Non-Custodial Crypto Platforms Retreat from U.S. Amid Regulatory Scrutiny

Wasabi Wallet and Phoenix exit the U.S. market following heightened legal uncertainties.

In a significant shift, two major Bitcoin wallets have decided to exit the U.S. market, likely in response to recent regulatory actions against non-custodial crypto services and indications of further scrutiny from U.S. authorities.

Paris-based Bitcoin company Acinq announced it will remove its popular Lightning network wallet, Phoenix, from U.S. app stores due to regulatory uncertainties. Users are advised to close their channels and transfer their funds before access is terminated on May 3, 2023.

Following suit, zkSNACKs announced it will restrict access to its privacy-focused Wasabi Wallet in the U.S. “In light of recent announcements by U.S. authorities, zkSNACKs is now strictly prohibiting U.S. users from using its services,” stated the company on April 27.

Both companies cited regulatory ambiguity as the primary reason for their withdrawal. Acinq’s statement highlighted concerns over whether self-custodial wallet providers, Lightning service providers, or even Lightning nodes might be classified as Money Services Businesses (MSBs) subject to regulation.

The exact announcements prompting these decisions remain unclear, but actions against Samourai Wallet and an inquiry involving MetaMask suggest non-custodial wallets might soon face regulatory challenges in the U.S.

An April 26 court document from the U.S. Department of Justice responding to a motion to dismiss the case against Tornado Cash co-founder Roman Storm indicates that even decentralized, non-custodial services may need to implement Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols and register with the Financial Crimes Enforcement Network (FinCEN).

"This could extend MSB laws to almost everything in the cryptocurrency space, barring users running their own nodes," noted crypto advocate Seth For Privacy on X. "If no control is required for money transmission, any service simplifying Bitcoin use might fall under this broad definition."

Many in the crypto community expressed regret over the exit of Phoenix from the U.S., understanding the legal uncertainty driving the decision. Jack Dorsey, founder of fintech firm Block, lamented Acinq's move as "completely unnecessary." Elizabeth Stark, CEO of Lightning Labs, echoed his sentiment, stating, "This is not the way."

The development follows the recent indictment of Samourai Wallet's CEO Keonne Rodriguez and CTO William Hill for operating an unlicensed money transmission business, allegedly processing over $2 billion in illegal transactions and earning more than $4.5 million in fees since 2015.

Legal experts have contested the basis for targeting non-custodial platforms, which do not hold user assets, but authorities globally have long sought to regulate these software systems. The EU, for example, is considering a 1,000 euro limit on transactions from self-hosted crypto wallets under new anti-money laundering laws. In the U.S., proposals to ban “unhosted wallets” were narrowly defeated in 2022.

Recent legal actions and statements from authorities have increased uncertainty, suggesting that many core crypto activities, including hosting a Lightning node, might be subject to money transmission laws. These concerns will likely be resolved through court decisions, prompting Consensys to sue the SEC.

It's uncertain if Phoenix and Wasabi will be the only wallets to leave the U.S., but Zeus, another wallet company, has pledged to stay. "We’re not going anywhere," declared the Zeus account on X.

Zeus founder Evan Kaloudis affirmed, “We believe Zeus complies with current laws. If the laws change, we will adapt accordingly.”

Kaloudis emphasized the importance of self-custody, stating, "If Zeus falls, all other Lightning node operators are next. If Lightning node operators fall, self-custody is next. This is the hill to die on: self-custody. If you don’t agree, you were never in Bitcoin for the right reasons. Future generations are watching and depending on us.”

Photo Source / Blockonome