Tornado Cash, a cryptocurrency mixing service that allows users to hide the origin of cryptocurrency transactions, made headlines in August 2022 after being sanctioned by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC).
Mixer has opened Pandora’s box and sparked public debate about its role in ensuring personal financial privacy when using cryptocurrency.
U.S. authorities have continued to impose sanctions on these services, with Sinbad.io being the most recent large company subject to OFAC sanctions. Tornado Cash and Sinbad were arrested by the FBI, and the U.S. Treasury accused them of facilitating billions of dollars in illicit transactions, particularly for North Korea-based hacking group Lazarus.
An anonymous representative of mixing service Mixero told Cointelegraph that mixers like Tornado Cash and Sinbad are targeted by North Korean hackers because of “North Korea’s significant holdings of cryptocurrency, which allows them to transfer large amounts at once, saving time.” He said it was popular with people.
Despite its reputation, Mixer provides a legitimate service by keeping cryptocurrency transactions private. But criminals using mixers to launder millions of dollars could threaten the legitimate use of these services by ordinary users seeking financial privacy when using cryptocurrencies.
Mixer’s role in protecting financial privacy
Cryptocurrencies have evolved in their properties and usage, but today they are still often seen by mainstream audiences as synonymous with a completely private medium for illicit activities.
Contrary to this misconception, cryptocurrencies are not completely anonymous. The underlying blockchain technology for most major cryptocurrencies is a public ledger where all transfers are public.
For example, Bitcoin (BTC), the most popular cryptocurrency, only offers pseudo-anonymity. BTC addresses do not necessarily reveal the identity of the owner, providing privacy.
However, if a unique transfer is linked to that person’s identity, all past and future transfers can be traced to that person. Convertible Virtual Currency (CVC) Mixing, a service provided by Crypto Mixer, was created for this core reason.
There are many cases where citizens want financial privacy, such as ordering food for delivery and paying with cryptocurrency. Your courier or delivery company should not be able to see your daily transaction history or the total amount in your wallet. In this case, the mixer may break the chain between the receiver and sender.
Other more serious examples include not wanting your salary to be made public or telling criminals your total wealth. There are also extreme cases where Mixer can save lives, such as avoiding totalitarian regimes to see who has donated to LGBTQ+ causes or supported journalists critical of the government.
In these situations, mixers can provide financial privacy and safety by anonymizing your cryptocurrency.
Can Mixer guarantee the safety of your financial privacy?
Mixers increase privacy in cryptocurrency trading by pooling and mixing funds from multiple users, making it difficult to trace the origin of a specific coin. This improves user privacy by stopping transaction tracking, increasing fungibility, and anonymizing cryptocurrency sources.
Even though mixers ensure the anonymization of all cryptocurrency transactions, the closure of Sinbad and Tornado Cash shows how authorities can still track this anonymization technology.
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Jason Somensatto, head of North American public policy at blockchain analytics firm Chainalytic, told Cointelegraph that Mixer cannot guarantee privacy. “I want to make it clear that Mixer does not delete traces. In many cases, Chainalytic can track mixed services and detect users’ output. Additionally, all transactions are permanently recorded on the blockchain. So even if wrongdoers use our services to effectively obfuscate their activities today, they may still be tracked in the future as tracking technology continues to improve.”
If the essential feature of blockchain technology is that it is a public ledger and the mixer is impenetrable, why do criminals still use cryptocurrencies to launder money? Somensato explained:
“Bad actors use cryptocurrencies for the same reasons people use them for legitimate purposes. Cryptocurrencies are easy to use, cross borders, instantaneous and liquid. Even when criminals understand the transparency and traceability of cryptocurrency, they may decide that these benefits outweigh the risks.”
U.S. Policy on Mixer Services
In October 2023, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced its intention to target Mixer as a “type of transaction of primary money laundering concern.”
The policy seeks to increase transparency about the mixer to combat exploitation by malign actors “including groups such as Hamas, Palestinian Islamic Jihad, and the Democratic People’s Republic of Korea (DPRK),” as described in the document. FinCEN Director Andrea Gacki said:
“CVC mixing provides a critical service to players in the ransomware ecosystem, rogue state actors, and other criminals to fund their illicit activities and obscure the flow of ill-gotten gains(…).”
