Empire Newsletter: The war on crypto mixing has a new front

Crypto mixers continue to be a target of government scrutiny

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The Last Samourai

The government continues to wage a battle against crypto mixers.

The DOJ targeted Samourai Wallet’s co-founders for creating a so-called “haven” for criminals because of the privacy-focused nature of its product.

Users of Samourai Wallet could obscure bitcoin transactions, helping to hide the source of funds. 

The DOJ claimed that CEO Keonne Rodriguez and CTO William Lonergan Hill operated a crypto “mixing service” that executed over $2 billion in unlawful transactions while laundering around $100 million in “criminal proceeds.”

Some of those funds allegedly came from the Hydra Market and Silk Road.

The two execs could each face up to 25 years in prison after both were charged with one count of conspiracy to commit money laundering and one count of conspiracy to operate an unlicensed money transmitting business.

Read more: DOJ arrests founders of privacy-focused crypto wallet Samourai

If these allegations sound familiar to you, it’s because the charges are similar to those made against the co-founders of Ethereum crypto mixer Tornado Cash last year. 

The government conducted a lengthy probe of Tornado Cash before opting to target Roman Semenov and Roman Storm, though the two were also accused of sanctions violations — a charge notably missing from the Samourai case.

Some of the same law enforcement agencies played a role in arresting the co-founders, namely the criminal divisions of the IRS and the FBI

But the US wasn’t the only country to take action against both Hill and Rodriguez. Europol, the Icelandic police, and the judiciary police of Portugal took part.

Anyone who tries to visit the Samourai domain is now greeted with a seizure notice, decorated with the badges of the relevant law enforcement agencies. A creepy outline of a person adorns the background. 

In the indictment, the DOJ uses X screenshots in what they say is clearly Hill and Rodriguez operating “accounts that encouraged and openly invited users to launder criminal proceeds through Samourai.” 

One such post, from 2022, shows Samourai’s official account welcoming “new Russian oligarch Samourai Wallet users.”

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The post was in response to a series of tweets from Ernest Urtasun, a former European Parliament member. Maybe not such a good look for Samourai on paper, though — in the lens of Crypto Twitter — it’s obviously not trying to be serious. 

In another tweet, part of a thread focused on the long-running feud between Samourai and Wasabi, an account under the handle Samourai Dev (which the DOJ alleges was run by Hill) said that Europol labeled Samourai an emerging “top threat” and added: “Do you see us shitting in our pants?”

Europol’s label wasn’t the first time that Samourai was noticed — not in a good way — by authorities. The UK’s National Crime Agency noted in 2022 that the service could be utilized by criminals.

Read more: Tornado Cash arrests spur privacy debate

The two co-founders, the DOJ alleged, “possessed and transmitted to potential investors marketing materials that discussed how Samourai’s customer base was intended to include criminals seeking privacy or the subversion of safeguards and reporting requirements by financial institutions.”

In January, just a few months before the arrests, Samourai penned a letter to FinCEN in which the wallet service pushed back on the proposed crypto mixing rules, claiming that they “infringe upon the legitimate financial privacy interests of cryptocurrency users.”

The DOJ, it seems, doesn’t feel the same way.

Katherine Ross

Data Center

  • Restaking protocol EigenLayer has attracted nearly 5 million ETH ($15.27 billion), up 14% since Monday.
  • Bitcoin fees have normalized after the Runes halving debut, now $4.56 for a high-priority transaction and down from record highs above $100.
  • There are 17,000 validators queuing to join the Ethereum network. Last week, 22,300 were waiting in the queue.
  • Base has had more daily active addresses than Arbitrum for most of this month, and could soon surpass Ethereum mainnet: currently 352,000 vs. 379,000.
  • After shedding supply since November, Maker has issued an additional $840 million DAI in the past seven weeks, equal to nearly 20% growth.

CZ’s final plea 

Prosecutors want Binance founder Changpeng “CZ” Zhao to serve 36 months in prison for violating the Bank Secrecy Act. Zhao’s team argues that probation alone — ideally with conditions that allow him to return to his home in the UAE — is appropriate. 

It’s now up to presiding judge Richard Jones, who has almost 500 pages of memos to sort through — 450 of which were submitted by the defense — before next Tuesday’s sentencing. 

The government says that CZ “willfully” and strategically defied US laws to “line his pockets” and grow his crypto exchange. His negligence threatened the security of the US, and he therefore deserves an “above-Guidelines” sentence of three years behind bars, prosecutors wrote in their memo Tuesday. 

Read more: Government says CZ threatened US security, recommends doubling Guideline sentence

The defense even hired a private firm to create a home security plan that could be used if CZ is placed on home confinement, AKA house arrest. The plan suggests a 10-person guard team, new fencing around CZ’s home, and new locks for all doors, among other things. I guess sacrificing landscaping is a small price to pay to avoid prison. 

CZ’s plea agreement, which he signed in November, stipulates that he will pay $50 million. The parties also agreed to a guideline sentencing range of 12-18 months, but they couldn’t get on the same page when it came to enhancements and adjustments. That’s where things get tricky. 

