The Danger of (Cryptocurrency) ‘Tumblers’? Why Governments see Mixers as Dangerous Enough to Want to Shut Them Down

For anyone looking at the front pages of cryptocurrency and financial news reports and web-pages, cryptocurrency mixers, which are also commonly known as ‘Tumblers’, were taking their share of the spotlight as of May 22nd this year. Why the sudden buzz around them? you may be wondering: it was in light of recent reports by authorities across Europe actively shutting down one such example of this service.

According to law enforcement officials questioned about the activity, this shut down was made necessary due to reports that the mixer – known as Bestmixer.io – was responsible for serving as a laundering solution for users to funnel dirty money through it through the medium fo crypto.

While this may have been the case, this hasn’t stopped the cryptocurrency community and stakeholders from condemning this clampdown, damning it as a massive governmental overreach by the European officials. According to this same community, it represents what could easily become a dangerous precedent, with this kind of unilateral measure being potentially used against cryptography and the crypto space wholesale.

The Ethereum community is nothing short of actively seeking out ways to innovate in the wake of problems, however, as Vitalik Buterin, the public chain’s co-founder, suggested that a mixing service be created which would operate completely on-chain.

One of the inevitabilities and unfortunate realities of cryptocurrencies are the combined fact that they are largely anonymous, thanks to the general characteristics of cryptocurrencies and their typical operations. While there is no avoiding this as an intrinsic factor – taking a pivot towards greater anonymization by creating a mixing solution which operates completely on-chain would be a welcome solution. It is certainly a preference in the minds of crypto enthusiasts in order to allow their crypto activity to continue being anonymous.

Cryptocurrency Transactions – Is Anonymity a Myth?

It is absolutely commonplace to hear terms such as ‘anonymous transactions’ circulating in the world of Bitcoin and cryptocurrencies – whether or not you’re adept at making them. In spite of this, the ultimate reality behind cryptocurrency payments and transactions is this – any that take place within a blockchain are far less anonymous than they are pseudonymous.

There’s no mistaking or denying the fact that blockchain / cryptocurrency transactions operate in a completely peer to peer format, rendering any intermediary, third party or invigilator completely redundant. However, this often leads to the conflation of cryptos as being anonymous, when they really aren’t.

In the world of conventional finance, if one individual wants to send a requisite amount of funds to another person, then they have to use some kind of service in order to expedite the payment. This is usually a bank or financial institution. It is because of this need for an intermediary, that the identities of both of these participants will need to be, and subsequently will be known by the third party and, as need occurs, these identities will be provided to legal entities should there be any need for them.

This is where cryptocurrencies set themselves apart – with the lack of need for this intermediary – this ultimately means that these two party can simply complete their transaction in a decentralized, trustless way. But while this comes off to the onlooker as though these two are completely anonymous, the way that blockchain transactions and cryptographics work means that their addresses serve as a red string, piecing together their activities.

Let’s use an example here – imagine there was some kind of malicious entity on the network – who really dislikes both parties making this transaction – decides to make a move against both of them. Through the application of some delicate cryptographics and blockchain based forensic studying of these two addresses – this user can follow all of these transactions back to a point where this party can find out the real life identities of these two people.

It is in these days that we are seeing this veil of pseudonymity being pulled away, with more and more public addresses of users involved with cryptocurrency exchanges, along with major stakeholders being made more of a known quantity within the community overall. While this is what more centralized entities see as being a step forward for bringing cryptocurrencies on the same kind of regulatory footing as the mainstream, the feelings are not mutual among those who prize their anonymity.

It’s this kind of information that provides one of the reasons for monitors being aware of when a hack is taking place long before a platform is in any position to know what’s happening and act accordingly. But with that said – We’re sure that any known digital wallet moving a large amount of money from their wallet to an unknown one would raise more than just one set of eyebrows.

With this in mind – there have been more than a few cases when seemingly complex cryptocurrency addresses have unfortunately resulted in their owners being subsequently ‘outed’. One of the biggest examples was the report from November 2018, when the United States Treasury Department instigated sanctions against a pair of Iranian citizens who were also implicated in the ransomware scam known as SamSam.

It was during the same time as these reports that the Office of Foreign Assets Control (OFAC), which is one of the departments within the US Treasury highlighted that this was actually the very first time that a Bitcoin address had been attributed to any of its individuals on its drafted sanctions list.

How They Work – Cryptocurrency Mixers

While cryptocurrencies like Bitcoin offer its users only pseudonymity, contrary to the thinking of its users in some instances. There are other digital currencies out there that strive to porivde their users with almost 100 percent anonymity by redacting every detail of transactions that take place – ranging from addresses, amounts that were moved and what users moved them.

Examples of these anonymity-minded cryptocurrencies include Monero (XMR), which was previously used in cyber-attacks such as WannaCry, and ZCash (ZEC), the latter of which was being used by citizens within Venezuela in order to circumvent authorities and obtain US Dollars. These currencies have since obtained a reputation as being a caste of crypto-assets known as ‘privacy coins.’

