The Anti-Privacy Case You Haven't Heard About
The DOJ is prosecuting two brothers for cryptocurrency activity under a new application of wire fraud law.
The Trump Justice Department has been forging ahead with the strategy of regulatory innovation via criminal prosecution of novel blockchain applications begun under the Biden administration.
Seemingly unhindered by the superficial signaling that baited the most credulous and cynical leaders of the cryptocurrency industry into supporting Trump, the DOJ has forged ahead with its shambolic and legally dubious prosecution of Roman Storm for creating non-custodial anonymization software that is legal in the United States; and that of Keonne Rodriguez and William Hill, creators of the privacy service Samourai Wallet.
Far less discussed has been the ongoing prosecution of Anton and James Peraire-Bueno, brothers who DOJ argues stole $25 million with strategies targeting traders profiting from “Maximum Extractable Value,” or MEV, a technique specific to blockchain-based trading. The prosecution, which began in New York on October 15, broadly alleges that the Peraire-Bueno brothers used trickery to mislead MEV traders, amounting to fraud. Charged with money laundering, wire fraud, and conspiracy, the brothers face a maximum of 20 years in prison for each charge.
L0la L33tz
A Legitimate Strategy
But defenders argue that the Peraire-Bueno brothers’ activity fell within fair competition under the Ethereum network’s standard practices. In opening statements, their defense team argued that, leading up to its execution in April of 2023, the brothers "planned a legitimate cryptocurrency trading strategy using publicly available information."
Peter Van Valkenburg, Executive Director of blockchain advocacy group CoinCenter, recently wrote that the Peraire-Bueno brothers “profit maxed up to the limit of Ethereum's consensus rules which overtly tolerate MEV... Therefore, it is incredibly inappropriate for the prosecutors in this case to try and substitute their own norms, duties, and assumptions of industry practice in order to hold the brothers guilty of a crime. It's wrong on the law and a very dangerous development for innovation in this space generally … MEV is ugly, but Ethereum's protocol allows it.”
MEV is ugly because it amounts to mass-scale front-running that’s bad for most everyday users of Ethereum – but it’s also to a degree inherent to the architecture of public blockchains. By scanning transactions waiting in public “mempools” for inclusion in upcoming blocks, then structuring transactions in the same block in ways that manipulate pricing for existing orders, so-called “MEV searchers” scalp regular users on a moment-to-moment basis. Most notoriously, their “sandwich attacks” front-run other traders, pumping up the costs of their orders and profiting from it. These activities are automated and industrialized.
That’s why the Peraire-Bueno brothers’ activities were regarded as entertaining and maybe even heroic by crypto veterans when they became public circa 2023: the brothers were, in broad strokes, sandwiching the sandwich attackers. While longer-term structural solutions to the MEV problem are on the table, the Peraire-Buenos were arguably taking direct action to make MEV more risky. By taking an aggressive stance on regulating blockchain activity, prosecutors threaten to quash this sort of PVP evolutionary pressure.
In a motion to dismiss, the brothers’ defense lawyers argue that the defendants had no clear reason to believe their activities were criminal. The “threshold constitutional question whether this novel prosecution properly can be brought where there is no prior judicial decision applying the wire fraud statute in similar circumstances that would put the Peraire-Buenos on notice that the alleged conduct could be considered criminal … It is fundamentally unfair for the United States government to regulate for the first time through criminal prosecution the rights and duties of searchers and validators on the Ethereum Network.”
Valkenburgh and CoinCenter agree, arguing in an amicus brief filed on October 31, that “Defendants appear to have contravened none of the clear rules or controls found within the Ethereum protocol in a manner deserving outside interference or enforcement.”
Criminalizing Privacy?
But the prosecution is strange and worrisome for more immediate reasons than this philosophical debate. Most bizarrely, the Peraire-Bueno brothers are not being charged with what seems the most conventionally criminal element of their activities – hacking. According to a postmortem by software firm Flashbots, the alleged attackers found a “vulnerability” in software called MEV Boost that allowed them illicit access to transactions in proposed blocks, allowing them to “exploit those transactions … [the attackers] broke the sandwich bots’ sandwiches up and effectively stole their money.” That vulnerability was quickly patched.
Instead of cybercrime, the brothers are charged with wire fraud and money laundering. The wire fraud charge is, prosecutors acknowledge, an entirely novel application of the law to apply to economic signals on a blockchain. The money laundering charges are in some sense a further reach, based in part on the Peraire-Buenos’ attempts to anonymize funds that the brothers, according to their defense team, had no reason to believe were criminal proceeds. The initial indictment even details their use of privacy services to shield their creation of a series of Ethereum validators, before any crime is even alleged to have occurred, as well as their use of a no-KYC cryptocurrency exchange and "single-use addresses".
This is where the Peraire-Bueno prosecution echoes those of Roman Storm and the Samourai Wallet devs. By creating a trail of precedent tying privacy protocols and services to criminal money laundering, the DOJ’s efforts are furthering a narrative that on-chain privacy, and financial privacy more generally, are inherently criminal. To the conspiracy-minded, this might explain why they are being prosecuted for financial crimes rather than the underlying alleged hacking.
David Z. Morris
Chilling Effects
But in the courtroom itself, the stakes are substantially clearer - and dire. A conviction on the current charges, CoinCenter argues, “would massively chill public participation in these innovative [blockchain] systems. To join the Ethereum network as a validator, one would no longer need only to understand the deterministic and verifiable rules of the software protocol, but also to wonder what the “emergent” codes of conduct in the ecosystem may be and whether those wooly norms will be seized upon by government prosecutors to hold one responsible for alleged violations that carry profound consequences.”
This chilling effect is eerily parallel to the fast-emerging consequences of the prosecution of privacy software developers like Storm: The U.S. government is using fear to very effectively intimidate actors from building services that are not just legal for U.S. citizens, but critical to the operation of the technology that so many Trump allies have eagerly profited from.
I’m not Changpeng Zhao’s biggest hater, but it’s deeply troubling that the founder of an off-chain exchange has been pardoned by the White House literally in the middle of the lower-profile prosecution of the Peraire-Bueno brothers for on-chain activities that many crypto users consider more creative than criminal.
It’s an even deeper irony (and all too in line with the kleptocracy that America has become) that they are facing criminal conviction for what many would characterize as taking a pound of flesh back from thieves.
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