On Wednesday, Federal prosecutors charged the founders of a crypto-mixing service called Samourai Wallet with conspiracy to commit money laundering and operating an unlicensed money transmitter business. In contrast, earlier this year, operators of a similar service, Tornado Cash, were charged with conspiracy to violate the International Economic Emergency Powers Act.
Inputs that matter: The International Emergency Economic Powers Act (IEEPA) provides the U.S. President broad authority to regulate a variety of economic transactions following a declaration of national emergency.
- Following committee investigations that discovered that the United States had been in a state of emergency for more than 40 years, Congress passed the National Emergencies Act (NEA) in 1976 and IEEPA in 1977.
- As of January 15, 2024, U.S. Presidents had declared 69 national emergencies invoking IEEPA, 39 of which are ongoing.
- History shows that national emergencies invoking IEEPA can last over a decade.
The opportunity: Another type of financial service designed to hide identities is the dark pool.
- Dark pools are private exchanges for trading securities that are not accessible to the investing public and have no transparency.
- Dark pools primarily facilitated block trading by institutional investors who did not wish to impact the markets with their large orders and obtain adverse prices for their trades.
- Critics argue that such facilities are vulnerable to potential conflicts of interest by their owners and predatory trading practices by some high-frequency traders.
- However, the market impact from large trades is significantly reduced using a dark pool.
- Examples of dark pools include those from Credit Suisse, Goldman Sachs, Citibank, and Morgan Stanley.
Zoom in: Conspiracy to operate an unlicensed money-transmitting business carries a maximum sentence of five years in prison.
- However, the U.S. Department of Justice states that conspiracy to violate the International Economic Emergency Powers Act (IEEPA) carries a maximum sentence of 20 years in prison.
Between the lines: According to the U.S. Attorney's Office of The Southern District of New York, Samourai has at least two features intended to assist individuals engaged in criminal conduct in concealing the source of their criminal activities' proceeds.
- First, Samourai offers a cryptocurrency mixing service known as "Whirlpool," which coordinates batches of cryptocurrency exchanges between groups of Samourai users to prevent the tracing of criminal proceeds by law enforcement on the Blockchain.
- Second, Samourai offers a service called "Ricochet," which allows a Samourai user to build in additional intermediate transactions (known as "hops") when sending cryptocurrency from one address to another.
Follow the money: The U.S. Attorney's Office claims that the two Samourai features may prevent law enforcement and cryptocurrency exchanges from recognizing that a particular batch of cryptocurrency originates from criminal activity.
- Such mixing services also provide capabilities similar to dark pools, where blocks of cryptocurrency can be traded with minimal effect on the market price.
- According to NASDAQ, dark pools capture over 40% of the average daily market share and reach as high as 50% on some days in the U.S., while in countries like Canada, they amount to only 7%, largely due to more stringent regulation.
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Read More
- https://www.congress.gov/congressional-report/110th-congress/senate-report/82
- https://www.axios.com/2024/04/24/samourai-wallet-arrested-crypto-mixing
- https://www.axios.com/2023/08/23/tornado-cash-doj-charges
- https://www.investopedia.com/articles/markets/050614/introduction-dark-pools.asp
- https://www.sec.gov/news/statement/shedding-light-dark-pools
- https://www.nasdaq.com/articles/the-risk-and-reward-of-more-dark-pool-trading