This clique of cryptocurrencies make use of processes such as transaction mixers, Zero Knowledge Proofs (zk-SNARKs) among other kinds of high anonymity protocols in order to almost completely obfuscate transaction information. The latter – Zero Knowledge Proofs – allow for transaction verification without additional forms of authentication in order to allow for transactions to be completed.

While these kinds of privacy coins allow for an extensive amount of anonymity for their users, not everyone with a desire to stay anonymous want to essentially use or be relegated to these coins. It’s this quandry where cryptocurrency mixers enter the equation. With the use of these services, users can hide the source of their virtual currencies as well as where and who they’re destined for.

Much as the name would have us think – these ‘mixers’ take whatever target transaction is involved, and include with ita range of other transactions that have the same correlated value. The concept behind these mixers is that these transactions would all be mixed together, thereby confounding any third parties or spies that would attempt to ‘follow the money.’

While these tumblers are known for this obfuscation service, they aren’t just used for this purpose. They are also put to use when you’re trying to receive cryptocurrencies from platforms and exchanges which adhere to existing anti-money laundering regulations such as Know Your Customer (KYC) protocols.

So, if for example a user has managed to obtain a total of 1 Bitcoin over this week – with half of it being from trading, .3 from their online services, and the remaining .2 from freelance contracting. If this same user were to attempt to withdraw all of this through their associated Bitcoin address, there’s a strong possibility that they would lose all of their anonymity due to the fact that they would be pulling money out from a platform with KYC protocols.

To avoid this kind of scenario, they could make use of a cryptocurrency tumbler solution to mix up their transactions by pooling it with a range of other users. In doing so, they would be provided with a ‘burner’ address, like a temporary wallet. These burner wallets do not retain any of their users information for more than one day.

The entire process of mixing transactions can be one which takes anywhere from 30 minutes to nearly 6 hours. The longer it takes to mix these transactions, the more secure they will be.

There are a number of cryptocurrency mixing services and platforms out there, and they typically undertake the same kind of process. Users add their target address (or addresses) for receiving the coin mixture, then provide an ideal time frame for this to take place and agree to the associated fee, which can range anywhere from 2 to 5 percent.

According to a report from April 2019 found that, out of all Bitcoin payments taking place on the ecosystem, approximately 4.09 percent of these were made up of ‘mixed’ Bitcoin transactions. The cryptocurrency and blockchain analytics company – Long Hash – found that Bitcoin payments made through mixing platforms increased exponentially – surging up by more than 300 percent since August last year.

The Mainstream’s War Against Cryptographic Anonymity

While users of cryptocurrencies have a particular love of concepts such as privacy and anonymity. These are phrases that are either reluctantly swallowed or rejected by governing bodies and regulatory agencies. As a result of this – it’s not too much of a surprise that these same agencies would take measures in order to curtail the ability of users to ensure their own payments are made anonymous.

Countries such as France and Japan have since been pushing for privacy coins like Monero and Dash to be subject to nationwide bans. Conversely, China had been forbidding blockchain companies from developing features which allow for the enhancement of user and transaction anonymity, with Beijing going so far as to state that such regulation is a necessity for the longer term health of the blockchain industry.

Government agencies and their officials have also attempted to put forward these kinds of examples in order to justify their approaches – Privacy coins allow for criminals to evade taxes, support terrorism and launder money. Which is said very literally in spite of companies like HSBC and Deutsche Bank doing the same with ‘regulations.’

It was previously reported on by news platforms that a range of governmental entities are seeking to ramp up the kind of measures they have in order to better monitor blockchain transactions. With some of these organizations even turning to entities like the blockchain analytics experts like Chainalysis in order to identify potential hackers and evaders.

It now seems that governmental law enforcement organs are placing a lot more focus on these crypto tumbler platforms. Recently, Europol, collaborating with authorities from both Luxembourg and the Netherlands worked to shut down the world’s largest cryptocurrency mixing solution – BestMixer.io – which has a turnover rate of more than 200 million dollars since it was first established in May 2018.

It was within this report from Europol authorities, BestMixer.io had been accused of money laundering as well as being implicated with several forms of illegal financing, which were in violation with local and EU regulations on money laundering. This investigation allegedly first began in June 2018, with the Europol task force planning to share this information with a number of law enforcement agencies in different regions.

As soon as this report came to public attention, a good number of influential figures spoke out against these actions, including the internet security giant and crypto enthusiast – John McAfee, who took to Twitter to say the following:

“Bitcoin mixers are now being targeted. Anonymity itself is slowly being considered a crime. The word ‘Privacy’ will soon mean ‘Criminal Intent.’”

His comments do represent a good number of those in the industry who further charge the government of conflating the desire for privacy with criminality and criminal intent, all while mainstream banks are able to commit fraud and laundering on a much more monumental scale.

