Can crypto mixers adapt to survive lawsuits from US authorities?
Tornado Cash — a cryptocurrency mixing service that can hide the origin of crypto transactions — grabbed headlines after it was sanctioned by the United States Treasury's Office of Foreign Assets Control (OFAC) in August 2022.
The mixer opened a Pandora's box by igniting open debate about the role of mixers in ensuring personal financial privacy when using cryptocurrencies.
US authorities continue to impose sanctions on these services, with Sinbad.io being the last major player under OFAC sanctions. Tornado Cash and Sinbad have been busted by the FBI, accusing the US Treasury of hacking billions of dollars in illegal transactions, particularly the North Korea-based Lazarus network.
An anonymous representative of mixing service Mixiro told Cointelegraph that mixers like TornadoCash and Sinbad are popular among North Korean hackers because they “allow North Korea to transfer large amounts of cryptocurrency at once, saving time.”
Despite their name, mixers provide legitimate services by personalizing cryptocurrency transactions. But criminals using secrets to launder millions of dollars can threaten the legitimate use of these services by ordinary users seeking financial privacy when using cryptocurrencies.
The role of regulators in financial privacy
Cryptocurrencies have evolved in their properties and uses, but currently, to a mainstream audience, they are still seen as a completely private media synonym for illegal activities.
Contrary to this misconception, cryptocurrencies are not completely anonymous. The blockchain technology underlying most major cryptocurrencies is an open ledger where all transactions are public.
For example, the most popular cryptocurrency Bitcoin (BTC), is anonymous only. BTC addresses do not necessarily reveal the identity of their owner, providing a layer of privacy.
However, if a specific transfer is linked to their identity, all historical past transfers and future activities can be traced back to that individual. Mixing convertible virtual currency (CVC) – a service provided by crypto mixers – was created for that very reason.
There are many instances where citizens may want financial privacy, such as ordering food delivery and paying with cryptocurrency. The courier or delivery company should not be able to see your daily transactions or the total amount of money in your wallet. In this case, a mixer can break the chain between the receiver and the sender.
Other serious examples include not wanting your salary to be public or letting criminals know your net worth. There are also more serious cases where a mixer can save lives, such as avoiding totalitarian regimes to see who has donated to LGBTQ+ causes or approved a journalist critical of the government.
In such cases, mixers may de-identify cryptocurrencies to provide financial privacy and security.
Can mixers guarantee financial privacy security?
Mixers increase the secrecy of crypto transactions by combining and mixing the funds of multiple users, making it difficult to trace the origin of specific coins. This breaks the transaction trail, adds fungibles and anonymizes the source of cryptocurrencies to improve user privacy.
If mixers ensure that all crypto transactions are anonymous, the Sinbad and Tornado Cash closures show how authorities can monitor this anonymous technology.
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Jason Somnsato, head of public policy for North America at blockchain analytics firm Chainalysis, told Cointelegraph that mixers can't guarantee privacy: “I'm clear that mixers don't delete traces. In many cases, Chainalysis can combine services to track and track user results. Additionally, all transactions are recorded permanently on the blockchain. So while an illegal actor may use the service to effectively hide their activities today, they may be detected in the future as tracking technology improves.
If the intrinsic nature of blockchain technology is a public ledger, and mixers are impenetrable, why do criminals still use cryptocurrencies to launder money? Somensatto explained:
“Bad actors use cryptocurrencies for the same reasons people use them for legitimate purposes – they are easy to use, cross-border, instant and liquid. Even when a criminal understands the transparency and traceability of crypto, they may decide that these benefits outweigh the risks.
US policy on mixed services
In October 2023, the US Department of the Treasury identified the Financial Crimes Enforcement Network's (FINCEN) interest in targeting mixers “as a major money laundering issue.”
