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Keonne Rodriguez, co-founder of Samourai Wallet, pleaded not guilty to money laundering and operating an unlicensed money-transmitting business. The U.S. government is cracking down on crypto mixers like Samourai Wallet, which is under scrutiny for possibly qualifying as a money service business despite not handling funds directly. Meanwhile, Terraform Labs and its executives are contesting a hefty $5.3 billion penalty, calling it unjust, and Voyager Digital secured a $450 million settlement in its bankruptcy proceedings.
Samourai Wallet Co-Founder Pleads Not Guilty
Keonne Rodriguez, a co-founder of Samourai Wallet, has pleaded not guilty to charges of money laundering and operating an unlicensed money-transmitting business. His plea was entered during a court appearance on Apr. 29 in the U.S. District Court for the Southern District of New York. The Justice Department set Rodriguez's bail at $1 million, and he will be under house arrest in Harmony, Pennsylvania, with very strict restrictions, including a ban on any direct or indirect crypto transactions without approval.
William Hill, the chief technology officer of Samourai Wallet, was arrested on the same day but in Portugal, which complicated his appearance in a U.S. court because of ongoing extradition proceedings.
The U.S. government has been cracking down on crypto mixers in an effort to regulate them as authorities believe they facilitate money laundering for criminal organizations, including hacker groups and terrorists. This has included the recent sanctioning of other cryptocurrency mixers like Blender and Tornado Cash.
The legal outcomes for Rodriguez and Hill could be very serious as they might be looking at sentences of up to 20 years for money laundering and five years for operating an unlicensed business. The next court date for Rodriguez is scheduled for May 14, where proceedings will clarify the implications for him and the future of Samourai Wallet.
Redefining Money Service Businesses
The debate about whether non-custodial wallets like Samourai Wallet can actually be classified as money service businesses (MSBs) is intensifying. According to FinCEN’s 2019 guidance, a money transmitter is defined as someone who initiates and executes money transfers. Samourai Wallet, however, does not take custody of user funds, nor does it accept or execute fund transfers in the traditional sense. Funds are deposited and transactions initiated directly by users on their devices, which means Samourai does not interact with the funds directly.
The U.S. Department of Justice (DoJ) seems to be challenging this interpretation in its indictment of Samourai Wallet, suggesting that the wallet's operation and fee collection for services like broadcasting transactions could classify it as an MSB. This argument aligns more with the FATF’s expanded definitions, which include any central involvement or control in financial transactions as criteria for MSB classification.
This broad interpretation could extend MSB requirements to virtually any service facilitating financial transactions, potentially affecting a wide array of services beyond just crypto wallets.
This could raise some serious concerns about the future of financial technology and the internet’s freedom. By potentially requiring extensive licensing and KYC verifications for a broad range of services, these regulatory moves could impose stringent constraints on technological innovation and individual privacy in financial transactions.
Terraform Labs Contests SEC's $5.3 Billion Penalty
Meanwhile, Terraform Labs and its co-founder Do Kwon are pushing back against a massive financial penalty proposed by the U.S. Securities and Exchange Commission (SEC). After a jury verdict on Apr. 5, which found both Terraform and Kwon guilty of investor fraud, the SEC sought $5.3 billion in disgorgement and civil penalties.
However, in a filing from Apr. 26 with the U.S. District Court for the Southern District of New York, Terraform’s lawyers argue that the penalty should be capped at $1 million. They believe that any larger amount, particularly the disgorgement, would be unjust because it would involve seizing funds from the Luna Foundation Guard (LFG), which was not named in the SEC’s lawsuit.
The legal team for Terraform holds firm that the funds in question are rightfully held by LFG, stemming from token sales conducted by the organization, and not by Terraform Labs itself. Because of this they argue that these funds should not be subject to disgorgement since LFG was never part of the case. Additionally, Do Kwon’s separate legal filing opposes the SEC's request for details about his financial accounts and assets. He believes that this would infringe on his Fifth Amendment rights against self-incrimination.
Kwon was arrested in Montenegro in March of 2023 for possessing falsified travel documents, and did not attend the trial. He is currently under travel restrictions while Montenegrin authorities deliberate on extradition requests from both the U.S. and South Korea.
Voyager Digital Secures $450 Million in Settlement with FTX
A judge has approved a $450 million settlement agreement between the bankrupt crypto exchange FTX and Voyager Digital. The approval was granted by Judge John Dorsey of the United States Bankruptcy Court for the District of Delaware, and is a crucial step in resolving outstanding claims and compensating creditors as part of Voyager’s bankruptcy proceedings.
The settlement stipulates that Voyager Digital will receive $5 million currently held in escrow along with an additional $445 million related to a loan repayment lawsuit from Alameda Research. FTX, which is under the leadership of restructuring officer and CEO John Ray III, agreed to give up all rights to these funds. This effectively clears the path for Voyager to use the recovered assets to repay its debtors.
This agreement is a key component of Voyager’s broader strategy to reimburse its users and creditors after its bankruptcy filing in July of 2022, triggered by a downturn in the crypto market. Since declaring bankruptcy, Voyager has been actively pursuing settlements to maximize returns to creditors, including securing claims worth millions from entities like Three Arrows Capital and through Directors and Officers Insurance.
Although things are looking better for the company, there are still lawsuits filed against Voyager's former CEO, Stephen Ehrlich, by the U.S. Commodity Futures Trading Commission and the Federal Trade Commission for alleged fraudulent statements.
South Korea's Crypto Crime Investigative Unit
It seems like the ongoing criminal and legal actions in the crypto industry has led South Korea to intensify its efforts to regulate cryptocurrency-related activities by elevating its crypto crime investigative unit to a permanent department. It currently functions under temporary status as part of the Seoul Southern District Prosecutors’ Office and includes about 30 experts coordinating with seven government agencies like the Prosecutor’s Office, Financial Supervisory Service, Financial Intelligence Unit, and National Tax Service.
According to a report by Segye Ilbo, discussions about budget allocation and prosecutor appointments for this upgraded department are set to happen early next month. The move towards permanency will allow the department to engage more effectively with both domestic and international government agencies and handle an expected increase in caseload after the implementation of the Virtual Asset User Protection Act on Jul. 19. This new legislation introduces severe penalties for crypto-related crimes, including life imprisonment for offenses involving amounts more than 5 billion won ($3.6 million).
The push for a permanent crypto crime unit comes amidst a significant rise in enforcement actions and regulatory measures targeting the cryptocurrency sector in South Korea. In 2023, there was a 48.8% increase in suspicious transaction reports and a 90% rise in reports of suspected crypto-related crimes to law enforcement. The government also tightened rules for token listings on local exchanges and is planning to increase scrutiny of exchanges to shut down those who are not meeting Financial Action Task Force standards.
Crypto regulation has also become a political talking point, with major parties advocating for reduced restrictions ahead of this year’s parliamentary elections. Meanwhile, President Yoon Suk Yeol's administration, which took office in 2022, has postponed the implementation of a 20% tax on crypto capital gains from 2023 to 2025 and is focusing more on tax collection from cryptocurrency transactions.
