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Over the past two days, there has been a notable uptick in concern within the crypto community regarding the U.S. government’s actions toward non-custodial wallets, which facilitate the sovereign storage of crypto assets. Recent events have fueled a widespread belief that a targeted campaign against non-custodial wallets is now underway.
Debate Over Crypto Wallet Regulation Heats Up Following New Government Actions
Recent incidents, such as the indictment of Samourai Wallet and reports of Consensys receiving a Wells Notice from the U.S. Securities and Exchange Commission (SEC), which allegedly characterized Metamask as an “unlicensed broker-dealer,” alongside the FBI’s recent advisory warning against unlicensed money transmitters, have left the crypto community apprehensive. In online forums and on social media, numerous crypto advocates are expressing their concerns about what these developments might mean for privacy, non-custodial wallets, and the integrity of open source code.
These developments have sparked widespread uproar among the crypto community on social media platforms such as X and forums like Reddit. For example, following the news about Samourai, a Redditor asserted, “You might as well arrest people who own ATMs because some people might buy weed with the cash. A mixer is a tool to delete your transaction history, that is all. F*** off feds, privacy is a human right.” On the social media platform X, John Paul Koning wrote:
The entire crypto economy has been built on the legal assumption that by not taking custody, one needn’t register as a money transmitter. But then Samourai & Tornado, both non-custodial, were charged for failing to register. Huge implications for crypto if the Feds are right.
On X, numerous individuals meticulously analyzed the Samourai indictment, uncovering mistakes made by the U.S. government. One individual highlighted that the indictment accuses Samourai of operating as an unlicensed money transmitter while simultaneously admitting that the team never handled user funds. Privacy advocate Chris Blec highlighted the same contradiction stating:
How could Samourai Wallet have been ‘transferring funds on behalf of the public’ if they never took custody of user funds? There is no middleman in a Whirlpool tx. Funds never leave the user’s own wallets. There’s no ‘mixer’ repository. This part of the indictment is a lie.
In addition to the Samourai case and the reported Wells Notice from the SEC to Consensys, legislative efforts to regulate non-custodial wallets have also been underway. Senators Elizabeth Warren (D-Mass.) and Roger Marshall (R-Kan.) introduced the Digital Asset Anti Money Laundering Act (DAAMLA) last year, which alleges that “unhosted” crypto wallets “allow individuals to bypass AML and sanctions checks.” Just last week, the Internal Revenue Service (IRS) unveiled a reporting form some believe targets non-custodial wallets.
“The IRS proposed draft 1099 suggests that non-custodial wallets are brokers… not good for privacy fans,” the founder of Hodder Law Firm Sasha Hodder wrote.
Numerous observers believe that the crackdown on non-custodial holdings is underway, and services such as BTC mixing may soon diminish, especially within the continental United States. There is a prevailing hope that non-custodial solutions will not fade into obsolescence, as the crypto economy and its users depend heavily on these for achieving financial sovereignty—a cornerstone of Bitcoin’s entire appeal—eliminating the need for a third party. “At this point, the only safe place to run a mixer from, even a non-custodial one, is North Korea,” Sjors Provoost said. He added:
With the Tornado Cash and Samourai arrest there’s no more doubt: the U.S. and EU hate financial privacy. They won’t stop at anything to maintain their financial surveillance apparatus.
“Privacy is normal,” the lawyer Jake Chervinsky wrote on Thursday. “Living in a surveillance state in which the government demands to watch everything we do with our money at all times without obtaining a warrant is NOT normal. Treating software developers who build privacy-preserving technology as criminals is reprehensible,” Chervinsky added. Former Bitcoin developer Jeff Garzik responded to Chervinsky’s post stating, “Transactional privacy has been the default for all of human history, until recent efforts of the past decade or so.”