DC Judge Calls Unhosted Wallet ‘Horror Story’ a ‘Fiction’

Federal Magistrate Judge Zia M. Faruqui has learned to stop worrying and love unhosted wallets.

“The horror story of unhosted wallets is fiction, not fact,” wrote the judge in a Jan. 6 memorandum opinion for D.C. District Court. He quoted a Coin Center thinkpiece (also named in Strangelovian fashion) on the downside of over-regulating unhosted wallets, then added his own summation:

“Indeed, cash poses a greater challenge to law enforcement than cryptocurrency in unhosted wallets.”

Delivered in a footnote to an opinion on a cryptocurrency forfeiture case, Faruqui’s assertion runs parallel to the debate currently roiling unhosted wallets. His memorandum does not directly mention the Financial Crimes Enforcement Network’s (FinCEN) mid-December call to monitor high-value private wallets through a controversial rule that’s set the cryptocurrency industry ablaze.

FinCEN wants exchanges to collect information on participants of $3,000+ cryptocurrency transactions that involve an unhosted wallet. It argues its proposed rule is “similar” to the anti-money-laundering regulations already governing cash transfers.

Faruqui’s opinion highlights the difference between untraceable cash and inherently traceable crypto. The blockchain may purport to grant individuals anonymity, he wrote. But he said law enforcement can use blockchain forensics tools to “unmask” those individuals (as they did in this case) with relative ease:

“Ironically, the public nature of the blockchain makes it exponentially easier to follow the flow of cryptocurrency over fiat funds.”

Ari Redbord, head of legal and government affairs at blockchain forensics company TRM Labs, said the opinion is a “significant” contribution from the federal judiciary, even if it carries little precedential weight. Redbord, who worked as an assistant U.S. Attorney for a decade, said few judges have the technical know-how to parse the complexities of crypto tracing, let alone cite tracing tools in a…

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