US Administration Launches Comprehensive Offensive on NonCustodial Decentralized Finance Platforms Commentary

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Developers of decentralized finance apps should take note: federal agencies are cracking down on service providers, regardless of whether they control user funds. The Bank Secrecy Act (BSA) holds them accountable. The Department of Justice (DoJ), Office of Foreign Asset Control (OFAC), and Securities and Exchange Commission (SEC) have targeted decentralized service providers such as Samourai, Tornado Cash, Consensys, and more. This has forced Phoenix Wallet and Wasabi Wallet to exit the US market.

Even individual developers employed by startups creating decentralized technology are being targeted by the SEC under Chairman Gary Gensler. The Commission has requested a list of Consensys developers who contributed to the Ethereum merge upgrade in September 2022. This view of developers as bankers or competition for bankers is irrational and has a chilling effect on decentralized and privacy-preserving technology.

In April 2024, the DoJ indicted Keonne Rodriguez and William Lonergan, the founders of Samourai Wallet, on charges of conspiracy to commit money laundering and operating an unlicensed money service business. Despite not being a bank, Samourai Wallet provided software for automated financial processes. Rodriguez’s attorney plans to file a motion to dismiss the case and will include a letter from Senators Cynthia Lummis and Ron Wyden arguing that non-custodial crypto software should not be considered a money-transmitting service.

Alexey Pertsev, a developer behind Tornado Cash, is facing legal charges on multiple continents. Tornado Cash was sanctioned by the US Department of the Treasury’s OFAC for allegedly facilitating money laundering. Pertsev is also accused of laundering over $1 billion in illicit funds, including funds for North Korean hackers. In the Netherlands, he was found guilty of laundering $1.2 billion.

The liability of developers of open-source financial software has long been debated in the crypto community. However, recent court rulings have shown that the legal system holds them accountable. This sets a precedent for the criminal liability of dapp developers.

Uniswap, a decentralized crypto exchange, received a Wells notice from the SEC accusing it of acting as an unregistered securities broker and exchange. Uniswap plans to fight these charges, arguing that it is in compliance with US law.

Consensys, the Ethereum technology conglomerate, also received a Wells notice from the SEC regarding its MetaMask products. Consensys has sued the SEC, claiming an “unlawful seizure of authority.”

The SEC’s actions have led to the discontinuation of services for US customers by Phoenix Wallet and Wasabi Wallet. If self-custodial wallet providers are classified as money service businesses, it is unclear if they can operate in the US. The SEC’s targeting of non-custodial services could influence other countries to adopt similar policies. The crypto industry may have to wait years for a resolution, and the cases could potentially reach the Supreme Court.

Big banks and powerful players in the US government are resistant to decentralized financial technology and seek to destroy it without proper regulation. The crypto industry must fight for its survival.

Kadan Stadelmann, the chief technology officer of Komodo Platform, is a blockchain developer and operations security expert. He has experience in government operations security, launching technology startups, and cryptography. He joined the Komodo team in 2016 after starting his journey into blockchain technology in 2011.