The high-stakes fight to define “money transmitter”

From projectglitch xyz

Happy Holidays! Please enjoy the final Glitch newsletter of 2024. We hope you’re taking time to recharge and get ready for next year. It’s going to be a big one.

Photo by  Ilya Yarmosh  on  Unsplash

A rough guide to Anoncasting

One of the fundamental truths of the social media era is that the platforms are monetizing us: they hoard our personal data, track our behavior, and profit.

But what if users could post anonymously?

That’s the idea behind Anoncast, a tool that allows people to post anonymously on social media networks so that not even the platform itself can verify the identity of the poster.  Some  have dubbed it “ Tornado Cash  for shitposts.”

To use the Anoncast web app, you first have to do a very crypto thing and buy the $ANON token. The site then uses a thing called a Merkle membership proof—a mathematical algorithm that converts data into a numerical string that verifies the integrity of specific data within a dataset. This evaluates whether you have enough tokens to make a post to Anoncast’s feed on the crypto social media site Farcaster or X without revealing your address, balance, or identity to anyone. You don’t have to spend your tokens to do this, just hold them in your wallet.

A poster needs to be able to prove they have 5,000 anon tokens to post on Farcaster. Users who prove they have more than 2 million anon tokens are given the ability to then amplify posts to  AnonCast’s X feed , where they can reach a larger audience.

The creators say this setup promotes thoughtful posting by people who have an interest in their token holdings retaining value, as the feed remains entertaining, and people using it theoretically stay engaged ($ANON currently costs  $0.0055  per token but its price has fluctuated between $0.0196 and $0.0027, since launch).

Having to buy tokens just to post might seem like a lot, but it’s one of the the only places on the internet where you can post something without revealing any of your personal data.

How it works

Anoncast accomplishes this by using  Aztec’s Noir  to verify a user’s token holdings. Noir is a programming language that allows developers making apps to simplify the complex processes behind creating a zero-knowledge proof—in this case, proof of anon tokens. ZK proofs, as they’re called, allow a user to prove a fact without revealing any other information other than the fact itself.

After a person has written their post, or uploaded their meme, the only things the Anoncast servers ever see is the post itself and the proof showing there are sufficient funds. Once the proof is validated by the server, the app then sends out the post. Using a ZK proof for these purposes is still relatively slow: it takes around 20 seconds for a post to hit the feed once it has been sent, due to the complex computing required.

“We realize there’s probably a lot more things we can do,” the app’s creator Kartik Patel told Laura Shin’s  Unchained podcast  in late November.

Patel is excited about the potential for building consumer applications that use ZK proofs. In the future, he says, platforms like AnonCast could allow things like anonymous posting with verified badges. That might allow you to prove you work for a certain company, for example, without revealing who you are (a useful tool for whistleblowers).

Anoncast also recently added a feature called  Reveal  where you can, at a later date, verify it was you that sent an anonymous post. This is done through attaching a secret phrase to a post when you create it. So if your genius quip or funny meme goes viral and you want to take credit for it, you can. —Lucy Harley-McKeown

Define: money transmitter

What does it mean, legally, to transmit money? The answer is important in the US for two reasons. First, a “money-transmitting business” is a financial institution, meaning it is required to collect personal data about its customers to comply with a law called the Bank Secrecy Act (BSA). Second, it is illegal to run a money transmitting business without registering with the Department of Treasury and obtaining a license to operate in at least one US state.

A fight is now unfolding in US courts over whether developers of autonomous, blockchain-based privacy software can be legally defined as money transmitters. The conflict has been inflamed by the Department of Justice's recent prosecutions of the developers of the Ethereum-based privacy application Tornado Cash and the Bitcoin privacy application Samourai Wallet. Two new research papers argue that in these cases the government is misinterpreting the relevant law–formally known as Title 18, United States Code, Section 1960—in a way that brands innocent software developers as criminals.

“The government has stretched Section 1960 far beyond its proper limits,” Amanda Tuminelli, chief legal officer at the DeFi Education Fund, Daniel Barabander, general counsel at the VC firm Variant, and Jake Chervinsky, chief legal officer at Variant argue in a  paper  published by the International Academy of Financial Crime Litigators.

Section 1960 makes it illegal to operate an unlicensed money-transmitting business. It came into effect in 1992. Initially, Section 1960 criminalized knowingly running an “illegal money transmitting business”—that is, the operator had to be aware that they were running a business that required a license. The law has evolved since then to make it illegal to run an “unlicensed money transmitting business,” whether or not the operator knows the business requires a license.

In the wake of 9/11, the government used Section 1960 to prosecute people suspected of financing terrorism. This year, the Department of Justice turned to Section 1960 in the prosecution of Roman Storm, who helped build Tornado Cash, and in the indictments of Keonne Rodriguez and William Lonergan Hill, two of Samourai Wallet’s developers.

In the process, the DOJ also introduced a new definition of “money transmitting” that shocked the crypto industry’s legal establishment.

