According to Chainalysis, a reputable blockchain analytics firm, stolen funds only account for 8.1% of the mixed cryptocurrencies.
Since the first created Bitcoin by Satoshi Nakamoto in 2009, it has been suggested that criminals and bad actors have used the booming cryptocurrency market to launder over $2.5 billion through Bitcoin and other prominent cryptocurrencies. Contrary to popular belief, laundered Bitcoin has been made on both regulated and unregulated crypto exchanges, through bitcoin mixing services. Although mixers are created for benevolent purposes, in particular, to protect the identity and anonymity of users dealing with Bitcoin. However, with the likes of banks and payment gateways like Paypal and Amazon gift cards, bad actors have discovered mixers as a good process in concealing their money laundering operations.
The mixing process works by automatically redistributing Bitcoin across multiple transactions/wallets assigned by the user, sending to the destination addresses at randomized intervals that made these transactions virtually untraceable. Coupled with Tor browsers and VPN, users including bad actors will be able to leave no traces for the authorities to investigate on their operations. Therefore, in the legal standpoint, using mixers is not illegal because there is no law that explicitly prohibits them. In addition to it, bitcoins sent using these processes cannot be considered illegal in the absence of specific evidence in this regard.
An Unfortunate Case of Larry Harmon
As mentioned earlier, users of bitcoin have long considered mixing as a way to ensure anonymity when transacting in Bitcoin, which is a pseudonymous cryptocurrency. While the revolutionary blockchain technology allows financial transactions to be verifiable and immutable, it has become a well-known fact that anyone with a particular bitcoin address will be able to see the full transaction record of the address. Due to this fact, a growing number of people dealing with the most liquid cryptocurrency - Bitcoin, are concerned that their entire financial history will be advertised and made available on the blockchain to anyone that has their Bitcoin addresses.
According to the Financial Crimes Enforcement Network (FinCEN), although Bitcoin mixers are sometimes linked to obfuscating the source of millions of dollars in illicit proceeds, they are officially classified as money transmitters. As such, they are required to register with FinCEN for an operating license on a state-by-state basis. So, when do Bitcoin mixers constitute money laundering? Some people have brought forward a case that may shed some light, where the grounds for a recent federal indictment against one software developer and mixer operators may hold the answer to the legitimacy of mixers.
On 3rd February 2020, a lawsuit involving a 36-year-old Ohio-based software developer, Larry Harmon, was arrested with a count of “money laundering conspiracy” charge involving his mixer software and the “unlicensed” money transmitting business operation without the approval of FinCEN. According to federal prosecutors, Harmon has operated his software called Helix from 2014 to 2017. But interestingly enough, Helix was not meant to be just a Bitcoin mixer, it was linked to another of his business, Grams, a search engine for Tor-based darknet markets. Prosecutors alleged that the sole purpose of Helix was to obfuscate criminal activities from law enforcement on the darknet. They further iterated that Helix had moved over 350,000 Bitcoin (BTC) on behalf of his clients, with the largest volume coming from Grams.
Meanwhile his wife, Margo Harmon, had accused the authorities of having seized all of Larry’s crypto wallets and posted forfeiture notices on their home.
Implications for other mixers
The legal action imposed by the authorities may make sense to some, however there is a growing concern among users of Bitcoins that this indictment may impact other bitcoin mixers, which many have relied on for non-illegal reasons, such as for financial privacy purposes. Moving forward, it is uncertain if Bitcoin mixers could be deemed as an illegal tool for money laundering. Software developers of mixing softwares are also concerned if they might also be held responsible for the tools that they have created, which mainly started for legitimate purposes for users - privacy.
Ex-lead maintainer for Monero, Riccardo Spagni, also known by the alias "Fluffypony" dismiss their concerns as a “kind of a silly idea”. In his tweet, he mentioned Larry’s case as not just an innocent case of mixing software development, but that he hosted the service and profited from it. Developing a privacy-focused software solution is not a problem, and pointed out that other privacy-oriented softwares such as Tor Browsers, Telegram and Whatsapp have also been misused for criminal activities.
Therefore, existing bitcoin mixers like MyCryptoMixer that are created as a form of privacy assurance for users of ordinary users of Bitcoin, should not worry about any implication from an isolated case of Larry’s. In May 2018, William Knottenbelt, researcher at Imperial College London, stated in an interview by MIT Tech Review that mixers (or tumblers) are not necessarily a sign of criminal activity, since the majority of the people using mixers do it for privacy reasons. He added that in the case of illegal transaction activities involving cryptocurrencies, there are better ways to cover the tracks such as using privacy coins like Monero and ZCash, as they reveal a lot less about the transactions recorded on their blockchains.
Chainalysis, a reputable blockchain analytics and forensic firm, has revealed a statistic that stolen funds only account for 8.1% of the mixed cryptocurrencies. Furthermore, as much as 40% of all cryptocurrency transactions on mixers originate from crypto exchanges that require strict KYC/AML compliance, while only 2.7% is sent from darknet markets. That is not to mean that transactions from exchanges were not used for illicit activities in the past, since bad actors can virtually utilise many methods to fulfill their money laundering purpose, making money laundering one of the hardest crimes to prove in our hyperconnected world today.
The truth about mixers
There is a myth, brought about by regulators, surrounding the Bitcoin mixer that the main purpose is to hide traces of illegal transactions and prevent tracking the real owner of the cryptocurrency. This misconception has been further rolled over to many people, making them believe that since they are not performing any illegal financial activities, there is no need to use mixers.
However, as mentioned in earlier paragraphs, as cryptocurrency adoption increases, more people will convert their traditional financial assets into cryptocurrencies. Unfortunately, most of the popular cryptocurrencies such as Bitcoin, Litecoin, XRP and Ethereum have blockchains that enable easy access to transaction data of every address. For example, you are sending or receiving Bitcoin from someone. In order to complete the transaction, the other party will need to have your bitcoin address. By revealing your address, you are basically giving the rights to the other party full access to your transaction data on the blockchain, since it is easily accessible through blockchain explorer platforms.
In comparison, you may be susceptible to kidnap and other misdeeds if anyone that has known your bank account number will be able to identify your entire transaction history and balance in your bank account. Likewise, you will likely hope to have your online purchases discreet as it may involve very intimate information that third parties do not need to know. This is the main reason that laws around the world protect the integrity of personal data and the privacy of financial information. Cryptocurrency users should get to enjoy sufficient protection to their crypto finances and safety, just as how they are protected with their banking and online purchases information.
Mixing is still safe after all
It was certainly unfortunate for Larry’s case as his software was directly involved in the illegal darknet market activities, making him a no-brainer target for prosecution. Fortunately, the “illegality” of making your cryptocurrency transaction untraceable and anonymous is not at all as scary as regulators are trying to suggest. In reality, illegal activities can be performed on any platforms. As the saying goes, ‘if there's a will, there’s a way’. Bad actors can deploy numerous methods that can even include exchanges, as they can simply trade the bitcoin multiple times across different pairings and swapping them for different cryptocurrencies (a.k.a. altcoins) instantly, switching between different wallet addresses. After which, these transactions will likely end up in countries with extremely lax KYC/AML compliances. Therefore, it is worth mentioning that there are less illegal uses of mixing services, as proven in statistics provided by Chainalysis.