How Financial Surveillance Threatens Our Democracies: Part 1

Authored by Alexandre Stachtchenko via Bitcoin Magazine,

When they descended into coal mines, miners would take a caged canary with them.

The toxic gasses, notably carbon monoxide, that accumulate in these places and pose a deadly risk to miners, would kill the canaries before the miners.

This information made them aware of the danger, enabling them to evacuate before it was too late.

On May 14, 2024, Alexey Pertsev, a software developer who built an open-source tool to preserve online privacy, was found guilty of money laundering and sentenced to more than 5 years in prison by a Dutch court.

In the court’s decision, the following can be read:

“The tool developed by the suspect and his co-authors combines maximum anonymity and optimal concealment techniques with a serious lack of identification functionalities. Therefore, the tool cannot be characterized as a legitimate tool that has been inadvertently used by criminals. By its nature and operation, the tool is specifically intended for criminals.”

Seeking to preserve one’s privacy is thus at worst proof of criminality, at best complicity in a crime. A threshold has been crossed.

Unfortunately, it is likely that this case will generate little empathy and interest, as the person involved worked in the crypto industry, and the tool developed, Tornado Cash, was intended to preserve transaction confidentiality.

However, it would be a grave mistake to consider this an isolated incident limited to a fledgling industry for which the public has little affection.

This is our canary in the coal mine.

It has stopped singing and is dying. If we do not react, all the miners will perish. Cryptos are an early and glaring revealer of an insidious phenomenon that has been eroding our liberal democracies for about thirty years and is reaching a point of no return.

Despite the lack of evidence of their effectiveness, financial surveillance measures continue to be regularly reinforced, defying all democratic rules and requirements: the primacy of secrecy, freedom as a norm, the principle of proportionality of rights limitations, technological neutrality, presumption of innocence… Preemptive control prior to any offense becomes the norm, the enforcement of law becomes selective and arbitrary, bank account closures take on the appearance of censorship and financial suffocation, and property rights are reduced to a mere shadow.

The fight against money laundering and terrorist financing has degenerated into collective hysteria worthy of authoritarian or even totalitarian regimes, to the point of criminalizing a fundamental and constitutional right: privacy. The famous American computer engineer Phil Zimmermann warned us in 1991: “if privacy is outlawed, only outlaws will have privacy.”

Far from being a “crypto” issue, this shift away from liberal democracy concerns everyone. There are numerous examples in regimes known for their democracy, spanning from India to the United Kingdom, and from Canada to France.

Note: If the crypto part does not interest you, you can proceed directly to part II.

I. LESSONS FROM THE CANARY

1. THE UNITED STATES INVOLVES ITSELF

Less than a year ago, the arrest of the Tornado Cash developers had already legitimately caused quite a stir. But the scope of the case, limited to the crypto world, perceived as a den of terrorists and money launderers, had quickly confined the indignation to a small group of insiders.

In April 2024, American and European public authorities, emboldened by this success, continued to move forward in a worrying direction.

Several events occurred almost simultaneously. The arrest of the developers of the Bitcoin wallet developers of Samourai Wallet, by the FBI in cooperation with the IRS (the American tax authority), with the guilty cooperation of European authorities, kicked things off. Their crime would be to have “conspired to launder money” and to have “operated an unlicensed money transfer business”. They face 20 years’ imprisonment for the first charge and 5 years for the second. By comparison, the maximum irreducible life sentence in France is 30 years.

Following this was an FBI notice urging all Americans not to use “money transmitting businesses” that do not collect their identity and are not registered. And the Federal Bureau continued by threatening to freeze all funds that had been mixed with funds obtained through illegal means.

To better understand the absurdity of such an announcement by the FBI, let us transpose the reasoning into the physical world, and highlight two major issues.

The first concerns the accusation of operating an unlicensed money transfer business.

Samourai Wallet is a company that provides Bitcoin wallets with enhanced transaction privacy. It does not operate transactions on behalf of its clients; it provides the wallet software. In the physical world, their equivalent would be a leather craftsman who crafts leather wallets enabling their users to store cash. He facilitates cash management but has no say in how the wallet owners spend their cash.

Here, the U.S. federal services conflate and lump together a large bank that operates transactions on behalf of its clients and a leather craftsman, holding the latter responsible for how his clients use their cash.

How far can we go with this line of reasoning? To ATMs? To the people at the Central Bank who print these bills? To the lumberjacks who produce the wood used for the paper of the bills?

Similarly, should we hold a carpenter responsible for what his clients decide to put in the furniture they make? Or an architect if the house they build ends up being used for drug trafficking?

It quickly becomes apparent that this conflation is completely absurd. A wallet creator is not responsible for what the wallet owner decides to do with the money stored in it. Being part of the cash or cash storage value chain should in no way imply responsibility for its final use, as there is no limit to this reasoning.

This question was actually raised 20 years ago regarding peer-to-peer exchanges, which allow multiple people to exchange information directly in a decentralized manner. This communication protocol and the software that enable it are sometimes used to commit offenses, particularly against intellectual property rights. However, despite attempts to criminalize the tool itself4, European5 and American6 courts have ruled in favor of technological neutrality, stating that the software in question allows both legal and illegal exchanges and that their providers are not responsible for the use made by third parties. The case law then focused on the responsibility of each individual involved in a potentially illegal activity, acquitting some individuals due to lack of evidence of their criminal intent7. These judicial solutions are obviously in line with the normal exercise of fundamental rights.

The second issue lies in the threat of fund blocking.

Freezing any money mixed with funds obtained through illegal means would be equivalent to arresting anyone whose bills, whether in their leather wallet or pocket, have passed through the wrong hands.

In 2009, a university study covered by CNN showed that 90% of American dollar bills carry traces of cocaine, and up to 100% in some major cities. This helps us better understand the absurdity of the FBI’s threat: almost all the cash in the world has already passed through the wrong hands. Should all cash holders be imprisoned? Of course not.

Following these absurd coercive actions, on 26 April 2024, the United States Attorney for the Southern District of New York published the government’s rationale against Roman Storm, the lead developer of the privacy software Tornado Cash. The author insists, considering Tornado Cash as a “money transmitting business.”

According to this argument, “the definition of “money transmitting” in Section 1960 does not require the money transmitter to have ‘control’ of the funds being transferred. […] For instanc