Non-custodial cryptocurrency mixer developers are not subject to U.S. regulation.

A recent seizure of a custodial cryptocurrency mixer by EU authorities has prompted some people to ask us what this means for popular privacy software like CoinJoin or Wasabi Wallet, which are user-hosted software tools, not third-party services that take custody of user funds.

In the U.S. at least, recent guidance from FinCEN clearly specified that the developers of such software do not qualify as money services businesses as that term is defined in the relevant law and regulations. Here is the relevant portion of our analysis of FinCEN’s recent guidance:

[L]et’s look at what the Guidance says about privacy-preserving cryptocurrencies like Zcash and Monero, as well as privacy-preserving services like tumblers. Section 4.5.1 states that mere developers of cryptocurrencies or protocols are not regulated as money transmitters. This section draws a critical distinction between those who provide services that can anonymize cryptocurrency payments and others who only provide software. In both cases the Guidance seems to be considering tumblers and mixers as well as dedicated privacy-preserving cryptocurrency networks. For example, one can imagine a mixer service provider (which receives coins from users, shuffles all the coins, and sends them back to its users) on the one hand, or one can imagine mixer software (which is merely a protocol that allows participants in a mix to move money to and from each other without any service provider in the middle e.g., TumbleBit protocol) on the other. Similarly, you could have privacy-preserving cryptocurrency software (e.g., Monero or Zcash) on the one hand, and on the other a centralized service (like Liberty Reserve or e-Gold) with no internal records kept of user transfers. What’s significant about this distinction is that, according to the Guidance, service providers are money transmitters and software providers are not. Again, this is not a surprising interpretation and it is one for which Coin Center has long advocated, but it is excellent that FinCEN explains it all and offers clarity to mere developers of these highly significant privacy technologies. The Guidance states clearly: An anonymizing software provider is not a money transmitter. FinCEN regulations exempt from the definition of money transmitter those persons providing ‘the delivery, communication, or network access services used by a money transmitter to support money transmission services.’ This is because suppliers of tools (communications, hardware, or software) that may be utilized in money transmission, like anonymizing software, are engaged in trade and not money transmission.

As we said then, we are glad to see FinCEN’s care in carving out the developers and users of privacy-protecting software that will become important tools for those who need it most in an increasingly surveilled society.