the Google and Apple app stores, though theoretically the software can be built, run and hosted by anyone.

Some experts contacted by CoinDesk, including Frye, believe that crypto mixers could theoretically be legal to code, but likely not to market or maintain. Releasing software is generally protected by the First Amendment in the United States, because code is a language and language is speech.

“While crypto mixers might in theory be legal, if used only for protecting the privacy of legal transactions, using them to conceal illegal transactions is definitely illegal,” Frye said.

“It's clear that if developers maintain any involvement in privacy tools beyond authoring code – whether that be operating front-ends, facilitating any kind of money movement or taking fees – they will be targeted. For on-chain privacy to succeed in the future, tools must be completely decentralized,” Thorn echoed.

Others, like TradeLayer founder Patrick Dugan, noted that it also matters whether authors of crypto mixer code profit from their inventions. Samourai allegedly earned at least $4.5 million in fees from its wallet and mixer services, according to the indictment.

“The case will ultimately come down to any revenue mechanism the developers may have used that might constitute an operating enterprise in the eyes of prosecutors, making them culpable for money laundering done by proxy,” Dugan said, mentioning that, unlike Tornado Cash, Samourai did not have a token.

Fighting for privacy

Despite the realpolitik of the situation, many in the crypto community see the targeting of crypto mixers as an infringement of the basic human right to privacy.

“The government's seizure of Samurai and the arrest of the folks running it is troubling. It feels more like what an authoritarian regime would do rather than a free country. I think people have a fundamental right to privacy in their financial transactions, whether digital or physical,” crypto sleuth Ogle told CoinDesk in an interview.

“I'm a big fan of privacy services so I have no moral concerns about what was happening,” said one Bitcoin Lightning developer, who asked to remain anonymous in order to discuss the situation more candidly. “But it seems a bit silly on their part. If I understand the situation correctly these are two American citizens who didn't even do that great a job of covering their tracks. So an arrest is pretty unsurprising.”

Others noted that despite the increased heat on privacy services, there will always be demand for these protocols – from legitimate and criminal users.

See also: Privacy-Preserving Payments Shouldn't Be 'Niche', Monero Dev Says

“Given how easy it is to spin up or use another mixer, this doesn't solve the problem of illicit funds being washed," Ogle said. "It just pushes it to another service.” Dugan noted that there are also privacy coins already in circulation for "for those seeking pure Exit via cryptocurrency privacy," though "it ain't easy." He added, "use monero, it's been delisted almost everywhere, so you know it's legit."

Zooko WIlcox, founder of privacy coin Zcash, told CoinDesk: “It’s legal to create privacy technology in the USA, and we’re going to keep doing it, because privacy and freedom are core parts of American civilization.”

Additional reporting contributed by Cheyenne Ligon and Nikhilesh De.