We examine the dual-edged sword of privacy in crypto, looking into how anonymity tools like mixers and privacy coins have impacted mass adoption amidst rising financial crimes.
On Jan. 3, 2009, the public got the chance to experience what anonymity in finance actually meant—something we know today as cryptocurrency.
The inventors of crypto saw it as a way to save economies from crashing due to the shortcomings of fiat currencies. Fast forward to the present, and financial watchdogs are battling the use of virtual currencies due to the tendency of fraudsters to use them to make away with billions of dollars every year.
Certainly, there’s a notion that money launderers like to use crypto to steal people’s funds because it’s supposedly untraceable. Whether it’s through crypto mixers or privacy coins, the sentiment has tarnished the image of crypto, but to what extent? Let’s find out.
Crypto mixers and privacy coins: anonymizing transactions
Before we look at how much crypto mixers and privacy coins have impacted the virtual currency landscape, let’s get one thing straight: cryptocurrency is more pseudonymous than it is anonymous. In lay language, it means that the digital ledgers behind them do not hide the fact that a transaction has been made, they hide who exactly made it.
So, in essence, crypto is not entirely untraceable. And that is why some developers within the crypto community decided to create a way to completely anonymize transactions, and two ways to do that were through crypto mixers and privacy coins.
Crypto mixers, or tumblers, are platforms that take potentially associated funds and pool them with others to make it difficult to establish the source of certain coins. On the other hand, privacy coins are cryptocurrencies that employ certain sophisticated features of cryptography, like stealth addresses, to enhance the obscurity of their users.
Privacy coins and crypto mixers’ purpose is probably the reason why financial fraudsters use them to hide where the money is going.
Chainalysis released a report earlier this year, showing there was about $24.2 billion worth of crypto received by illicit addresses in the financial year 2023.
Taking a deeper look into this, we can unpack events that support what scammers think when going the crypto way:
Tornado Cash
According to the European Union’s (EU) Innovation Hub for Internal Security, hackers and scammers often launder stolen funds using crypto mixing services like Tornado Cash to obscure traceability and evade detection. Per the EU hub, the services have massively slowed down the efforts of regulators to create grounds for crypto mass adoption.
Looking at the case presented against the co-founder of Tornado Cash, maybe the EU is pointing fingers in the right direction. Recently, identified by blockchain analytics entity Arkham Intelligence, Orbit Chain saw an exploiter move about $47.7 million to Tornado Cash. The funds are a portion of $82 million stolen from the network back in January.
We can only speculate what the hacker wants to do with the funds shifted to the crypto mixers. Sadly, such incidents have fueled the fate of Tornado Cash co-founder Alexey Pertsev, who was sentenced to sixty-four months for money laundering in May by a Dutch court.
Crypto mixers such as Tornado Cash were meant to increase the anonymity factor of using virtual currencies. However, money launderers and scammers found a way to “corrupt” the service, forcing some open source software makers to draw back on creating them or improving their functionalities for fear of prosecution.
Although the crypto community is rallying behind the Tornado Cash co-founder, with privacy advocate Chris Blec emphasizing the need for new legislation to safeguard user privacy in emerging blockchain technologies, the damage may have already been done.
Privacy coin Monero, money laundering, and CSAM watch
Privacy coins have their merits and liabilities, but overall, they present a development in crypto that enthusiasts want to see move forward. These digital assets, for example, Monero (XMR), echo the very things cryptocurrency users want in their entirety: confidentiality and discretion.
Unfortunately for the community, those two entities are exactly the music money launderers, hackers, and scammers want to hear. So, they take advantage of the characteristics and perks of using privacy coins.
CSAM cases
In Chainalysis’ recent crypto crime report, Monero was said to have been widely used by CSAM (child sexual abuse material) vendors in the financial year 2023. Per the crypto statistics firm, Monero plays a more significant role in enabling CSAM vendors to launder their on-chain earnings rather than solely obscuring the purchases themselves.
Chainalysis shared a snapshot of a CSAM-affiliated dark web forum asking for donations in Monero.
