The Year in Crypto: War on Digital Privacy

Privacy is not a crime.

But when it comes to the crypto industry, projects and coins that allow users to tread lightly on the chain are facing higher levels of scrutiny than ever before.

In 2024, government-led efforts were made to combat the practice of coin mixing services continued as the developers behind Bitcoin Fog, Tornado Cash and Samouri Wallet were all in court. Meanwhile, so-called privacy coins were faced with hurdles as some exchanges no longer supported them.

While Bitcoin’s pioneers drew inspiration from the Cypherpunk movementPrivacy and crypto have been intertwined since the industry’s inception as a means of internet-based resistance.

But that link, rooted in skepticism from governments and big banks, showed signs of fraying this year as exchanges found themselves in a maturing industry and developers faced prosecution.

As a layer 1 network, Midnight uses zero-knowledge proofs to maintain metadata associated with users, companies, and transactions.

While it’s very different from the privacy tools the government has cracked down on, CEO Eran Barak said he’s seen a growing sense of unease among developers working on solutions that will help maintain privacy across the chain.

“I think there is definitely nervousness around the topic of privacy,” Barak said Declutter. “People saw the hammer being thrown at it [industry] players.”

Privacy projects

Pioneered more than ten years ago privacy coins have protected users from prying eyes on-chain for much of the crypto industry’s existence. But this year, several exchanges have moved away from coins that help maintain the anonymity of their users, such as Money (XMR).

After warning that it would delist Monero in February, Binance decided started converting XMR from customers to stablecoins as part of the removal process in September. Early this year, Binance also hit Monero competitors with a “monitoring tag” on its platform, including Zcash (ZEC) and Firo (FIRO). Yet these cryptocurrencies have yet to be delisted.

Citing regulatory changes in the European Economic Area (EEA), Monero took another hit in October, as Kraken had said to delete the coin on its platform for European users. Meanwhile, other cryptocurrency projects have been engaged in privacy-focused research.

Secret Network, launched in 2020, is a blockchain with private smart contracts. Rather than supporting a token that is difficult to trace, Secret Network allows developers to build applications that support encrypted data on-chain, essentially providing a form of confidential computing.

According to Alex Zaidelson, CEO of SCRT Labs, multiple exchanges warned his team that Secret Network’s token could be removed in addition to Monero’s problems. He said it took time and persuasion, but eventually the exchanges discovered that Secret Network was fine to offer from the perspective of the anti-money laundering (AML) rules that regulated exchanges are subject to.

“We have seen a number of regulated players distancing themselves from anything related to privacy,” Zaidelson said Declutter. “It took work and explanation to make sure people understood the difference between privacy coins. That and confidential computer chains.”

Zaidelson also said there is a real need for privacy in the crypto industry if the technology has any chance of becoming mainstream. Common examples include a hedge fund that doesn’t want to reveal its positions, he said, or a healthcare application that wants to put patient data on-chain.

“We can’t expect everyone to live in a glass house,” Zaidelson said. “You can’t build technology rails to keep everything running without protecting the data. It’s unimaginable.”

Coin mixers

While privacy advocates say coin mixers can help users maintain their anonymity, the government has identified them as a common tool for money launderers for years. By allowing users to obscure the source and destination of crypto transactions, the government’s crackdown on coin mixers continued this year, be it Bitcoin or Ethereum.

Although Tornado Cash was sanctioned by the US Treasury Department’s Office of Foreign Asset Control in 2022 – in fact blacklist the tool for Americans: the charges against the developers of the mixer would not be filed until a year later. Meanwhile, privacy advocates such as whistleblower Edward Snowden labeled the administration’s move as “deeply authoritarian.”

In 2023, federal prosecutors charged Tornado Cash founders Roman Storm and Roman Semenov with money laundering, sanctions violations and a conspiracy to run an unlicensed money transmission business. According to the US law enforcementSemenov remains at large, while Storm was arrested and faces charges in the Southern District of New York.

In September, a federal judge in New York denied Storm’s request to dismiss his three charges, ruling that the case could proceed. Although Storm’s legal battle within the crypto industry has been portrayed as a free speech issue, the judge ruled that Storm’s invocation of First Amendment rights had little to do with the legal statutes under which he was charged. The court effectively ruled that the protection of freedom of expression was not relevant at that stage of the trial.

Those associated with Tornado Cash faced legal trouble elsewhere this year. In May, a Dutch judge joined the court in ‘s-Hertogenbosch found Tornado Cash developer Alexey Pertsev is guilty of money laundering, claiming the privacy-protecting tool is “intended for criminals,” and has been handed a 64-month prison sentence. While Perstev has since done that appealed Following the ruling, Vitalik Buterin, co-founder of Ethereum, described Perstev’s prosecution as downright chilling.

“The Alexei thing is definitely very unfortunate,” Buterin says said at a conference in Berlin. “I think a lot of people made that assumption […] that just building software is something that is okay and a completely legal and legitimate way to fight for privacy.”

At the end of November, a glimmer of hope emerged for Tornado Cash. The US Fifth Circuit Court ruled that the Treasury Department exceeded its authority in sanctioning Tornado Cash’s smart contracts, ruling that autonomous software cannot be considered proprietary.

“No one wants criminals to use crypto protocols,” said Coinbase Chief Legal Officer Paul Grewal wrote in a message on X (formerly known as Twitter). “Completely blocking open source technology because a small portion of users are bad actors is not what Congress approved.

A litany of cases

While Storm’s case in a New York federal court has captivated corners of the crypto industry, he isn’t the only developer of privacy-focused crypto tools facing legal pressure there.

In April, the Ministry of Justice arrested and accused the developers of Saumouri Wallet of operating an unlicensed money transmitter. Allowing users to obscure Bitcoin transactions by combining them, prosecutors described the product as a currency mixer that “conducted more than $2 billion in unlawful transactions” while facilitating $100 million in money laundering.

Rodriguez, who is being prosecuted in the Southern District of New York, was refused bail in September due to “bug out prep” citations. Although Hill was issued While on bail, Republican Sen. Cynthia Lummis of Wyoming criticized the overall case.

“The DOJ’s unprecedented and unlawful change to the law’s interpretation threatens to criminalize core elements of Bitcoin,” she wrote in a May article letter. “Wallet software is no more responsible for illegal financing than a highway is responsible for a bank robber’s getaway car.”

Roman Sterlingov, who was found guilty of money laundering earlier this year, operated the cryptocurrency mixer Bitcoin Fog more than a decade ago. Through his maintenance of the instrument, federal prosecutors alleged he laundered more than $400 million in criminal proceeds.

While the developer was arrested in 2021, he was not convicted until November. A federal judge in Washington, DC is representing one of the industry’s most notable cases involving a coin blender. convicted Sterlingov to 12 years in prison.

Ultimately, the regulatory heat became too intense for some coin-blending services projects in the US this year. After the arrest of Samouri Wallet developers, projects such as Wasabi Wallet and Phoenix Wallet closed their doors to US users quite quicklyleaving their privacy tools out of reach for the foreseeable future.

A group of lawmakers on Capitol Hill, who view the use of coin mixers as a national security concern, requested an update from the U.S. Treasury Department on Tornado Cash in November.

In one letterThey expressed concern that North Korea-linked hackers are still using the service to launder money among a litany of predatory actors such as child molesters and human traffickers.

“Despite sanctions, Tornado Cash has remained online and continues to operate,” the lawmakers wrote. “This problem shows no signs of going away anytime soon.”

Edited by Sebastian Sinclair