The United States’ crusade against financial crime proliferating through the cryptocurrency market has been well documented of late, this as the growth of the crypto space has grown exponentially over the last decade alone. The abuse of cryptocurrency ‘mixers’ (otherwise known as blenders or tumblers) by bad actors has been a particular area of focus, this as these platforms have helped to collectively facilitate tens of billions of dollars’ worth of white-collar crime at the international level to date. The premise of this practice is to bolster anonymity with respect to funds transfers by allowing the mixture of potentially identifiable or “tainted” cryptocurrency funds with “clean funds”, so as to obscure the trail back to the fund’s original source. This allows funds derived from criminal activity to be laundered without a trace, further contributing to an expanding cycle of illicit activity. With crypto mixers growing in both prevalence and utilization, specifically of the unethical variety, the Treasury’s Financial Crimes Enforcement Network (FinCEN) proposed treating all international Convertible Virtual Currency (CVC) mixing as transactions garnering the distinction of having “primary money laundering concerns” in late 2023. This came as part of a greater effort to boost transparency and hinder misconduct in this regard both domestically and abroad (with FinCEN’s NPRM coming in wake of findings that malicious actors including Hamas, Palestinian Islamic Jihad, and the Democratic People’s Republic of Korea were exploiting these platforms to fund their destabilizing activities). To date however, no concrete changes to domestic regulations harboring the use of these platforms has been brought forth. The same holds true for the general use of crypto wallets, this in spite of the re-introduction of the Digital Asset Money Laundering Act in 2023 aimed at closing gaps in the existing anti-money laundering and counter-terrorism financing (AML/CFT) framework as it applies to digital assets.
As the world becomes increasingly digital, criminals are looking for ways to maintain the same levels of anonymity there once were with cash-based transactions. While centralized mixers have garnered much of the attention from federal authorities to date, decentralized tools continue to exceed existing sanctions authority across much of the developed world, effectively allowing large-scale money laundering activities to continue virtually unimpeded. As the U.S. has begun to shift their focus in this regard, they have achieved some notable early results for their efforts in the form of shutdowns of several major mixing platforms and convictions of the very individuals operating them. This trend has been highlighted by the monumental conviction of the founder of notorious cryptocurrency mixer Bitcoin Fog in March, and the ongoing criminal proceedings against the founders of decentralized crypto mixer Tornado Cash alleged to have laundered excess of $1 billion on behalf of its customers. Given the global reach of these platforms and the continued investment into the crypto industry by a growing number of consumers, much work remains to be done to limit their potential for abuse however, with this made evident by yet another scandal related to money transfer services that has recently arisen.
Last week, the U.S. Federal Bureau of Investigation’s (FBI) New York field office released details about charges levied against two top executives of the popular crypto wallet Samourai Wallet. Keonne Rodriguez, the Chief Executive Officer and co-founder, and William Lonergan Hill, Chief Technology Officer and co-founder, were formally charged on multiple counts that included conspiracy to commit money laundering and conspiracy to operate an unlicensed money transmitting business, allegedly using their platform to execute over $2 billion in unlawful transactions and launder over $100 million in criminal proceeds.2 Reports indicate that the two individuals are accused of facilitating transactions from various dark web markets such as Silk Road and Hydra Market, as well as from web-server intrusion operations, a spear-phishing scheme, and multiple schemes to defraud decentralized finance protocols.2 The efforts of the U.S. government in this regard, coupled with assistance received from law enforcement authorities in Iceland also allowed for Samourai’s web servers domain to be seized.
Regarding the proceedings against Samourai Wallet, IRS-CI Special Agent in Charge Thomas Fattorusso said, “$2 billion in transactions with an unlicensed money transmitter means $2 billion flowed without any oversight, from whomever to wherever.” This is a troubling reality for those parties seeking to hinder financial crime across international borders. When cryptocurrency companies operate with disregard for regulations and requirements, there is no telling how much money being moved through them is legitimate. It also becomes difficult to tell if people like Rodriguez and Hill are operating their business purposefully to attract criminals looking to launder their money, with these practices also affecting the average citizen using their platform in a non-malicious way by entangling them into a web of potentially-suspicious activity. The U.S. government has advised American citizens against using cryptocurrency services that do not adhere to Money Services Business registration and anti-money laundering standards set national law, highlighting specific legal risks and the potential for financial disruption from using unlicensed services, especially when funds are mixed with those derived from illegal activities.1 Given that there is no specific legislation that bars individuals from utilizing these platforms however, their advisement largely falls on deaf ears.
All told, these developments raise new questions regarding privacy protection in the financial realm. Many supporters of independent cryptocurrency took issue with the FBI’s announcement, claiming that the federal government is dissolving the right to one’s financial privacy. Despite these criticisms, the FBI remains steadfast in cracking down on bad actors utilizing technology to evade law enforcement detection and create environments conducive to criminal activity. In a statement following the arrests of Samourai Wallet’s founders, FBI Assistant Director in Charge James Smith noted that the bureau and the U.S. government as a whole remains “committed to exposing covert financial schemes and ensuring no one can hide behind a screen to perpetuate financial wrongdoing.”2
Citations
- Brett, Jason. “Amid Bitcoin Fog Operator Conviction, Are Crypto Mixers Now Illegal?” Forbes, Forbes Magazine, 28 Mar. 2024.
- “Founders and CEO of Cryptocurrency Mixing Service Arrested and Charged with Money Laundering and Unlicensed Money Transmitting Offenses.” U.S. Attorney’s Office | Southern District of New York, United States Department of Justice, 24 Apr. 2024.
