Wasabi Wallet Explains New Bitcoin Censorship

Privacy-focused bitcoin wallet Wasabi Wallet announced on Sunday that it would begin blocking certain unspent transaction outputs (UTXOs) from joining its CoinJoin rounds, triggering surprise and rebellion on Twitter as users wondered why the project would make a move allegedly contrary to Bitcoin’s uncensorable philosophy.

However, the decision will only be enforced by Wasabi’s default coordinator, a centralized entity in charge of build the CoinJoin transaction with inputs provided by Wasabi users which is managed by the company behind the Wasabi project, zkSNACKs.

“zkSNACKs coordinator will start denying some UTXOs to sign up for coinjoins”, Wasabi tweeted on Sunday.

This surprising decision led many people to believe that some regulatory pressure had to be exerted to coerce the company into taking such an unpopular path.

However, zkSNACKs co-founder and CEO Bálint Harmat said Bitcoin Magazine that the decision to restrict certain users from using Wasabi for their privacy purposes was a proactive decision as no current legislation requires them to do so.

“People started identifying Wasabi with illicit activities and actors, and we wanted to differentiate ourselves from those actors in the space,” Harmat said, adding that the route taken on Sunday was zkSNACKs’ solution to enforcing it.

Harmat explained that the company does not wish to be associated with criminal activity of any kind, adding that several reports over the past year linking hackers, money launderers and other nefarious actors to Wasabi and zkSNACKs partly prompted the movement from such an angle. harms the image of the brand.

“We have always been against the use [CoinJoin] for illicit activities, and according to the news, many actors have started profiting from the software,” Harmat said. “And that created a lot of bad press for us.”

“Wasabi is for people to maintain their privacy, not to hide illicit activities,” he added.

zkSNACKs is the legal entity behind Wasabi Wallet. Adam Ficsor, Gergely Hajdú and Harmat built the company as Wasabi began to grow, Harmat explained, to make it easier to hire people and grow it even further.

“We expected this project to grow, and it is currently,” Harmat said. “We were expecting a lot of people [to be] come, work for us, and be able to pay them and engage with them, we think it is important and necessary to have a legal entity. And in the long run, it’s probably the basis of a growing business.

While much of the media coverage on CoinJoin has focused on illegal uses, Harmat said he expects the tide to turn as Wasabi highlights how the practice can benefit regular users. of Bitcoin.

But zkSNACKs’ self-preservation decision has cast doubt on the company’s motives as consumers struggle to understand the reasoning for this censorship, given that its coordinator does not fall under a regulatory category of “money transmitter”. The choice could, however, serve as long-term insurance, as Harmat explained that he only sees the development of targeted regulation as a matter of time.

“We did our research and really got into the legal details,” Harmat said. “There are no current regulations on joint coordinators in progress. However, I am aware that this will change in the future.

the FinancialTimes reported earlier this week that the UK’s National Crime Agency (NCA) has called for the regulation of CoinJoin, which it calls “decentralized crypto mixers,” as it alleges such a tool is used by criminals to avoid detection when laundering money through bitcoin.

“They can be used to provide an ‘overlay’ service, shuffling criminal money, obscuring its origins and audit trail, in the same way that a cash business might be used by criminals to legitimize cash through the banking system,” Gary Cathcart, investigative finance manager at the NCA, said. FT.

Harmat commented on the news, telling FT that NCA’s claims, along with similar arguments highlighted in the report by Europol as well as chain analytics firm Elliptic, did “not correspond to reality”, adding that zkSNACKs is “just a team of developers and economists working hard for a better future.”

Contrary to popular belief, CoinJoin is not a mixing service and is not a custodian. Rather, it is a collaborative bitcoin transaction where different people confidently contribute with the goal of breaking any heuristic ties their funds might have when traversing the bitcoin blockchain in the past. So there is no money transmitter involved.

“CoinJoin coordinators are simply message parsers,” Samourai Wallet, another privacy-focused bitcoin wallet with CoinJoin built-in, tweeted Monday. “They are not transmitters of money, they are not facilitators, they simply transmit data packets to connected clients. Clients never hand over custody to a third party. Clients collaborate with each other.”

But even though the coordinator of zkSNACKs will start censoring certain UTXOs when creating CoinJoin spins, users can in theory choose to use Wasabi Wallet’s privacy feature with another coordinator. However, currently “there are no such ‘settings’ as a solution,” Harmat said, adding that users need to change the client to connect with another coordinator.

“We didn’t think about implementing a new user interface for switching coordinators,” Harmat said, when asked if Wasabi would take proactive steps to ensure users have an easier way to choose another coordinator. . “Obviously the whole project is open, everyone is free to do what they want with it.”

zkSNACKs co-founder Adam Ficsor posted a message on Wasabi Wallet’s public Telegram channel on Tuesday saying that the company “will have to hire” a blockchain analytics firm “and screen CoinJoin entry records with them.” — a plan that Harmat echoed.

However, zkSNACKs does not currently have a clear idea of ​​the specific transactions that should be censored as it has not yet established a detailed plan on how it will choose which UTXOs to block, Harmat explained, but the broader goal is “to filter out these types of illicit activities.”

A proactive approach to safeguarding the legal well-being of the company makes sense in the business sector, as leaders must make tough decisions to ensure a prosperous future for the company and its employees. However, it is unclear why this proactivity was necessary in the specific case of zkSNACKs, as a CoinJoin coordinator cannot be equated with a money sender – a designation that can be considered the holy grail of regulatory pressure, where intense regulation exists and offenders are heavily prosecuted.

Therefore, while zkSNACKs’ recent decision can be seen as a self-preservation measure, it arguably legitimizes overbroad regulation by watchdogs who don’t yet understand what CoinJoin really is and attempt rather to apply rules that don’t match – ultimately encouraging such regulatory practice and inviting even more to go overboard, which would be of little benefit in the long run.