FinCEN will pursue these services “within or involving jurisdictions outside the United States.” The United States has already made inroads overseas, controversially arresting Tornado Cash developers in Amsterdam and working with Dutch authorities to take down Sinbad.io.
The problem for U.S. authorities may not strictly be the mixer service itself, but its biggest customers.
According to Chainalytic’s analysis of on-chain data, Sinbad controlled more than $24 million in funds stolen from the Lazarus Group, including Ether (ETH) and BTC from the Axie Infinity and Horizon Bridge hacks.
It’s not easy to take down an international mixer. Although the Clearnet website that traditional web browsers can access no longer exists, Sinbad’s dark website still operates. Tornado Cash was also relaunched on Clearnet, although it changed its approach and provided some compliance mechanisms.
Either way, with U.S. authorities on the hunt, illegal mixer users have already migrated, so the end of Sinbad could be coming.
Speaking to reporters in February 2023, Mehdi, the pseudonymous founder of Sinbad, described Mixer as a legitimate privacy technology project. He compared the service to privacy-focused cryptocurrencies like Monero (XMR) or Zcash (ZEC), and anonymity-enhancing cryptocurrency wallet software such as Wasabi or the Tor browser. It encrypts user traffic and routes it through multiple servers, hiding people’s identities.
The right to financial privacy is a key driving force for mixer makers. A Mixero representative explained:
“We are of the view that the U.S. sanctions against mixed companies such as Tornado Cash and Sinbad are not only unjustified but also violate people’s right to privacy. It’s also puzzling why Mixer is singled out, especially considering the existence of completely anonymous cryptocurrencies like Monero. “This raises questions about the basis for these actions against the mixer.”
Privacy: Can Mixers Solve Misuse?
The complete freedom that pure libertarians desire comes at a cost. Mixers that follow a no-control policy may have legitimate value, and their use by sanctioned groups such as North Korean hackers may also expose them to regulatory scrutiny.
So should the average user avoid mainstream mixers? What if mixers could implement barriers to block certain groups that attract the attention of U.S. authorities, such as the Lazarus Group? is this possible?
According to a Mixero spokesperson, the only way to satisfy legislators is to implement know-your-customer standards. “But that defeats the very purpose of creating a mixer.”
Conversely, Somensatto said there are mechanisms mixers can implement, “including using Chainalytic tools to monitor transactions and receive notifications of exposure to illicit sources.” He said: “Broadly speaking, blended service providers can avoid enforcement action by implementing a robust AML/CFT (anti-money laundering/counter-financing of terrorism) program. This is essentially a mechanism to prevent illegal activity. Money laundering by illegal actors and sanctioned entities.”
A Mixero official said, “Adopting this method is against our policy.” However, the ideology of anonymity conflicts with anti-money laundering tools.
Financial privacy as a human right
Many in the cryptocurrency space consider financial privacy to be a human right. However, few governing bodies currently recognize this.
The United Nations has an extensive list of “rights inherent to every human being.” Financial privacy does not explicitly appear as a human right, but privacy does appear as a human right. In some cases, it may make sense to expand to include financial privacy. What about the law?
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Suzanne Ulrich, a Dutch privacy lawyer and consultant, told Cointelegraph that there are clear laws governing financial privacy.
“In Europe, people are protected by a variety of laws, including the Convention on the Protection of Human and Fundamental Rights and the General Data Protection Regulation. In addition to these European umbrella protections, many countries have included privacy rights in their constitutions. Although the United States also has privacy rights, financial privacy is generally less protected than in Europe. In the United States, financial privacy is regulated through laws enacted at the federal and state levels.”
While the law firmly protects the human right to privacy, financial privacy can be ambiguous. So are privacy laws sufficient to justify the existence and legality of mixer services?
Mixer has acquired an unpopular image over the years by opening his bar to every wanderer in town. Cleaning up your image may require finding strategies to bar the entry of illegal actors, and your survival may depend on it.