As Wasabi Wallet and Phoenix Leave the U.S., What’s Next for Non-Custodial Crypto?

  coindesk.com 13 m

Two Bitcoin wallets are pulling out of the U.S. market — likely as a response to recent regulatory action taken against the non-custodial Samourai Wallet and indications that the U.S. Securities and Exchange Commission is investigating the most popular Ethereum access point MetaMask.

This is an excerpt from The Node newsletter, a daily roundup of the most pivotal crypto news on CoinDesk and beyond. You can subscribe to get the full newsletter here.

On Friday, Paris-based Bitcoin company Acinq announced it is pulling its popular Lightning network wallet, Phoenix, from app stores in the U.S., citing regulatory uncertainty. Users are recommended to close their channels and move their funds before access is terminated on May 3, 2023.

See also: Custodial Wallets vs. Non-Custodial Crypto Wallets

A day later, zkSNACKs announced it is closing off access to its privacy-preserving Wasabi Wallet in the U.S., saying “In light of recent announcements by U.S. authorities, zkSNACKs is now strictly prohibiting U.S. users from using its services,” in an April 27 statement.

The point was echoed in Acinq’s statement, which said “recent announcements from U.S. authorities cast a doubt on whether self-custodial wallet providers, Lightning service providers, or even Lightning nodes could be considered Money Services Businesses and be regulated as such.”

It’s unclear exactly what announcements Acinq is responding to, but legal action taken against Samourai Wallet and the recently disclosed Wells Notice inquiring about MetaMask indicate that non-custodial wallets could fall under U.S. regulatory purview.

Further, an April 26 U.S. Department of Justice court document responding to a motion to dismiss a case against Tornado Cash co-founder Roman Storm indicates that even decentralized, non-custodial services likely need to implement KYC/AML and register with FinCEN, based on Section 1960 of the U.S. Code.

“This would extend the MSB laws to encompass practically everything in the cryptocurrency space outside of a user who runs their own node,” crypto advocate Seth For Privacy wrote on X. “If no control is required for money transmission, then anything that makes it easier to use Bitcoin could fall into this overbroad definition.”

Many observers in the crypto community have noted that the decision to pull Phoenix from the U.S. is regrettable, but largely understandable given the legal uncertainty. Jack Dorsey, founder of fintech firm Block, which built a hardware wallet, lamented that Acinq’s move “feels completely unnecessary.”

“Agreed. This is not the way,” Lightning Labs CEO Elizabeth Stark said in response to Dorsey.

The news comes off the heels of the latest crypto company indictment, the arrest of Samourai Wallet CEO Keonne Rodriguez and Chief Technology Officer William Hill, for running an unlicensed money transmission business. The DOJ alleges that Samourai processed over $2 billion in unlawful transactions, earning more than $4.5 million in fees since 2015.

While legal experts have challenged the ground for going after non-custodial platforms that do not hold assets on behalf of users, authorities around the world have for years tried to bring these software systems under some sort of regulatory oversight.

See also: UK Government Backtracks on Unhosted Wallet Data

The E.U., for instance, has been mulling a 1,000 euro ($1,080) limit on crypto transactions from self-hosted crypto wallets as part of new anti-money laundering laws. U.S. authorities have also considered introducing legislation that would essentially ban “unhosted wallets,” which was successfully beaten back in 2022.

But new legal actions and statements from authorities have upped the uncertainty, raising the prospect that many core crypto activities beyond building wallets could fall under money transmission laws, including even hosting a Lightning node. Like much else in crypto, these concerns will likely come down to court decisions, which is partially why Consensys, for one, has decided to sue the SEC.

It’s unclear whether Phoenix and Wasabi will be the only wallets to leave the U.S., though at least one wallet company, Zeus, has vowed to stay. “We’re not going anywhere,” the Zeus account said on X.

“We believe that Zeus is following the letter of the law right now. If the law changes or any judgments are made, we will make adjustments accordingly,” Zeus founder Evan Kaloudis said.

“If Zeus falls, all other Lightning node operators are next. If Lightning node operators fall, self-custody is next. This is the hill to die on: self-custody. If you don’t agree, you were never in Bitcoin for the right reasons. So get behind us, or go home. Future generations are watching and depending on us.”

See also: Samourai Wallet Charges Raise Existential Questions

Source