Crypto Mixers: A Balancing Act between Financial Privacy & Anti-Money Laundering Measures
Summary:
This article discusses the impact and controversy surrounding cryptocurrency mixers like Tornado Cash and Sinbad.io. Following sanctions from the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC), debates have arisen regarding mixer's role in ensuring personal financial privacy in cryptocurrencies. Although providing valuable privacy services to users, these mixers have been accused of facilitating illicit transactions. The article highlights that despite enhancing privacy by obscuring transaction origins, mixers are not entirely foolproof, as demonstrated by the shutdown of Sinbad and Tornado Cash. The US has been intensifying its policies against mixers, viewing them as potential avenues for money laundering. The article concludes by emphasizing the tension between ensuring privacy rights and preventing monetary malfeasance.
The cryptocurrency mixer service, Tornado Cash, known for its ability to obscure the origins of crypto transactions, made headlines when it was sanctioned by the Office of Foreign Assets Control (OFAC) at the United States Department of the Treasury in August 2022. This event thrust open the doors of dialogue around the role mixers play in preserving individual financial confidentiality in digital currency dealings. The crackdown on such services has continued, with Sinbad.io being the latest significant player facing OFAC sanctions. The FBI has shut down both Tornado Cash and Sinbad, accusing them of aiding illicit transactions amounting to billions of dollars, particularly by the North Korea-based hacker group, Lazarus. A representative from the mixer service Mixero, who wishes to remain anonymous, informed Cointelegraph that these mixers are favored by North Korean hackers due to their huge crypto reserves which allow for large volume transactions, saving time.
Despite their reputation, mixers perform a legitimate function in maintaining the privacy of crypto transactions. However, their usage by criminals to conceal large-scale illicit money laundering operations could pose a threat to regular users who simply seek privacy for their cryptocurrency dealings.
Cryptocurrency, although commonly associated with illicit activities by mainstream audiences, is not entirely anonymous. Blockchain technology, the foundation of most leading cryptocurrencies, is essentially an open ledger where all transactions are public. Take Bitcoin (BTC), the leading cryptocurrency, it only offers pseudo-anonymity. Whilst the owners of BTC addresses remain hidden, providing a layer of privacy, if a specific transaction is tied to their identity, all past and future transfers linked to that individual become traceable. To mitigate this, crypto mixers offer a service called convertible virtual currency (CVC) mixing.
Ordinary citizens may desire financial privacy for a variety of reasons, like keeping their daily transactions or total wallet balance hidden when paying for a delivery with crypto. In these scenarios, a mixer can break the link between the sender and receiver. In more critical situations like keeping your salary or total wealth private to avoid revealing this information to criminals, or in extreme cases where using a mixer could potentially save lives - for instance, when donating to an LGBTQ+ cause or a journalist critical of the government in an oppressive regime - mixers come in handy to anonymize cryptocurrencies, ensuring financial privacy and safety.
Mixers boost privacy in crypto transactions by pooling and mixing the funds of multiple users, which makes it difficult to track the source of specific coins. However, the shuttering of Sinbad and Tornado Cash shows that authorities can still trace this privacy-enhancing technology. Jason Somensatto, the North American public policy head at blockchain analytics firm Chainalysis, conveyed to Cointelegraph that mixers cannot provide an assured guarantee of privacy.
In October 2023, the Financial Crimes Enforcement Network (FinCEN) at the U.S. Department of the Treasury expressed plans to focus on mixers as a "primary money laundering concern". Under this policy, there is an intent to increase transparency related to mixers, aiming to prevent misuse by harmful actors as detailed in its documentation. The policy also stated that it would target these services beyond the borders of the United States. Tornado Cash's creator was controversially arrested in Amsterdam, and Sinbad.io was taken down in collaboration with Dutch authorities.
The challenge for U.S. authorities is not strictly the mixer services themselves but rather their major clients. As revealed by Chainalysis's on-chain data analysis, Sinbad processed more than $24 million of pilfered funds from the Lazarus Group, including Ether (ETH) and BTC taken from the Axie Infinity and Horizon Bridge attacks. Taking down an international mixer is not a simple task.
Despite the U.S. authorities' pursuit, illicit users of the mixers may have already found other avenues, marking a potential end for Sinbad. In February 2023, Mehdi, the pseudonymous founder of Sinbad, stated that the mixer is a legitimate project aimed at preserving privacy, equating its service to privacy-oriented cryptocurrencies like Monero (XMR) or Zcash (ZEC), privacy-enhancing crypto wallet software such as Wasabi or the Tor browser, which masks users' identities.
Privacy activists argue that the sanctions targeting Tornado Cash and Sinbad are not only unjustified but also an infringement on human privacy rights, especially given the existence of fully anonymous cryptocurrencies like Monero. This brings into question the motivations behind these actions against the mixers.
Regulators' scrutiny increases when mixers with a zero-control policy are used by sanctioned groups like DPRK hackers. To avoid this, should mixers implement measures to block certain groups? According to the Mixero spokesperson, this would require implementing Know Your Customer standards, which contradicts the very purpose of a mixer. On the other hand, Somensatto believes mixers can adopt strategies to monitor transactions and be alerted of exposure to illicit sources using tools provided by Chainalysis.
Many in the crypto community believe financial privacy is a human right, however, most governmental institutions don't recognize it as such. It is worth noting that privacy is listed in the United Nations' extensive list of “rights inherent to all human beings,” and some argue financial privacy can be reasonably inferred from that. Suzanne Ulrich, a privacy lawyer and consultant based in the Netherlands, suggests that financial privacy is indeed legally secure, at least in Europe. However, it appears that the enforcement of these privacy laws may not be enough to justify the existence and legitimacy of mixer services. To refurbish their image, they may need to devise strategies to bar entry to illicit actors and this could be key to their survival.
Published At
12/18/2023 2:00:00 AM
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