Are cryptocurrency mixers inherently evil or are there actually good use cases for them?
By Eric Johansson
The anger started to rip through the cryptocurrency community as soon as the US Treasury sanctioned mixer Tornado Cash. Bitcoin bros were furious. Raging redditors filled subreddits with laments about the sanctions. Congressmen known for backing the industry sent open letters to Treasury secretary Janet Yellen, urging her to explain the ban. The community equated the ban to an assault on freedom of speech and innovation that went against the decentralised vision of the entire technology.
The protests grew even more vocal after Dutch financial crime authority FIOD arrested blockchain developer Alexey Pertsev on August 10, two days after the initial US sanctions were imposed. He was arrested on suspicion of having been involved with the blacklisted tumbler. More than 50 protesters gathered in Amsterdam on August 20 to protest the arrest.
The Treasury, on the other hand, said it had simply taken action against a money laundering tool for cybercriminals. No matter what its motivations were, the result of the sanctions are that US users have been cut off from Tornado Cash’s services.
The Treasury had previously blacklisted rival mixer Blender.io in May. The regulator has hinted that further crypto crackdowns may be on the way.
“[The] Treasury will continue to aggressively pursue actions against mixers that launder virtual currency for criminals and those who assist them,” said Brian E. Nelson, under secretary of the Treasury for Terrorism and Financial Intelligence, when the ban was imposed.
For an industry already battered by the ongoing crypto crash, the sanctions against Tornado Cash is seen as another nail in the coffin for the Wild West of the cryptocurrency industry. But why are people so upset? Why do regulators believe that cryptocurrency mixers are so bad? To understand that, we must first explain what cryptocurrency mixers are.
The US Treasury’s Office of Foreign Assets Control (OFAC) claims that cybercriminals have used Tornado Cash to launder north of $7bn since the protocol was launched in 2019. That figure includes $455m stolen by a group of North Korean hackers. So let’s unbox that accusation in order to understand what these tumblers do.
Criminals launch cyberattacks every day. Those attacks often mean that they install malicious code. The malware usually has one out of two goals: it either cuts off victims from accessing their own systems, or it gives the hackers access to private data, which the cybercriminals can then threaten to spread online. In both cases, the hackers provide the victims with the ability to pay a ransom. If the ransom is paid, the victim reclaims access to their systems and the digital thugs promise to not disseminate the confidential data.
Almost without fail, the blackmailers request the ransom to be paid in cryptocurrencies like bitcoin or ether. The reason for this is that digital dosh gives them a layer of anonymity, making it more difficult for law enforcement agencies to track the culprits. However, that doesn’t meant it is impossible to follow their path across the internet.
“[Anyone,] including law enforcement, can easily follow the money because all transactions are tracked to each wallet by way of the public key,” Roger Grimes, data-driven defense evangelist at KnowBe4, tells Verdict. “So, when someone, including a criminal, receives cryptocurrency, transfers it, or withdraws it, the cops might not know exactly who it is, but they can [follow] the money.”
That was the case in 2020 when the FBI successfully recovered $2.3m in bitcoin that was paid in ransom to the cybercriminals behind the Colonial Pipeline hack. The cyberattack had crippled the biggest US fuel pipeline for five days. Colonial Pipeline had paid a $4.4m ransom.
Ransomware gangs obviously don’t want to be separated from their ill-gotten gains. That’s where cryptocurrency mixers like Tornado Cash and Blender.io come in, if the Treasury is to be believed. Cryptocurrency mixers allow users to blend their virtual currencies. Once mixed, it’s much trickier to track the origins and the further journey of any transaction put into a tumbler.
“The easiest way to imagine a mixer is if you gathered 100 people in a room and asked everyone to put a £10 note into a pile,” Yoni Greene, head of intelligence at WRS ETL, tells Verdict. “The pile would then be mixed up, you would take a £10 note back out, and essentially it would be clean. This is because the chain of money has become broken.”
Even though cryptocurrency mixers can be used to launder money, crypto evangelists have maintained that this view would be slightly limited.
“If cybercriminals are looking to launder money and cover their tracks, then a mixer would be a good way to do so,” Katharine Wooller managing director at cryptocurrency wealth platform Dacxi, tells Verdict. “However, one could also take the view that the general public should also have a right to financial privacy.
“Ask this question – is there any difference between holding or hiding your money in a crypto mixer, or in a Swiss or Cayman Island bank account – what checks are being done and by whom?”
Tumblers could arguably give people living in oppressive regimes the financial privacy and the ability to make legal transactions anonymously.
Cryptocurrency mixers could also provide a way for people living outside of non-democratic countries to donate to causes within those borders. For instance, many people have rushed to donate money to help Ukraine fight back against Russia’s invasion. Many did so by using cryptocurrencies.
However, that could also mean that Russia could find out who had donated to Ukraine by pretty much using the same trails that FBI used to recover the ransom paid in the Colonial Pipeline attack. To avoid Vladimir Putin’s regime from tracking the donations, a lot of people used cryptocurrency mixers to hide their tracks.
One of the ones who did so was Vitalik Buterin. The Ethereum foudner has said he used Tornado Cash to donate to Ukraine.
I'll out myself as someone who has used TC to donate to this exact cause.
The news about the Treasury’s sanctions against Tornado Cash comes as regulators around the world increasingly put the screws on the crypto industry.
In the US, the Securities and Exchange Commission’s (SEC) semi-new chair Gary Gensler has publicly urged Washington D.C. to give him more power to better police the industry.
In May this year, the SEC doubled the headcount of the people charged in policing the crypto market.
This summer, the market watchdog launched an investigation against Coinbase. It accused the exchange of having enabled users to trade in digital assets that should be seen as securities. By defining some cryptocurrencies as securities, it would enable the SEC to regulate the crypto market in new ways.
Across the pond, the European Council reached an agreement in June to introduce new regulations to police the trade of cryptocurrencies and similar digital assets. The markets in crypto-assets proposals, or MiCA, aim to protect investors and provide financial stability.
Countries like China, South Korea, India and Australia either have or are mulling over tougher rules for digital assets.
The Financial Stability Board, an international body that monitors and makes recommendations about the global financial system, urged lawmakers in July to introduce international regulations in order to supervise the crypto market.
“Regulators are certainly beginning to catch up to the fact that crypto is beginning to play a role in shaping global financial systems and flows of capital in a significant way, and that it’s not going anywhere,” Alan Vey, chairman and founder of blockchain protocol Aventus, tells Verdict.
While parts of the crypto community resent any perceived challenge to the laissez faire state of the industry, others have welcomed these moves. This second camp believes tougher rules are necessary in order to clean up digital assets’ reputation and to, eventually, bring it into the mainstream.
“However, given the pace at which blockchain evolves — with new developments on an hourly basis — regulators will need to continue working to adapt as the crypto market morphs and changes, which will require close interaction with market participants to ensure that the regulators’ fingers are on the pulse,” Vey concludes.
GlobalData is the parent company of Verdict and its sister publications.
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