Crypto Mixers or Tumblers have been in the news recently for facing government sanctions. The technology allows users to hide their publicly visible transactions by mixing them up with other coins, making them almost untraceable.
That comes with some danger though! As we get new technology, money laundering also increases. Hackers and scammers can increase anonymity in their transactions and hide their crypto assets from their criminal activities by using crypto mixers or tumblers. Let’s find out how crypto mixers work, why would someone need to use a mixer, and the possible legal implications of doing so.
What are Crypto Mixers or Crypto Tumblers?
The concept of crypto mixers is simple. They mix your digital currency or money with another user's digital currency to make many combinations that turn into countless transactions to confuse the source and destination of crypto assets. The mixing process is unique to each platform, and each user’s crypto is locked in with a smart contract.
Now the question is why would someone use such a service? A cryptocurrency’s appeal is mainly rooted in a user’s strong desire for privacy in personal transactions, complete anonymity, and reduced government regulations. Crypto mixers, especially decentralized mixers, do exactly that. Any individual seeking increased privacy, or trying to circumvent government restrictions in countries that have banned crypto transactions, can use a mixer.
But sadly, more often than not, they are also used for money laundering. According to the blockchain analysis firm Chainalysis, usage of crypto mixers is at an all-time high, but 25% of funds on these platforms come from illicit addresses linked to cybercrime.
A recent example of this is Tornado Cash, a popular crypto mixer that is making headlines for the wrong reasons.
The Tornado Cash Saga
Torando Cash was recently sanctioned by the US government as its platform is frequently used to launder stolen cryptocurrency, especially by a North Korean hacking group called Lazarus. In March this year, a popular game that accepts crypto, Axie Infinity, was hacked and nearly $625 million was stolen, which was allegedly laundered by using Tornado Cash.
A blockchain developer associated with Tornado Cash was also recently arrested in Amsterdam for “hiding criminal financial flows and promoting money laundering” through the Tornado Cash platform.
Tornado Cash is not the first crypto mixer to be sanctioned.
Another popular mixer, Blender.io was also sanctioned in May as it was used by the Lazarus group to launder around $20.5 million worth of cryptocurrency.
These mixers pool and scramble different digital assets from thousands of addresses, which often include illicit wallets set up by hackers looking to launder funds. The mixing process obfuscates the origin and destination of the stolen money.
This is a prime example of the potential downsides of such a technology. While there are several legit users, it is often misused by hackers.
Types of Crypto Mixers
Crypto mixers can be centralized or decentralized.
In centralized mixers, users add their e-wallet addresses on the platforms and then send a specific cryptocurrency amount that they want to mix. In other words, the user grants the agent full control to conduct numerous transactions in order to mix their cryptocurrencies. The agent in this case is the algorithm that carries out these transactions automatically.
On the other hand, in decentralized mixers, there’s no middle party involved. The users band together and select a cryptocurrency that they want to mix. The bigger the transaction, the more users need to be involved. Algorithms and middle parties are not a part of the mixing process.
Centralized vs Decentralized Mixers: What’s the Difference?
Decentralized mixers allow a higher level of anonymity compared to centralized mixers. This is because centralized mixers have access to a user's IP address, which means the transactions are not fully anonymous.
Moreover, centralized mixers aren’t that secure since they’re very prone to getting attacked and having their data stolen. On the other hand, decentralized mixers have a key advantage if we compare them to centralized mixers. They give users full access to increase their amount and the more users there are, the more anonymity they can achieve.
The Legal Grey Area
All in all, if I were to make a final statement, no, crypto mixers aren’t illegal everywhere. It mostly depends on the country and all the laws and regulations there. And even though crypto mixers have their benefits in providing security, the truth is that not everyone uses them for the same purpose.
While the tech itself isn’t bad, hackers have a very twisted method of using crypto mixers. Another report by Chainalysis reveals that in 2021 around $8.6 billion was laundered around the world, mostly by using mixers.
Crypto mixers are essentially based on the original principles of cryptocurrency — a decentralized place where the flow of money is stateless, anonymous, and private. These services let you hide your transactions’ origin and destination in order to make them fully secure and private. But they come with a huge risk. You won’t know who you are banding together with to mix your cryptocurrency and could possibly receive ‘dirty’ coins, that were used for illicit activities.