Empire Newsletter: Crypto mixers have their day in court

A new scare tactic

Crypto mixers, and those who make them, are having their day in court. 

Yesterday, Tornado Cash developer Alexey Pertsev was found guilty of money laundering and sentenced to 64 months in a Dutch prison. 

The sentencing, which happened after a brief trial in March, left CoinCenter’s Peter Van Valkenburgh “sad” and “angry that the money laundering laws in the Netherlands have such a low threshold for intent, especially mere negligence.”

But the verdict shouldn’t impact US cases, which is important to note because Tornado Cash co-founder Roman Storm is expected to face a trial later this year. 

So let’s zoom out for a second here. 

Crypto mixers, such as Tornado Cash, have clearly hit a nerve with governments outside the US. But, as we previously mentioned here, the US government is looking to seriously inhibit or scare people away from these services. Tornado Cash was sanctioned years ago, then both Storm and Roman Semenov were charged. (Semenov is notably still at large, though Storm was arrested.)

The chart from Dune shows that there are still cash deposit transactions happening on Tornado Cash, though there’s clearly been a drop-off since the March 2022 highs. The US government sanctioned Tornado Cash in August 2022, making it illegal for US citizens to interact with the protocol, which is reflected in charts of deposit and withdrawal transactions.

The privacy tool has many lawful users and provides a receipt mechanism to prove the provenance of withdrawn funds when requested by an appropriate authority.

Then there’s Samourai Wallet, which saw a bit of a different approach from the US government.

The Department of Justice teamed up with other international agencies to not only arrest two co-founders — William Lonergan Hill and Keonne Rodriguez —- but also seized the web servers and domain “in coordination with law enforcement authorities in Iceland.”

The indictment accuses the Samourai Wallet account on X of encouraging users to “launder proceeds” using its services. 

What’s the aim here for the government? Is it to suppress the technology or is it to punish those behind it?

That’s the question I’ve been mulling over when looking at the approach that the DOJ has taken to both cases. 

CoinCenter’s note earlier this month explained how the DOJ changed tack when it comes to the developers. 

As we talked about previously, guidance from FinCEN — the Treasury’s financial enforcement bureau — has long suggested that crypto shouldn’t count as funds.

The agency further wrote: “The person participating in the transaction to provide additional validation at the request of the owner does not have total independent control over the value.”

These points are worth bringing up once again because of the potential shift they show. The DOJ has seemingly disregarded such guidance in favor of directly targeting the developers. 

And, while the Dutch legal system is totally separate and neither the US nor the Dutch systems will have any direct influence on these types of cases, the underlying theme here is that multiple governments have targeted the developers behind the technology.

Is that enough to end mixers? In crypto, probably not as seen by the aforementioned charts. But it’s clearly enough to scare folks from using the services. 

Data Center

• Among memecoins, FLOKI’s leading the gains — up 10% — this morning as Roaring Kitty continues to post videos on X. 
• Grayscale’s bitcoin ETF saw outflows of $50 million on Tuesday, while ARKB brought in $133 million, per Farside data. 
• Ark’s Bitcoin Monthly noted that there are two “crucial” support levels remaining for bitcoin: the 200-day moving average of $48,335 and the on-chain mean, which is $42,538.
• BTC’s price is hovering around $62,000, a 1.2% change in the last day.
• Core Consumer Price Index month-over-month fell to 0.3%, just under the 0.4% expected in April. 

The end is near

After a few years of bankruptcy proceedings, we may be near the endgame when it comes to the companies that failed at the beginning of last cycle’s downturn. 

As we wrote about last week, FTX put forth a creditor payback plan that could be approved by both a creditor vote and, in June, a court.

But it may not be all smooth sailing for the former crypto exchange, as Blockworks’ Ben Strack and I previously reported. The estate’s plan does have some “controversial elements” that aim to shield some of the non-debtor entities from potential future lawsuits, Matthew Gold, partner at Kelinberg Kaplan, told Ben last week. 

FTX’s bankruptcy — though it came at a time when there were a number of other bankruptcies such as Celsius, Voyager and BlockFi — stands on its own, said Jonathan Groth, partner at DGIM Law.

The bankrupt exchange is a “special case” in comparison. 

“The plan that they’re proposing [and the fund they’ve amassed] to repay creditors is really based more on the liquidation of securities holdings through FTX’s branch of Alameda and other recoveries…just really selling off other assets,” Groth said.

Voyager and Celsius returned between 35% and 65% to 85%, respectively, to creditors. Just looking on a numbers basis, FTX is saying it is planning to make customers whole and even pay interest to some. That, of course, doesn’t take into account the appreciation of certain cryptocurrencies such as bitcoin. When FTX filed for bankruptcy, bitcoin was under $20,000. Now, of course, it’s above $60,000. That’s clearly a massive change. 

However, the bankruptcy code — which Judge John Dorsey upheld earlier this year at a hearing after some creditors said they wanted their payouts to recognize current prices — says that customers should be repaid based on the date that the company declared bankruptcy. 

FTX also benefited from the asset location, managing to cobble together between $14 billion and $16 billion to repay creditors. Creditors are owed $11 billion.

“In any of these other insolvency proceedings where the estate and the fiduciary may be lucky enough to still hold some crypto assets, they may be able to benefit from this market upswing that we’re seeing,” Groth said.

Even if some creditors are unhappy with the plan, Groth said “it’ll be really difficult for a court to look at this and say, ‘How unhappy can you be?…You’re being made whole.’” 

— Katherine Ross

The Works

• Circle is looking to make the US its legal home base ahead of its planned IPO, Bloomberg reports. 
• Peter Thiel’s VC fund and Vitalik Buterin backed Polymarket in a $70 million raise across Series A and Series B rounds.
• Ex-FTX executive Ryan Salame is seeking an 18-month sentence, according to a court filing.
• Robinhood announced its first-ever staking product — Solana staking — for customers in Europe. 
• Berachain’s $1.5 billion valuation following its $100 million Series B raise last month earned it a spot on Crunchbase’s Unicorn Board. 

The Morning Riff

Former Binance CEO Changpeng Zhao is about to have a lot of time on his hands as he prepares to serve his four-month prison sentence in the US. Or, as he called it, “quiet time.”

So what’s a guy to do with all that time?

Sounds like CZ might be going the very classic route of publishing a book. The former executive said he’ll “give it a try” in a response on X. 

What could the said book be about? I’m thinking not about what led to his prison sentence, and Zhao — at least in court — said he’d go back and “change that part of Binance’s story” when discussing what led him to be in front of a judge for sentencing. 

Read more: Empire Newsletter: Why CZ and SBF’s sentencings were so different

CZ’s newest endeavor is Giggle Academy, a nonprofit education platform, so maybe he’ll pen a self-help book or advice on how to be the next crypto kingpin. 

Actually, the latter might be helpful — depending on what he writes about — because we’ve seen quite a few topple thanks to casual law-breaking and deceptive practices. But, hey, there’s always room for improvement. 

Either way, there’s no denying that CZ is a force within crypto even putting the guilty plea aside. I’m hoping that his book ends up in the hands of our very own Molly Jane Zuckerman. 

— Katherine Ross

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