The policy also seeks to increase transparency in combating exploitation by malicious actors, including groups such as Hamas, Palestinian Islamic Jihad and the Democratic People's Republic of Korea (DPRK), according to the document. According to FinCN Director Andrea Gaki:
“CVC mixing provides a critical service that helps players in the ransomware ecosystem, rogue state actors and other criminals pay for their illegal activities and disrupt the flow of ill-gotten gains. […]He said.
FinCEN tracks any of these services “in jurisdictions outside the United States.” The United States has already gone abroad to take down Sinbad.io, arresting the Amsterdam-based developer of Tornado Cash and cooperating with Dutch authorities.
The issue for US officials may not be the hybrid service itself, but only its biggest customers.
According to Chinalysis' on-chain data analysis, Sinbad managed more than $24 million in stolen funds from the Lazarus group, including Ether (ETH) and BTC from the Axie Infinity and Horizon Bridge hacks.
Downloading an international mix is not easy. The clearnet website – accessible by normal web browsers – most of which no longer exist, Sinbad's Dark website is still up and running. Tornado Cash has also relaunched in clearnet, although it has changed its approach and introduced some compliance mechanisms.
Either way, with US authorities on their tails, users of the illegal mix may have already fled, signaling the end of Sinbad.
In the year He compared the service to privacy-focused cryptocurrencies Monero (XMR) or Zcash (ZEC), anonymous crypto-wallet software such as Wasabi or Tor Browser, which encrypts user traffic and routes it through multiple servers to hide people's identities.
Financial privacy rights are a key driver for the creators of the mergers. A Mixero representative explained:
“We believe that US sanctions targeting mixers such as Tornado Cash or Sinbad are not only inappropriate, but also represent a violation of human privacy rights. Furthermore, it is puzzling why mixers are singled out, especially considering the existence of completely anonymous cryptocurrencies such as Monero. It raises questions about the reasoning behind the actions taken.
Protecting Privacy: Can Mixers Abuse?
Total freedom, as a pure libertarian would have it, has value. A mixer that follows a zero-control policy may have legitimate values and may be used by sanctioned groups such as DPRK hackers, putting the mixer under regulatory control.
So should casual users stay away from mainstream blenders? What if mixers implemented barriers to block certain groups that would attract the attention of US authorities, such as the Lazarus group? Is this possible?
According to a Mixro spokesperson, the only way to satisfy regulators is to know your customer's standards, “but that goes against the purpose of Mixro.”
Conversely, Somensatto says there are strategies that brokers can implement, including “using Chinalysis tools to monitor transactions and report exposure to illegal sources.” He added, “Generally speaking, joining service providers can avoid enforcement actions by applying strong AML/CFT. [Anti-Money Laundering/Combating the Financing of Terrorism] The program is primarily a mechanism to prevent money laundering by illegal actors and entities.
“It is against our policy to accept these methods,” said a Mixero representative. Yet again, the ideology of anonymity has been undermined by anti-money laundering tools.
Financial privacy as a human right
Many in the cryptocurrency space consider financial privacy a human right. However, few governing bodies currently receive this recognition.
The United Nations has an extensive list of “rights that belong to all human beings.” Financial privacy is not clearly seen as a human right, but privacy is. For some, including financial privacy as an extension may make sense. What about the law?
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Suzanne Ulrich, a privacy lawyer and consultant based in the Netherlands, told Cointelegraph that there are strong laws regarding financial privacy:
“In Europe, people are protected by various laws, such as the Convention for the Protection of Human Rights and the Protection of Fundamental Rights and the General Data Protection Regulation. In addition to these European umbrella protections, many countries have included privacy rights in their constitutions. In the United States, there is also a right to privacy, but financial privacy in general.” “It's less protected than in Europe. In the United States, financial privacy is governed by federal and state laws.”
The law strictly protects the right to privacy, but financial privacy can be ambiguous. So are privacy laws sufficient to ensure the existence and legitimacy of hybrid services?
Mixers have acquired an unpopular image over the years as they open their saloon doors to any passenger in town. To clean up their image, they may need to find strategies to prevent illegal actors from entering, and their survival may depend on it.
