The Year in Crypto: The War on Digital Privacy

Privacy is not a crime.

Yet when it comes to the crypto industry, projects and coins that allow users to lightly step on the chain face a higher level of scrutiny than ever before.

In the year In 2024, a government-led effort to combat the use of coin mixing Services The developers behind Bitcoin Fog, Tornado Cash, and Samouri Wallet have all continued their momentum as they face court challenges. Meanwhile, the so-called Privacy coins They hit a snag when some exchanges stopped supporting them.

Drawing inspiration from Bitcoin pioneers The cypherpunk movementPrivacy and Internet-based countermeasures have been intertwined since the crypto industry began.

But that relationship, based on skepticism by governments and big banks, has shown signs of fraying this year as exchanges move toward a mature industry and developers file lawsuits.

As a Layer-1 network, Midnight uses zero-knowledge authentication to protect metadata associated with users, businesses and transactions.

Although it's very different from government-controlled privacy tools, CEO Iran Barak says he's seen a growing sense of unease among developers working on solutions that help protect privacy on the chain.

“I think there's definitely fear on the topic of privacy,” Barak said Decrypt. “People saw the hammer come down. [industry] players”

Privacy projects

He pioneered ten years ago. Privacy coins For most of the existence of the crypto industry, they prevented users from seeing on-chain. But this year, several exchanges have withdrawn from coins that help protect the anonymity of their users, e.g. Monero (XMR).

After warning that Monero will cancel in February, Binance began to change Client XMR to stablecoin as part of delisting process in September. Earlier this year, Binance launched Monero competitors with “Tracking accountincluding Zcash (ZEC) and Firo (FIRO) on its platform. Still, those cryptocurrencies have yet to be phased out.

Kraken suffered another blow to Monero in October citing regulatory changes in the European Economic Area (EEA). List The coin on the platform for European users. Meanwhile, other cryptocurrency projects have been experiencing privacy-focused scrutiny.

Launched in 2020, Secret Network is a blockchain featuring private smart contracts. Far from supporting a hard-to-trace token, a secret network allows developers to build applications that support encrypted data on-chain, effectively providing a secret computing mechanism.

According to SCRT Labs CEO Alex Zadelson, many exchanges have warned their team that the crypto network token could be canceled along with Monero's problems. He said it took time and convincing, but in the end, the exchanges found that the secretive network was good enough to deliver against the anti-money laundering (AML) laws that govern transactions.

“We've seen a lot of regulated players distancing themselves from anything related to privacy,” Zadelson said. Decrypt. “It took work and explanation to get people to understand the difference between privacy coins. That and private blockchains.

Zadelson also said there is a real need for privacy in the crypto industry if the technology has a chance to enter the mainstream. Common examples include a hedge fund that refuses to disclose its positions or a healthcare app that wants to put patient data on-chain.

“We can't expect everyone to live in a glass house,” Zadelson said. “You can't build technology rails to run everything without protecting the data. It's unthinkable.”

Coin mixer

As privacy advocates speak Coin collectors It can help users remain anonymous, which the government has targeted for years as a common tool for money laundering. Allowing users to hide the source and destination of crypto transactions, the government's crackdown on coin miners has continued this year, tied to Bitcoin or Ethereum.

Although Tornado's cash in 2010 Despite sanctions by the US Treasury's Office of Foreign Assets Control in 2022—effectiveness Black list The lawsuits filed against the developers of American's device—the mixer—were not filed until a year later. Meanwhile, privacy advocates, such as whistleblower Edward Snowden, have criticized the government's actions as “Deep tyrannyHe said.

In the year Federal prosecutors in 2023 Accused Tornado Cash founders Roman Tornado and Roman Semenov for conspiracy to commit money laundering, sanctions violations and unauthorized money transfer business. As in the US Law enforcementSemenov is still in full custody, while Storm is about to be sued in the Southern District of New York.

In September, a federal judge in New York dismissed three of Storm's charges and ruled that the case could go forward. Although Storm's legal battle has been described as a free speech issue in the crypto industry, the judge found that Storm's invocation of First Amendment rights had no bearing on it. Legal regulations Accused. In effect, the court found that free speech protections were not necessary at that stage in the hearing.

Those associated with Tornado Cash have run into legal trouble elsewhere this year. In May, a Dutch judge at the s-Hertogenbosch court found Tornado Cash developer Alexey Persev was convicted of money laundering and sentenced to 64 months in prison, saying the privacy protection tool was “intended for criminals.” While since Perstev He appealed The decision, Ethereum founder Vitalik Buterin, described Perstev's case as too chilling.

“The Alexey thing is definitely sad,” Buterin said. he said. At the Berlin conference. “I think a lot of people are going under the assumption […] There is nothing wrong with building software and fighting for privacy is completely legal and legitimate.

A glimmer of hope emerged for Tornado Cash in late November. The U.S. Fifth Circuit Court of Appeals ruled that the Treasury Department overstepped its authority to block Tornado Cash's smart contracts, saying access to independent software could not be considered property.

“No one wants criminals to use crypto protocols,” said Paul Grewal, Chief Legal Officer of Coinbase. He wrote On X (formerly known as Twitter) post. “To completely ban open source technology because a small portion of users are bad actors is not what Congress authorized.

Many issues

Although the stormy case in New York federal court has captivated corners of the crypto industry, it's not the only developer of privacy-focused crypto tools to face legal pressure there.

In April, the Department of Justice caught up And the developers of Saumouri Wallet accused them of operating as an unlicensed money transmitter. By allowing users to mix and match Bitcoin transactions, prosecutors described the product as a coin mixer that “made more than $2 billion in illegal transactions,” facilitating $100 million in money laundering.

It was Rodriguez who was prosecuted in the Southern District of New York. It is forbidden Because of the “bug out prep” notes on September's bailout. Although Hill Released Senator Cynthia Lammis, Republican of Wyoming, was critical of the entire issue.

“The DOJ's unprecedented and illegal change in legal interpretation threatens to criminalize the core elements of Bitcoin,” she wrote in May. Letter. “Wallet software is not responsible for illegal financing; the highway is responsible for a bank robber's getaway car.”

Roman Sterlilov, who was convicted of money laundering earlier this year, developed the cryptocurrency mixer Bitcoin Fog over a decade ago. In connection with the device repair, federal prosecutors charged them with embezzling more than $400 million in criminal proceeds.

While the developer was arrested in 2021, he was not sentenced until November. In representing one of the industry's most high-profile cases involving coin mixing, a federal judge in Washington, DC; He was sentenced. Sterlilov up to 12 years in prison.

Finally, regulatory heat for some projects with coin-mining services in the US has grown fiercer this year. Following the arrest of the developers of Samurai Wallet, projects such as Wasabi Wallet and Phoenix Wallet closed their doors to US users. Rather quicklyKeeping their privacy devices out of reach in the future.

A group of Capitol Hill lawmakers who view coin mints as a national security threat asked the U.S. Treasury for an update on Tornado Cash in November.

as if LetterHackers with ties to North Korea are still using the service to launder money from nefarious actors such as child abusers and human traffickers, he said.

“Despite the sanctions, Tornado Cash has remained online and continues to operate,” the lawmakers wrote. “This problem shows zero signs of going away anytime soon.”

Edited by Sebastian Sinclair