Privacy is not a crime.

However, when it comes to the cryptocurrency industry, projects and coins that enable users to transact lightly on-chain face higher levels of scrutiny than ever before.

In 2024, government-led efforts to combat the use of currency mixing began Services This process has continued apace as the developers of Bitcoin Fog, Tornado Cash, and Samouri Wallet have faced challenges in court. Meanwhile, the so-called Privacy coins They faced hurdles as some exchanges stopped supporting them.

Taking inspiration from Bitcoin pioneers Cypherpunk movementPrivacy and encryption have been intertwined since the industry's beginnings as a means of Internet-based resistance.

But that link, rooted in the skepticism of governments and big banks, has shown signs of fading this year as exchanges transition into a mature industry and developers face prosecution.

As a layer-one network, Midnight uses zero-knowledge proofs to maintain metadata associated with users, businesses, and transactions.

Although it's very different from privacy tools that the government has cracked down on, CEO Eran Barak said he's noticed a growing sense of unease among developers working on solutions that help maintain on-chain privacy.

“I think there is definitely tension around the issue of privacy,” Barak said. Decryption. “People saw the hammer falling on the (industrial) players.”

Privacy projects

Pioneering for more than a decade, Privacy coins It has protected users from prying eyes on the chain for much of the cryptocurrency industry's existence. But this year, many exchanges have distanced themselves from coins that help maintain the anonymity of their users, e.g Monero (XMR).

After warning that it would delete Monero in February, Binance The conversion has begun XMR for clients to stablecoins as part of delisting in September. At the beginning of this year, Binance also hit Monero's competitors with “Watch mark” on its platform, including Zcash (ZEC) and Firo (FIRO). However, these cryptocurrencies have not been deleted yet.

Citing regulatory changes in the European Economic Area (EEA), Monero took another hit in October as Kraken said it would. to cross out The currency is on its platform for European users. Meanwhile, other cryptocurrency projects have been navigating privacy-focused scrutiny.

Secret Network, which launched in 2020, is a blockchain that features private smart contracts. Beyond supporting a hard-to-trace token, the Secret Network allows developers to build applications that support on-chain encrypted data, effectively providing a form of secret computing.

According to SCRT Labs CEO Alex Zaidelson, several exchanges have warned his team that the Secret Network token could be deleted along with the Monero issues. He said it took time and convincing, but in the end, the exchanges found that Secret Network was able to deliver through the lens of anti-money laundering (AML) rules to which regulated exchanges are subject.

“We've seen a bunch of regulated players distancing themselves from anything related to privacy,” Zidelson said. Decryption. “It took us work and explanation to make sure people understood the difference between privacy coins and secret computing chains.

Zidelson also said that there is a real need for privacy in the cryptocurrency industry if the technology has any chance of reaching the mainstream. Common examples include a hedge fund that doesn't want to disclose its positions, or a healthcare app that wants to put patient data on-chain, he said.

“We can't expect everyone to live in a glass house,” Zidelson said. “You can't build technology pipelines to run everything without data protection. It's unthinkable.”

Coin mixers

While privacy advocates say Coin mixers They can help users maintain their anonymity, and have been targeted by the government for years as a popular tool for money launderers. By allowing users to obfuscate the source and destination of cryptocurrency transactions, the government's crackdown on currency mixers has continued this year, whether linked to Bitcoin or Ethereum.

Although Tornado Cash will be sanctioned by the US Treasury Department's Office of Foreign Assets Control in 2022 - effectively black list The tool intended for Americans - charges will not be filed against the developers of Blender until a year later. Meanwhile, privacy advocates, such as whistleblower Edward Snowden, denounced the government's move as "Deeply authoritarian".

In 2023, federal prosecutors Charged Tornado Cash's founders, Roman Storm and Roman Semenov, are charged with money laundering, sanctions violations and conspiracy to operate an unlicensed money transfer company. According to the United States Law enforcementSemenov remains at large, while Storm was arrested and faces trial in the Southern District of New York.

In September, a federal judge in New York denied Storm's request to dismiss the three charges against him, ruling that the case could continue. Despite Storm's legal battle within the cryptocurrency industry being portrayed as a free speech issue, the judge found that Storm's invocation of his First Amendment rights had little impact against Legal laws under which he was charged. Effectively, the court found that freedom of expression protections were irrelevant at that stage of the trial.

Those associated with Tornado Cash have faced legal problems elsewhere this year. In May, a Dutch judge at the Hertogenbosch court Found Tornado Cash developer Alexei Burtsev was found guilty of money laundering, stating that the privacy-preserving tool was “intended for criminals,” and was sentenced to 64 months in prison. While Perstev has since done so resume After the ruling, Vitalik Buterin, co-founder of Ethereum, described Berestev's trial as absolutely horrific.

“It's really unfortunate about Alexei,” Buterin said He said At the Berlin conference. “I think a lot of people were assuming (...) that just building software is acceptable, and it's a perfectly legal and legitimate way to fight for privacy.”

In late November, a glimmer of hope appeared in Tornado Cash. The US 5th Circuit Court ruled that the Treasury exceeded its authority in sanctioning Tornado Cash's smart contracts, finding that the standalone software could not be considered proprietary.

“No one wants criminals using cryptocurrency protocols,” said Paul Grewal, chief legal officer at Coinbase. books In a post on X (formerly known as Twitter). “Banning entire open source technology because a small portion of users are bad actors is not what Congress allowed.

Series of cases

Although Storm's case in federal court in New York has captured the attention of the cryptocurrency industry, he is not the only developer of privacy-focused cryptocurrency tools facing legal pressure there.

In April, the Department of Justice Arrested It accused the developers of Saumouri Wallet of operating an unlicensed money transmitter. By allowing users to obfuscate Bitcoin transactions by combining them, prosecutors described the product as a currency mixer that "carried out more than $2 billion in illegal transactions" while facilitating $100 million in money laundering.

Rodriguez, who faces trial in the Southern District of New York, was arraigned to reject Bail in September due to "preset bug" notes. Although Hill was Released Out on bail, Cynthia Lummis, a Republican state senator from Wyoming, expressed her criticism of the case overall.

“The Department of Justice’s unprecedented and unlawful change in interpretation of the law threatens to criminalize core elements of Bitcoin,” she wrote in May. letter. “The wallet software is no longer responsible for illicit financing any more than a highway is responsible for a bank robber's getaway car.”

Roman Sterlingov, who was convicted on money laundering charges earlier this year, has operated the Bitcoin Fog cryptocurrency mixer for more than a decade. By maintaining the tool, federal prosecutors alleged that he laundered more than $400 million in criminal proceeds.

While the developer was arrested in 2021, he was not sentenced until November. We represent one of the industry's most prominent cases involving a coin mixer, a federal judge in Washington, D.C., convicted Sterlinghoff to 12 years in prison.

Ultimately, regulatory pressures for some ventures offering coin mixing services in the US have become too intense this year. After the Samouri Wallet developers were arrested, projects like Wasabi Wallet and Phoenix Wallet closed their doors to US users Fairly quicklyputting their privacy tools out of reach for the foreseeable future.

A group of lawmakers on Capitol Hill, who view the use of coin mixers as a national security concern, requested an update from the U.S. Treasury Department on Tornado Cash in November.

In a letterThey expressed concern that hackers linked to North Korea were still using the service to launder money among a series of actors such as child abusers and human traffickers.

“Despite the sanctions, Tornado Cash has remained online and continues to operate,” the lawmakers wrote. “This problem shows no signs of going away anytime soon.”

Modified by Sebastian Sinclair