Samourai Indictment & FBI Notice Are An Assault On Bitcoin And Privacy

As of the last two days, the Department of Justice has indicted the founders of Samourai Wallet, which provided an interface for the Whirlpool mixing pool and allowed for a degree of privacy by mixing transactions on Layer 1 Bitcoin. The FBI also issued a warning for Americans against self-custodied assets on Bitcoin – in a political act that was meant for scaremongering more than actual effect (in fact, anybody could withdraw their funds from Samourai and transfer them to a wallet like Sparrow – federal investigations can not deny access to one’s Bitcoin despite multiple attempts to make it much more complicated).

The attack on Samourai Wallet used many of the tools of the state, from app store takedowns (a popular tactic embraced by the Chinese Communist Party to enforce its wall garden Internet), management of domain space to physical extradition in what was a frontal assault not only on businesses building on Bitcoin but digital privacy and self-custody itself. What was alarming is that access to Whirlpool isn’t a good criminal tool. This action was set into motion even though only ~5% of activity in the mixer could be attributed to criminal activity. The rest of the 95% was treated as suspect just for trying to enforce more privacy over one’s transactions, for a tool that wasn’t designed for large-scale criminal inflows but rather as a privacy-enhancing layer.

This was part of a larger drive towards undoing digital privacy and giving citizens less control and power that doesn’t just stop at financial transactions. A similar “know your customer” proposal is being considered for anybody who uses cloud computing infrastructure in the United States, ostensibly to protect from foreigners scaling nefarious AI models on US-based infrastructure. Heads of national security have asked for access to end-to-end encrypted communications in a constant push to create backdoors to Internet privacy and security. And the United States ended up passing a clean reauthorization of FISA Section 702 – warrantless digital surveillance that has, in the past, been used to spy on Americans for political means.

Yet, while there has been debate about FISA Section 702, the foundation of a panopticon on financial data has been mainly left unquestioned. Americans take for granted a state of play where their transactions outside of cash involve uploading a passport or some other ID that can tie every piece of their financial history to them. FinCEN has long been at the roots of the financial debate. In 2013, the FinCEN administrator set a position that “exchangers and administrators of convertible virtual currency” are money transmitters under the Bank Secrecy Act. The Bank Secrecy Act enacted in 1970 has created a world where the default assumption is that if you spend large amounts of money, you have to identify yourself and leave a history tree of every bit of the expenditure you made – a world being cornered in by the adoption of central bank digital currencies and digital rails, and a world where cash is increasingly penalized. The Bank Secrecy Act was once controversial and not enforced by banks well into the 1980s amid constitutional fears and was tried in the Supreme Court. It is an artifact of legislation – that can be undone or retried if given enough time and energy.

There is no use of Bitcoin in an ETF that gives Bitcoin the properties that make it so desired and have helped it grow so quickly when it comes to censorship resistance and the choice of how to transact – and which serve as a direct counterposition to a world where all financial data is consumed about you in a state of control and fear. As encrypted apps have exploded in popularity, and the usage of VPNs (not privacy-preserving in itself, though a signal of the understanding of the importance of IP addresses in identification) and Tor has increased significantly, the demand for digital privacy and control has never been more vibrant – permeating to a discussion where central bank digital currencies like the Digital Yuan are unpopular both in practice for those forced to be implemented and in theory for those polled. Custodied Bitcoin on ETFs and exchanges like Coinbase miss this and can only claim to be exposed to the price. This depends a lot on how a peer-to-peer market for Bitcoin uses Bitcoin and how the demands for user privacy and custody come through.

The issuers of Hong Kong’s Bitcoin and American ETFs can’t have it both ways. Bitcoin may be a shiny marketing lure and a financial signal, but it will quickly lose its appeal if it cannot be used as intended, and it cannot scale as it must into a merchant network near you. Digital privacy is an important part of the narrative – embracing open-source code means working with developers toward solutions that are privacy-preserving. Lightning Network is meant to be an important scaling solution – but with important parts of infrastructure disrupted (for example, ACINQ taking down the popular Phoenix Wallet because of fears of being classified as a money services business), Bitcoin can hardly afford to be a static technology that isn’t used at scale for it to have any financial value. The effect of overly broad (and inaccurate) pronouncements from national security figures amounts to censorship by fear and destruction of entire ecosystems beyond their remit.

The United States has an important role to play here – and it should be legislators and the popular will that decide this balance between privacy, control, and access that new technological developments bring, not overreach and speculation by national security agencies that are out of their depth and not scoped for the tradeoffs inherent here. The United States’s centrality in financial transactions and being the Internet backbone has given it a decisive advantage in the world – and yet, that advantage could quickly spill away due to overly broad interpretations of lawfare – and leave the United States weaker than ever before, without as much significant input in a fracturing Internet and global financial system. It will also expose human rights activists from across the world.

The inability to make private payments is a denial of self and a call to self-censorship, including in areas of American policy-making like association of expression with laws countering it (e.g., Hong Kong) that are held most dear as symbols of the freedoms constitutional law is supposed to provide. Just as with central bank digital currencies, it should be up to the people and legislators to decide these essential tradeoffs.

People and average users of Bitcoin should also make informed decisions based on vetted information of what they hold dear. The principles of self-custody and the ability to transact and merge seamlessly with the Internet make Bitcoin stand out, not its position as a financial “commodity” like any other. In cases where states threaten that access, the question of exit, voice, or loyalty comes to the fore.

A common response to this assault has been to “code more” and build more resilient protocols, a necessary but insufficient answer. Bitcoin is more than just a ticker on a stock brokerage. It is a technology and a tool meant to give control back to the people rather than being an array of tools used to enforce control. It requires a holistic effort that considers legislative power, tapping the popular will, and new technologies that can reinforce the critical concepts of digital privacy, control over one’s assets and information, and the censorship-proof and decentralized nature of Bitcoin.