These same critics state that there are plenty of reasons why individuals would want or wish to uphold their privacy when conducting business with cryptocurrencies.

Sjors Provoost, a prominent Bitcoin developer commented the following:

“Dutch law enforcement took down a mixer today and apparantly charged them with money laundering. I find this a very worrying precedent, because mixers are currently the only tool to mitigate Bitcoin’s poor on chain privacy. This action puts lives at risk.”

These same Cryptocurrency related robberies cannot just be limited to hacks which take place online. There have been more than enough reported cases of physical assaults on crypto owners, with some instances even leading to the death of the victim. These reports are global – taking place anywhere from Dubai, Singapore and even within the United Kingdom, Crypto owners are more than easily subjected to attacks by robbers and armed looters looking to make off with virtual coins.

There are a large number of government agencies all over the world contending that the application of cryptocurrency tumbler services are similar to being wholly involved in illegal and often terroristic activities. While this may be the case in the minority of cases, it appears that the govenmental hostility towards cryptocurrencies is fuelling a push into the various realms of cryptocurrencies.

Emin Gün Sirer, working as the associate professor of computer science in Cornell University, while also representing the initiative for cryptocurrencies and smart contracts as its Co-Director, provided his input into the kind of merits behind this kind of government activity, especially where it purtains to a prevalence of money laundering activity within the cryptocurrency world. According to Professor Gün Sirer:

“Dutch law enforcement took down a mixer today and apparantly charged them with money laundering. I find this a very worrying precedent, because mixers are currently the only tool to mitigate Bitcoin’s poor on chain privacy. This action puts lives at risk.”

In spite of the continued allegations foisted against cryptocurrency companies by government and state agents, there is far less ‘hard’ data circulating within the public domain to show that this is the case. In fact, the exact opposite has been proven on a number of occasions.

Early in 2019, Japans police organization (the National Police Agency) published its 2018 report on money laundering, demonstrating that, out of all reported cases of money laundering – less that 2 percent of the total amount consisted of crypto-related laundering.

In spite of this glaring statistic, the Financial Services Agency within Japan went on to declare this year that it would be increasing the level of oversight that cryptocurrency exchanges would be subject to in order to ‘stamp out’ money laundering activity, talk about taking a flamethrower to a cigarette. The country’s Financial Action Task Force visited the . country during the slip of 2019, with Japan hoping to obtain a favourable financial rating from the international body by attacking a major minority while ignoring the rest.

Maybe instead of inordinately wasting resources on a problem that makes up nearly 1 percent of laundering, they can actually address the remaining 99 percent of instances. Cryptocurrencies had no contribution to the fact that the country recieved the FATF’s lowest rating for AML and KYC regulatory compliance in 2008.

Will There be a Pivot Towards On-Chain Anonymity?

Should these governments decide to continue their foolish clamp down on existing avenues for ensuring cryptocurrency anonymity, then it is very much the case that developers of all kinds will simply develop and launch new more stable platforms in order to make it nigh impossible for agencies to police them. Professor Sirer echoed the same opinion with his recent statements, arguing the following:

“The problem with shutting down a mixer/tumbler is that it will force the community to develop more effective tumblers and mixers that cannot be shut down or traced as easily.”

One of the examples that we are already seeing is the proposal for on-chain anonymization solutions. Shortly after the news broke about the shutdown of BestMixer, Vitalik Buterin of Ethereum proposed exactly this – an on-chain Ethereum mixer in order to uphold user privacy.

This proposal for an Ethereum mixer would go far beyond the current mixing systems, making it an interoperable solution for any users, rather than just obfuscating collections of transactions by ensuring that they don’t appear at all within the blockchain. Buterin did go on to mention that this kind of solution may only be able to handle small levels of ETH, at least at this stage.

Sirer gave his own opinion about the prospect for on-chain mixing platforms:

“I doubt that either Bitcoin or Ethereum will add on-chain anonymity measures any time soon. Bitcoin is capacity limited and change-averse, while Ethereum is focused on building a world computer. But other coins will emerge with stronger guarantees, and there’s plenty of research into bolt-on alternatives. By clamping down on a service that is easy to trace, law enforcement is setting the stage for another generation of services that they will not be able to control or corral.”

According to Satoshi Nakamoto’s white paper for Bitcoin back in 2008. Under Section 10, it placed a greater emphasis on the need for privacy – such as limiting the amount of personal information provided or needed by the various parties involved in a transaction. The twin necessities of privacy and anonymity are fundamental principles in the world of cryptocurrencies, and they are held as sacrosanct in the minds of enthusiasts.

It would not appear to be beyond the realms of theory. If they were pushed to do so, it’s looking more and more likely that developers would band together in order to safeguard these digital rights.

The views and opinions expressed in the article Why Governments See Tumblers as Risky and Want Shut Down? do not reflect that of 48coins, nor of its originally published source. Article does not constitute financial advice. Kindly proceed with caution and always do your own research.

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