“The government seeks to define a whole new class of ‘money transmitting’ entities: developers of a decentralized protocol offering privacy for digital token transfers where no intermediary ever has control over the user’s tokens at any stage,” Jacob Hirshman and Kaili Wang, both lawyers for Circle, and Matt McGuire of Arktouros write in a  paper  published by the Stanford Blockchain Review.

No intermediary ever has control. Can you transmit money if you never control it? Until the Tornado Cash and Samourai Wallet prosecutions, the crypto industry had good reason to think the answer was no. This confidence came from a 2019 regulatory guidance from the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), which had been widely interpreted to state that decentralized applications are not money transmitters (and thereby  not financial institutions  subject to the BSA) as long as no intermediary ever has “independent control” over the money in the protocol.

The core of Tornado Cash is a set of immutable smart contracts that no person or entity can control or shut down. Neither Roman Storm nor any of his co-developers—or anyone for that matter—ever had control of the money in those contracts. Similarly, it appears that neither the developers nor any other third parties had control over Samourai Wallet users’ bitcoins.

Now the DOJ is arguing that the developers of Tornado Cash and the Samourai wallet can be money transmitters under Section 1960 even if they didn’t have control over the money.

The shift has outraged the crypto legal and policy community. Coin Center’s Peter Van Valkenburgh  called  the new stance “a threat to liberty and the rule of law.” Many feel the government betrayed them by contradicting the FinCEN guidance. “In their allegations, the DOJ wrongfully disregards this guidance as inapplicable in (the Tornado Cash) case and instead seeks to interpret a criminal statute in the widest possible breadth,” Hirshman, McGuire, and Wang argue.

The FinCEN guidance aside, though, Barabander, Tuminelli, and Chervinsky argue that DOJ’s “novel theory” runs contrary to something the courts have already established in previous cases involving Section 1960: that transmitting money “requires obtaining and relinquishing control over funds.” They warn that if the government wins this argument, “Section 1960 would become not merely a powerful tool, but rather, an unchecked license to prosecute blockchain developers and participants who are powerless to prevent money laundering.”

It’s not just a crypto thing either, Hirshman, McGuire, and Wang argue. If the DOJ’s interpretation is adopted, the government could call “any software that has any involvement with the value chain” a money transmitter, they write.

“Such a broad interpretation could, with the stroke of a prosecutor’s pen, wrongly require market participants in huge swathes of the traditional and onchain financial markets, as well as non-financial markets (e.g., internet service providers, telephone carriers), to collect massive amounts of highly sensitive personal data.” —Mike Orcutt

Headline Watcher

Deutsche Bank tries to tackle compliance hurdles for public blockchains.  According to Bloomberg , the bank is building an Ethereum Layer 2 based on the same technology that powers the zero-knowledge rollup ZKsync—and hopes to use the platform to manage illicit finance risk.

Botto, the millionaire AI artist, is getting a personality. The artist has made more than $4 million selling its art. Now the DAO that controls Botto has elected to add a modified version of its large language model that “allows it to converse about its artwork,”  reports Wired .

These AI Minecraft characters did weirdly human stuff all on their own. As part of an experiment run by a startup called Altera, up to 1,000 “AI agents” used large language models to “develop a remarkable range of personality traits, preference, and specialist roles,”  according to MIT Technology Review .

TikTok asks Supreme Court to block law banning its US operations.  The New York Times reports  that TikTok and its Chinese parent company argue the law, which sets a deadline for the app to be sold or shut down, violates the First Amendment.

The top cybersecurity agency in the US is bracing for Donald Trump. The Cybersecurity and Infrastructure Security Agency was created under the first Trump administration. But it became a right-wing target after its director rejected Trump’s claims about the 2020 election. Anonymous staffers  tell Wired  they are worried the new administration will undermine the agency’s ability to protect the nation against cyber threats.

The Island of Eternal Life. On the Honduran island of Roatan, an experiment in “exiting” from mainstream society is underway. While communes and cultish compounds have a long history, the area known as Vitalia (“city of life”) is a modern manifestation of what some call the network state movement. Adherents claim it’s about leaving behind wasteful bureaucracy and broken societal norms in favor of a tech-fueled utopia. Oh, and  they are working on living forever .

“We’re not allowed to own bitcoin.” That’s what US Fed chair Jerome Powell  said during a news conference  this week when asked if he sees value in the idea, backed by Donald Trump, that the US should build a “strategic bitcoin reserve.” “The Federal Reserve Act says what we can own and we’re not looking for a law change,” Powell said.

Billionaire Justin Sun allegedly pushed CoinDesk’s new owners to remove banana article. You read that right. He ate a $6.2 million banana and didn’t like how CoinDesk reported on it so,  according to Fortune , he pressured the publication to remove the article. Never change, crypto media! Update: shortly before this newsletter went out, CoinDesk’s owner fired its top three editors.