The government says CZ should be penalized for knowing that people used Binance to facilitate unlawful activity. He also posed a threat to national security, and an example needs to be made, prosecutors say. 

Read more: Here are the details of Binance and Changpeng Zhao’s plea deal

The defense, obviously, argues the opposite. CZ took responsibility and admitted fault, they say, so leniency is in order. 

This part is murky. Yes, CZ took the plea, but there’s a lot we don’t know. The UAE doesn’t have an extradition treaty with the US, so it makes you wonder what exactly the DOJ had on CZ to get him to come to the negotiating table in the first place. 

— Casey Wagner

The crypto must flow

Slowly, and then all at once. 

That’s how believers of hyperbitcoinization say BTC will consume the world. 

Nigeria reckons something similar has happened to its local currency — and it’s all Binance’s fault.

Hyperbitcoinization will supposedly go like this: As crypto adoption increases and global inflation goes parabolic, fiat currencies will rapidly depreciate against bitcoin to the point of worthlessness, and everything with value is priced in ultra-expensive BTC.

Let’s set aside seemingly spurious allegations of money laundering and tax evasion directed at two Binance executives. Bayo Onanuga, special advisor to the president, has claimed Binance fixed exchange rates for the naira pairs on its platform — which only the central bank can legally do.

Read more: Binance ends Nigerian naira services in wake of scrutiny

The naira, alongside the Nigerian economy, has spiraled since the 2008 global financial crisis. The COVID pandemic and its negative impact on global oil prices have exacerbated the issue more recently, with inflation up to 30%.

The naira has lost 72% of its value against the US dollar since 2019

Onanuga was quick to blame Binance, though earlier this year, the central bank governor blamed Nigerian students who study abroad.

But the central bank had placed strict controls on foreign exchange in a bid to stave off the naira’s outright collapse, including caps on US dollar trade volumes, reportedly $9.8 billion for the entirety of 2023, and in October, none at all. Nigeria has coincidentally sought $10 billion in damages from Binance, according to the BBC.

Those caps led to an artificial supply crunch for US dollars, hindering price discovery on official markets. At the same time, discrepancies widened on parallel markets like the ones found on Binance, a crypto-only exchange for years, with stablecoins USDT and FDUSD largely serving as substitutes.

Binance’s naira pairs were for years reportedly so popular that local operators regularly cited those prices when conducting broader business, rather than official central bank rates. Parallel markets showed 34% lower prices for Naira-USD trades at the end of last year, according to Nairametrics, although it’s unclear whether that includes prices found on Binance.

In any case, Binance didn’t set its market rates for the naira. Crypto traders did that. 

Crypto trades around the clock, and much of its promise lies in its power to attract liquidity. There are no capital controls in crypto; hypothetically, if all of crypto wanted to swing trade the naira, it could, as long as they had a Binance account.

Nigeria’s beef with Binance is really about it supplying a fiat offramp as the naira tanked. Whether that amounts to market manipulation is a matter for Nigerian courts, which have an unfortunate reputation for corruption.

Read more: Binance ‘made aware’ of executive who fled Nigeria

Hyperbitcoinization may not happen. But perhaps hypertetherization could strike inflation-weary economies — a rapid unsanctioned flight from local currencies to crypto-dollars, like what Nigeria believes occurred.

If that happens, then the operation of exchanges in places that need crypto the most will quickly become one of the most dangerous jobs in finance.

— David Canellis

The Works

  • Jack Dorsey’s Square will let its merchant users convert a portion of their sales into bitcoin, according to TechCrunch. 
  • Mark Zuckerberg’s metaverse plans are making “steady progress” according to the latest quarterly report from Meta. 
  • Rep. Maxine Waters, D-Calif., told Bloomberg a long-in-the-making stablecoin bill is nearly ready.
  • “Crypto con man” Jay Mazini AKA Jebara Igbara was sentenced to 84 months yesterday.
  • The “Buy Bitcoin” sign held up behind Janet Yellen in 2017 has sold at auction for 16 BTC, or $1 million.

The Morning Riff

Gauntlet CEO Tarun Chitra is in Variety this week, making the case for Hollywood to adopt crypto.

And sure, crypto definitely has the power to crowdfund cool projects, and blockchain can square the kinds of information asymmetry that results in unfair deals for creators and artists.

But let’s not forget how this has played out before. In 2022, actor-producer Seth Green bought a Bored Ape with a mind to turn the ape avatar into a TV star.

Read more: ‘Killer Whales’: Crypto finally gets its own ‘Shark Tank’

Except hackers linked to a multimillion-dollar scam ring stole Green’s Bored Ape before the show could debut, putting the entire project in jeopardy. 

Did Green hold the copyright if the NFT was no longer in his crypto wallet? Could he be sued by the hacker for copyright infringement? 

It appears Green later forked out $260,000 in ETH — $100,000 more than he paid for it — to the hacker in return for the Bored Ape, and nothing has been heard about the show since. 

Crypto might be ready for Hollywood. But I doubt Hollywood is ready for crypto.

— David Canellis


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