Empire Newsletter: The DOJ’s about-face on money transmitters

The DOJ is alleging that wallet developers should be charged with unlicensed money transmission

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United States Attorney General Merrick Garland | Senate Democrats/"SCHUMER MEETS WITH JUDGE GARLAND" (CC license)

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Take it to court!

Crypto’s long been regarded as the “Wild West” and one of the biggest reasons that the comparison still sticks — despite how far the market has come since Satoshi’s days — is because of the regulation via enforcement approach that some government bodies have taken (looking at you, Gary Gensler).

But now it looks like the Department of Justice is trying to join the Securities and Exchange Commission’s ranks, at least when it comes to unlicensed money transmission. 

The DOJ is alleging, in two separate cases, that wallet developers should be charged with the violation. 

As CoinCenter’s Peter Van Valkenburgh pointed out last week, this approach marks a change for the DOJ. Since roughly 2013, the stance from other arms of the government had been that developers and users of non-custodial wallets weren’t transmitters. 

But it looks like the DOJ has changed its mind, at least in the Tornado Cash and Samourai Wallet cases.

Read more from our opinion section: Samourai Wallet matters more than your memecoins

CoinCenter broke down the historical context, highlighting that FinCEN — the Treasury’s financial enforcement bureau — said in 2013 that crypto could be a value “that substitutes for currency” but that it’s not inherently a currency or “funds.”

FinCEN’s 2019 guidance also backed this up. 

“The person participating in the transaction to provide additional validation at the request of the owner does not have total independent control over the value,” the agency wrote at the time.

Van Valkenburgh said the Tornado Cash developers — the DOJ is taking aim at Roman Storm and Roman Semenov in this case — and the Samourai Wallet founders didn’t have “any actual control over the cryptocurrency that users of the tool owned.”

Read more: Tornado Cash arrests spur privacy debate

“Under clear and long established FinCEN guidance and under any common sense reading of the underlying law, these developers are not money transmitters. Nonetheless the prosecution persists unjustly,” he continued.

CoinCenter noted that Samourai Wallet, in particular, didn’t have “total independent control” over funds, which wouldn’t make them money transmitters.

Senator Cynthia Lummis, notoriously pro-crypto, echoed Van Valkenburgh’s concerns.

“This stance contradicts existing Treasury finance, common sense and violates the rule of law,” she said last week.

Here’s the thing: Crypto is dealing with the repercussions of the lack of regulation already. 

Take a look at the Consensys suit against the SEC. I know we’ve talked about this extensively, but the SEC investigating ETH as a security would mark a huge change in how it approaches regulation (though all of this is just alleged at this time). 

The SEC’s public stance has been that ETH — like bitcoin — isn’t a security. Changing its stance would not only pit two agencies against each other (the CFTC has previously claimed it’s a commodity), but it shows just how far we have to go when it comes to regulation in this industry.

The DOJ’s wallet transmitter arguments could set up something similar. 

Read more from our opinion section: Ether is the Schrödinger’s cat of crypto

The Justice Department’s filings further muddy the water, not to mention the public disagreement with the previous policies. For their part, CoinCenter said they’ll continue to watch and “defend both the wrongly accused developers” and previous policies

So grab your popcorn and take a seat. It’s just another day in the land of crypto, I guess.

— Katherine Ross

Data Center

  • Crypto VCs invested $2.49 billion in Q1 of this year, according to Galaxy Digital
  • That figure represents a 68% quarter-over-quarter increase.
  • One more point from Galaxy’s May 3 report: A whopping 80% of that amount went to early-stage firms, meaning VCs spent the period betting on new teams and projects. 
  • BTC cracked above $65,000 this morning, though it has slid slightly to about $64,400 as of the time of writing. 
  • A new dashboard co-developed by Visa posits that less than 10% of stablecoin transactions represent “organic payments activity.” 

