‘Then They Fight Us?’ Bitcoin Wallet Founders Arrested for Money Laundering, Japan's Crashing Currency, Biden Proposes Higher Taxes
News Block #35 (4/30/2024)
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‘Then They Fight Us?’: Samourai Wallet Founders Arrested for Money Laundering
The developments hitting the Bitcoin space the last week have people saying we are in the “then they fight us” stage.
On April 24th the Department of Justice announced that authorities had arrested and charged the two founders of Samourai Wallet with money laundering and operating as an unlicensed money transmitting business.
The DOJ claims Samourai developed and operated a crypto mixer, highlighting Samourai’s Whirlpool service. Whirlpool made Bitcoin transactions private by batching transactions together from multiple people, making it difficult to know exactly where the bitcoin came from and where it’s ultimately sent to.
In this day and age, privacy is becoming synonymous with criminality in the eyes of financial authorities.
The DOJ argues that Samourai made it difficult for law enforcement to trace criminal activity and facilitated more than $100 million in money laundering transactions.
One reason this indictment raised eyebrows is that Samourai was labeled as an unlicensed money transmitting business when in reality Samourai was non-custodial, meaning it never held or controlled customer funds. The founders simply wrote and released code that enabled users to privately transact. Their open-source code was open for all to use – criminals and law-abiding citizens included.
To be completely fair, though, the Samourai founders did themselves no favors in how they pitched the company to investors. In the indictment, the DOJ included slides from Samourai’s investment deck in which they specifically pointed to dark markets as a potential source of revenue and said that illicit actors could find their premium privacy services of use.
Samourai Co-Founder Keonne Rodriquez pleaded not guilty and will fight the charges.
This case raises a lot of questions like: how can something be a money transmitting business if it’s just open-source code with no control over user funds? And does writing open-source code that enables private transactions make someone a criminal if that code is used for illicit activity?
Shortly after the indictment was announced, the FBI published the following public service announcement:
You may be familiar with Tornado Cash, whose developers were indicted on similar charges last August. On Friday, we were given more insight into the DOJ’s thoughts on the matter when it published its response as to why it rejected a Tornado Cash founder’s motion to dismiss the charges.
The DOJ argued that the definition of money transmitting does not require the transmitter to have control of the funds being transferred. It pointed to things like a USB cable transferring data from one device to another and a frying pan transferring heat from a stove to the pan as examples of something that’s transferred without someone ever having control over it.
I’m not a lawyer – but those analogies seem pretty ridiculous to me. It’s not hard to understand why the DOJ’s rationale had some in the Bitcoin community in an uproar. The DOJ’s definition of a money transmitter is extremely broad and basically could include every functioning wallet, smart contract, and node in the ecosystem.
For instance, are nodes now considered money transmitters because they relay transactional information they do not control? Are multi-sig providers now considered money transmitters if they only partially control the funds? Is an individual now considered a money transmitter if they simply self-custody but transact peer-to-peer with someone else?
This regulatory uncertainty led to some wallet providers restricting their services from U.S customers last week, including Phoenix Wallet and Wasabi Wallet.
Phoenix wallet explained its decision to pull out of US app stores in a statement saying, “Recent announcements from US 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,”
The fact that non-custodial wallet providers are leaving the U.S. in light of this news is definitely concerning. Some would say we’re driving out innovation.
What I believe is going on here is authorities are struggling to figure out how to regulate a new technology that is disrupting the centralized traditional financial system that they currently totally control.
Over the last several decades, we have seen financial regulators increase the amount of surveillance and control all in the name of combating illicit activity. But the arrival of decentralized technologies like Bitcoin are making it more difficult for them to maintain their stronghold on how individuals transact, and they don’t like this.
CoinCenter’s Neeraj Agrawal summed it up well.👇
Others like Lyn Alden saw these developments as a tacit admission from regulators that Bitcoin is not some worthless, speculative asset – It’s money. I mean how can Bitcoin not be money in their eyes if Bitcoin wallet providers are considered money transmitters?
Alright so they’re clearly fighting Bitcoin – at least Bitcoin as a currency. As Lyn wrote in the tweet below, “the struggle for financial privacy, custody, and overall self-autonomy is just heating up.”
The fact is, as authorities try to attack Bitcoin and exert their control, they only highlight its value proposition even more as freedom money.
What it boils down to is Bitcoin is a technology that gives power back to the people and allows anyone to take ownership of their wealth and transact freely without any intermediary.