They believe the vendors are asking for Monero because it leverages instant exchanges. Instant exchangers operate without holding users’ funds and generally do not support crypto-to-fiat conversions. However, unlike decentralized finance protocols, they are centrally managed by a single organization.
Furthermore, these exchanges leverage liquidity from multiple exchanges to offer competitive prices and facilitate direct crypto-to-crypto exchanges between users’ wallets, often making on-chain transactions challenging to trace. Combined with lax know-your-customer (KYC) requirements, these platforms can be advantageous for obscuring the origin of cryptocurrency transactions.
Scamming gamers
Back in 2021, the gaming community faced hackers who snatched away their fortunes by installing malware on very popular titles. The malware, dubbed crackanosh, was used by cybercriminals to draw the powers of computers globally and use them in mining cryptocurrency.
Since gaming rigs are usually quite powerful by design, their processing powers became a good offer that the hackers couldn’t pass, and they made over $2 million worth of Monero from the illicit activity.
Why did they choose to mine Monero? Well, it could be because it’s easier to mine than cryptos like Bitcoin. However, maybe it is because with Monero, they could somewhat easily exchange the digital currencies to fiat and go about their happily ever afters.
The tales could make us feel like Monero does more harm than good, and that is absolutely not the case. Privacy coins were developed to improve the functionality and use cases of the crypto industry. But scammers and money launderers have tarnished their reputations and brought greater scrutiny from financial and regulatory watchdogs.
Improving crypto’s reputation: what we can do
Recently, blockchain data analysis company Bitrace CEO Isabel SHI gave her insights on crypto crime at an event held at the Hong Kong Polytechnic University.
Isabel started by breaking down the reasons behind the widespread use of cryptocurrencies in criminal activities. She emphasized that the anonymity, decentralization, and ease of cross-border transfers make cryptocurrencies inherently suitable for illegal purposes.
The CEO pointed out that on-chain addresses do not necessitate KYC verification, thereby masking transactions from real-world identities. She also noted that the decentralized nature of cryptocurrencies ensures that only those with private keys can access their assets.
Moreover, Isabel highlighted that the permissionless and borderless nature of cryptocurrencies enables transactions to be conducted globally at any time, making them particularly attractive to criminals.
From Bitrace and Isabel’s insight, we can see that fraudulent tendencies arise from loopholes present in blockchain ecosystems. And to stop them, we might need to employ certain parameters that will not only eliminate the problem of attracting money launderers and scammers but also provide grounds for crypto mixers and privacy coins to thrive without a bad name.
Here is what crypto mixers and privacy coin developers can do to stop money launderers, hackers, and scammers from using the services for illicit activities and spearhead crypto mass adoption:
Crypto mixers
- Developers should implement strict KYC verification processes to authenticate users and deter anonymous transactions.
- Companies can collaborate with regulatory authorities and comply with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations.
- Integrating blockchain analytics tools can help crypto mixers and the community monitor transactions for suspicious patterns and intervene promptly.
- Since not many users know how to use tumblers responsibly, companies should educate them on the consequences of illicit activities to promote ethical behavior.
Privacy coins
- Developers can conduct regular audits and publicly disclose development activities to build trust with regulators and stakeholders.
- Collaborating with law enforcement to share information on suspicious transactions and combat misuse effectively will bolster regulation.
- Implementing optional auditability or compliance features to cater to users prioritizing regulatory compliance.
- Educating the community about the benefits of privacy while emphasizing responsible usage will discourage illicit activities.
Privacy slows down adoption, but it’s still important
Though the use of crypto mixers and privacy coins has been an issue in achieving mass adoption for cryptocurrencies, their contribution to improving financial privacy cannot be ignored. While offering a desirable feature to some of their users, the anonymity issues have been associated with regulatory compliance and unlawful activities.
Nevertheless, the necessary actions should be taken by developers, who should increase controls and cooperate with the bodies that regulate such areas. However, as the world changes and new technologies emerge, achieving the critical cryptocurrency adoption rate, even with such protective elements, is quite feasible.
By recognizing that privacy and regulation can coexist, the outlook for cryptocurrencies can remain positive for both regulators and crypto users.