Ghosts of crypto past

And in other DOJ news…

Even as the crypto industry plows ahead with new trends and tech — looking at you, memecoins and staking — some of the issues of yesteryear keep popping back up.

The DOJ rolled out indictments against a trio of former execs from crypto lender Cred late Friday. 

If you don’t remember Cred, you can perhaps be forgiven. The lender declared bankruptcy in 2020, a move that kicked off a multi-year legal process that saw Cred accuse exchange platform Uphold of essentially orchestrating its downfall. Uphold, as expected, denied the accusation. The bankruptcy process remains ongoing, though a reorganization plan was approved in 2021.

That era saw a raft of crypto lenders go belly-up in the wake of the downfall of crypto hedge fund Three Arrows Capital. Cred wasn’t among them, but some of that story’s components — a problematic retail-focused lending product, bankruptcy, and court drama — presaged the era of financial turbulence that culminated with FTX’s downfall.

Read more: Sam Bankman-Fried found guilty in landmark crypto trial

Which brings us to the Cred indictments. James Alexander, Joseph Podulka and Daniel Schatt were hit with wire fraud and money laundering charges, with the group accused of “making false and fraudulent statements to customers and investors about Cred’s lending and investing practices” per a DOJ press statement. 

Before the collapse, Cred’s execs presented two realities, the DOJ alleged. Publicly, Cred said everything was fine. But in the background, market volatility, culminating with 2020’s crazy crypto flash crash, pushed the lender into dangerous waters. 

Cred kept driving forward, the DOJ alleged: “Nevertheless, rather than disclose to Cred’s customers and investors the reality of Cred’s finances, defendants allegedly attempted to keep the business afloat by bringing in new customer funds and by discouraging existing customers from seeking and obtaining redemptions from their investments.”

The damage: hundreds of millions of dollars in lost value for customers’ crypto assets. 

The Cred trio face decades in prison. But will their day in court be as flashy or, in a word, historic as the FTX trial? I wouldn’t bet on it.

Still, the move is another highlight in the DOJ’s slow march across the crypto ecosystem. The Binance settlement and four-month jailing of Changpeng Zhao, as well as lawsuits against KuCoin and longtime bitcoin investor Roger Ver, signal that US prosecutors continue to return to crypto’s past in an effort to shape its future. 

Read more: DOJ charges Roger Ver with tax fraud

While the press might not flock to see the US government grill Cred, it’s worth paying attention — what plays out in those hearings and court docs may set important precedent. Stay tuned. 

— Michael McSweeney

The Works

  • A16z’s Chris Dixon says there’s a “void” of crypto representatives following the sentencings of CZ and SBF, Bloomberg reports.
  • Grayscale notched its first inflows since January on Friday after it saw over $17 billion in withdrawals. 
  • Bitcoin surpassed one billion transactions over the weekend, The Block reports.
  • Jack Dorsey left the board of decentralized social media platform Bluesky, according to a post from the company.
  • Bernstein analysts think bitcoin could still hit $150,000 this cycle.

The Morning Riff

Has bitcoin bottomed out?

It doesn’t matter if you’re on Wall Street, in your mom’s basement, or just checking on your wallet, everyone always has the same question after a price dip: Is this the bottom?

Let’s look at bitcoin, which dipped below $60,000 last week and is down roughly 3.7% over the last month. It’s been one hell of a ride for bitcoin so far this year between all-time highs, the halving and, of course, bitcoin ETFs

Unfortunately, macro events persist and bitcoin’s shown weakness during previous macro conditions.

But it may not be the overall environment either, because — as we’ve previously reported — analysts expected weakness after the halving. JPMorgan predicted that bitcoin could go as low as $42,000 post-halving, while others are eyeing $50,000. 

Given that bitcoin’s up nearly 3% over the past week, I think it’s fair to say that, even if it has further to fall and I’m gonna leave that analysis to the experts, it looks like there’s still a lot of room for bitcoin to regain its footing.

— Katherine Ross


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