If doing this is illegal, then I think every American arguably needs to stand up and ask themselves, “Do I still live in the land of the free anymore?”
Japan Intervenes to Prop Up its Crashing Currency
One theory for why people think authorities are accelerating their crack down on wallet providers now is because the government and central bank realize that they will soon have to print more money to keep the highly-indebted fiat system afloat. They will have to devalue the currency, once again.
Throughout history, a common theme when any government devalues its currency is you also see an increase in capital controls. Governments start to ramp up their efforts to block all the exits and prevent people from dumping the currency for better alternatives. Are these recent enforcement actions a signpost for what’s on the horizon?
Many people view Japan as the canary in the coal mine for what’s to come for all fiat currencies.
Japan can be thought of as the guinea pig for modern-day central banking. They were the first to implement Quantitative Easing and zero-interest rate policies, and, as a result, Japan’s debt-to-GDP has exploded to an eye-watering 263%, with more than 40% of the debt being held by the Bank of Japan today.
Said differently, for the last 20 years, Japan has been spending money by issuing an obscene amount of debt, and then having the central bank buy that debt. Sounds kind of familiar right?
So – how does this all end? Listen to what Ray Dalio had to say about it:
When I listened to that clip, it’s clear to me that all of the major indicators that Dalio cites for a coming currency collapse are currently present in Japan.
A massive amount of debt - check.
The central bank buying that debt – check.
And a currency in decline - check.
This past Sunday night, the yen crashed to a 34-year low against the dollar and, according to ZeroHedge, it’s lost 6% of its purchasing power in the last 3 weeks alone.
This comes after the Fed hiked interest rates at one of the fastest rates in history, forcing Japan to raise its own rates for the first time in 17 years.
Japan has to raise rates because it needs to maintain its currency’s value. If it doesn’t, then investors will move their funds away from Japan and invest in different countries where the returns are higher, further accelerating the yen’s downfall.
But Japan is finding that it’s hard to raise your rates when you have the highest debt burden in the world. If Japan raises rates too much, they risk causing a debt crisis, but if it fails to raise rates high enough, then its currency will continue to plummet.
So basically – Japan’s trapped.
After the yen fell on Sunday night, it appears that the Japanese government intervened to prop up its currency.
It remains to be seen if this short-term fix will be enough to stop the bleeding.
Luckily for the people of Japan, Bitcoin is one option available to them to escape this madness. One public Japanese company, Metaplanet, already made moves to protect itself by recently announcing that it would buy 1 billion yen worth of bitcoin and commit to adopting it as a core treasury asset moving forward.
What people need to understand here is that other highly-indebted governments today – like the U.S. – are in the same exact debt trap as Japan. They implemented the same policies – Japan is just much further along on the journey. This is why people keep a close eye on Japan to catch a glimpse of what’s to come.
At this point, it appears baked in the cake – governments will ultimately feel pressure to devalue their currencies. Prepare accordingly.
Biden Administration Proposes Tax on Unrealized Capital Gains
Another thing you often see throughout history when governments get this indebted is they confiscate the wealth of its citizens to make ends meet. One way they accomplish this is by increasing taxes.
That appears to be what the Biden Administration’s plan is according to its latest budget proposal which aims to increase the long-term capital gains tax to a staggering 44 percent!
But even more ludicrous than that was their plan to impose a tax on unrealized gains at 25 percent.
Let’s just walk through an example to see how crazy this idea is. Let’s say you invest in a piece of real estate. You hold it for five years, and it increases in value by 100%. Great! But now the government wants to tax you on that appreciation even if you still own the house. And what if your home’s value then falls later on? Do you think the government will give you any of that tax money back?
It can’t be stressed enough how damaging this proposal would be for investment and economic growth in this country. Why would someone choose to take on the risk of building or investing in a business if the government just taxes it as it grows?
As the Heritage Foundation’s E.J. Antoni said, “If you are going to tax something, you get less of it…and that’s just as true for investment as it is for anything else.” The truth is – the higher taxes go, the outcome is lower tax revenues – studies show it over and over again.
And although this proposal is unlikely to pass, it’s just another example of how the government will try to block individuals from protecting themselves from their inflationary policies.
If a proposal like this does pass in the future, I expect that many people will turn to more tax shelters and loopholes, and some will vote with their feet and move to other places that will help them accumulate wealth instead of confiscating it.
In that potential future, as people pack up what they have and uproot their lives, Bitcoin’s digital nature will shine.
Until next week, keep stacking.
- N₿
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