According to Coindesk, two Bitcoin wallets are exiting the U.S. market, perhaps in response to recent regulatory action against the self-custodial wallet Samourai, and also indicating that the U.S. Securities and Exchange Commission is turning its regulatory focus to MetaMask, the most widely used Ethereum access point.

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As we all know, a self-hosted wallet is a cryptocurrency wallet in which the private key is controlled by the user and does not rely on any third party. It can be considered as the product that is closest to the decentralization of the encryption core.

On April 26, Paris-based Bitcoin company Acinq announced that it would remove its popular Lightning Network wallet Phoenix from U.S. app stores due to regulatory uncertainty. Users are advised to close channels and transfer wallet assets before access is terminated on May 3, 2023.

Just one day later, zkSNACKs announced that it would shut down access to its privacy wallet Wasabi in the United States, saying in a statement on April 27 that "in light of recent announcements by U.S. authorities, zkSNACKs now strictly prohibits U.S. users from using its services."

This was echoed in Acinq’s statement, which said that “recent announcements by U.S. authorities have raised questions in the industry as to whether decentralized self-custodial wallet providers, Lightning Network service providers, and even Lightning Network nodes can be regulated as money service businesses and subject to such strict oversight.”

It’s unclear which announcement Acinq’s response is focused on, but the legal action against Samourai Wallet and the recently disclosed SEC Wells Notice against MetaMask suggest that self-custodial wallets may well fall under the SEC’s regulatory purview.

Additionally, an April 26 U.S. Department of Justice court filing responding to a motion to dismiss a case against Tornado Cash co-founder Roman Storm indicated that even decentralized self-custodial services may need to implement KYC/AML and register with FinCEN based on U.S. Code Section 1960.

“This is simply generalizing MSB laws to cover almost every sector of the cryptocurrency industry except for users who run their own nodes,” cryptocurrency advocate Seth For Privacy wrote on X. “If money transmission does not require controls, then anything that makes Bitcoin convenient and easy to use likely falls under this broad definition.”

Many commentators in the crypto community noted that Phoenix's decision to withdraw from the United States was disappointing, but given the legal uncertainty, the strategic shift was largely understandable. In response, Jack Dorsey, founder of Block, a fintech company that builds hardware wallets, lamented that Acinq's move was "completely unnecessary."

“Agreed, this isn’t the best solution,” Lightning Labs CEO Elizabeth Stark said in response to Dorsey.

The news comes after the cryptocurrency company was recently sued, with Samourai Wallet CEO Keonne Rodriguez and CTO William Hill arrested for operating an unlicensed money transmission business. The U.S. Department of Justice alleges that Samourai processed more than $2 billion in illegal transactions since 2015, earning more than $4.5 million in fees.

While legal experts have highly questioned the rationale for going after self-custodial platforms that don’t hold assets on behalf of their users, regulatory authorities around the world have been trying to bring decentralized systems within regulatory boundaries for years.

A prime example is the European Union, which has been considering imposing a €1,000 ($1,080) limit on crypto transactions from self-hosted crypto wallets as part of its new anti-money laundering laws. U.S. authorities also considered introducing legislation to essentially ban “self-hosted wallets,” but the legislation was rejected in 2022.

From the current point of view, the new legal actions and statements of the authorities have increased uncertainty and increased the possibility that many core crypto activities beyond building wallets may be subject to money transmission laws, even including lightning node hosting. Similar to other issues in the crypto field, the court's decision will provide important precedents for such issues. This is undoubtedly a regulatory offensive and defensive battle, and it is also one of the important reasons why Consensys decided to sue the SEC.

Just recently, software development company Consensys filed a lawsuit against the U.S. Securities and Exchange Commission (SEC) and its five commissioners, claiming that the SEC orchestrated a regulatory campaign to "seize the right to speak on cryptocurrency." The regulator attempted to illegally regulate Ethereum through special enforcement actions against Consensys and other companies, but in theory the SEC has no jurisdiction on the grounds that crypto tokens are not securities.

Consensys said the SEC has "set its sights on" the MetaMask wallet software, which allows users to self-custody ETH and other cryptocurrencies. The company emphasized in the document that they received a Wells notice from the SEC on April 10, warning of possible enforcement action against its MetaMask Swaps and MetaMask Stake products. The SEC stated in a conference call that Consensys is an unregistered broker-dealer. According to Consensys, the company received three subpoenas in 2023 requesting information related to "acquisition, holding and sale of ETH."

In response, Consensys filed a lawsuit in Texas and put forward four reasons why ETH is not a security. The first is the SEC's historical position on Ethereum. In 2018, William Hinman, then director of the SEC's Financial Division, delivered an important speech, clearly stating that Ethereum is not considered a security. The SEC did not respond to this position at the time, so there is no basis for the current change of its original intention. The second is the confrontation of regulatory power. The CFTC (Commodity Futures Trading Commission) has always believed that Ethereum is a type of commodity and has continued this in the KuCoin lawsuit. Finally, Consensys emphasized that Ethereum has a sufficiently decentralized architecture, and there is no core control and development group for Ethereum, and the change in the consensus mechanism does not affect this point.

But according to the latest court documents, the US SEC and its Gary Gensler seem to have made it clear for at least a year that Ethereum, the second largest cryptocurrency, is an unregistered security that does not comply with current federal regulations. For now, the SEC has not responded. And it is foreseeable that the lawsuit between the two will likely be a tug-of-war that will last for several years. It is for this reason that the market believes that the SEC will not approve any Ethereum spot ETF when the deadline (June 11) arrives.

As for decentralized wallets, it is not clear whether Phoenix and Wasabi will be the only wallets to leave the United States, but at least one wallet company, Zeus, has made it clear that it will continue to operate. "We will definitely not move out," Zeus' official account posted on X.

"We believe Zeus is complying with the letter of the law now. If the law changes or any judgment is made, we will adjust accordingly," said Zeus founder Evan Kaloudis.

“If Zeus goes down, all the other lightning node operators are next. If the lightning node operators go down, self-custody is next. Self-custody is the last line of defense.”