In 2022, cryptocurrency institutions were peppered with controversy following some of the biggest scandals to beset the virtual money industry. Few other industries experienced such turmoil, with the swift collapse and bankruptcy of FTX, Terra, Luna and Celsius, sending pervasive shockwaves through the global financial system and affecting almost all crypto tokens.
Crypto critics point to these frequent debacles and the fact that crypto has become a streamlined tool for criminals, including human traffickers, drug dealers, ransomware extractors, mobsters, and even the North Korean government, which employs hackers to steal crypto around the clock.
In August 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned currency mixer Tornado Cash for facilitating money-laundering. This came three months after OFAC’s unprecedented step in sanctioning the mixer Blender.IO which allegedly handled funds for Russian ransomware attacks. The Treasury accused Tornado Cash of helping hackers launder over $7 billion worth of cybercrime proceeds since its inception in 2019. The mixer was labelled as a favourite money-laundering tool for North Korea’s state-sponsored hacking organisation Lazarus Group, which relies on the cryptocurrency ecosystem to evade sanctions and finance its nuclear weapons programme. The U.S.Treasury accused Tornado Cash of enabling Lazarus Group launder $455 million worth of stolen virtual currency. Alexey Pertsev, a Russian developer for the mixing service, was arrested in the Netherlands on suspicion of facilitating the aforementioned crimes and is to remain in jail until February 2023.
One of cryptocurrency’s alluring qualities is that its pseudonymous nature makes it difficult to trace transactions. Mixing services add an extra layer of opacity and can facilitate illicit transactions by obfuscating their origins, destination and counterparties.
Some people opt to use mixers due to their desire for financial privacy, which is particularly crucial for individuals living under oppressive regimes or for those who seek to conduct legal transactions anonymously. However, a fraction of mixer users are cybercriminals.
By blending funds from different users and redistributing them, including unlawfully obtained funds and legitimately obtained funds, mixers allow holders of illegally sourced assets to obscure their origin. Almost 10% of all crypto assets held by illicit companies were laundered through a mixer in 2022. In addition, illicit cryptocurrency addresses sent nearly $23.8 billion in 2022, a 68.0% increase from the previous year. Intermediaries like mixers are also utilised by darknet market vendors/administrators and fraud shop vendors. In fact, more than 40% of illegal funds are channelled through intermediary services, with mixers being the primary means of transfer.
The lack of adequate infrastructure in the crypto space enabled authoritarian regimes, such as North Korea and Russia, to exploit new channels for funnelling funds outside of traditional payment systems using crypto assets. Efforts are currently underway to meet the need for enhanced regulatory oversight and security measures to prevent the illicit use of cryptocurrencies. One example of this is the United Kingdom’s National Crime Agency (NCA), which is seeking to subject crypto coin mixers to the country’s laws against money laundering. As a result of such regulatory scrutiny, mixers’ effectiveness as a tool for evading detection may diminish over time.
The Bitcoin mixing ecosystem is popular among users who desire anonymity, but scams and poor implementation have led to the development of secure protocols. Regulators across the globe are tasked with avoiding cryptocurrency becoming a safe haven for fraud. However, cryptocurrency companies have due diligence obligations in order to make informed decisions regarding account openings, monetary transfers and investment opportunities. Additional due diligence procedures can reliably determine the identity and tax residence of their Individual and Corporate Users, as well as of the natural persons controlling the latter. In addition to AML/KYC strategies, effective customer due diligence is a robust customer assessment framework which allows cryptocurrency companies to protect themselves from being used for criminal activity.
It is often argued that crypto is unfairly blamed for the misconduct of the fraudulent actors it attracts. The belief is that those who seek to defraud others will inevitably devise means to do so, regardless of the technology involved. Crypto supporters have long talked about separating money and state, with ambitious plans for the future. While mixing services are associated with criminal activity, adopting secure mixing methods could improve crypto institutions’ reputation and pave the way for further research in Bitcoin and cryptocurrency mixing.
