“The Treasury Department has imposed sanctions on Tornado Cash, a service allowing users to mix Ethereum coins, prohibiting American users from utilizing it.”
Irrespective of whether you are a novice or a pro in the world of crypto, you must have come across the term “coin mixer” or Tornado Cash, especially if you follow crypto hacks and exploits.
This blog will explain why they are used, how they work, their types, whether they are legal or not, and other crypto mixing services available today.
So, let’s get started with the blog.
What is a Crypto/Coin Mixer?
We already know that Bitcoin, Ethereum, and mostly all other public blockchains are transparent, in contrast to conventional centralized financial systems.
This transparency comes from the blockchain’s fundamental characteristic of recording all cryptocurrency transactions on a distributed public blockchain ledger, which means that anyone can access these records anywhere.
And getting information about a transaction by inputting a public address in a block explorer is not a big deal.
Why do people use coin mixers?
These are the two primary reasons why people rely on crypto mixers.
- Financial privacy
Several users require a lot of privacy. Financial privacy is paramount, especially for users confined under oppressive regimes or those who do not wish their identities to be revealed and want to make legal transactions anonymously. There are also users who opt for mixers out of preference.
- Money laundering
Did you know that a large percentage of coin mixer users are cybercriminals?
So, cybercriminals use coin mixers to obscure the connection between the crypto wallets that they use to extract illicit profits and to transfer their funds to crypto-to-fiat exchanges.
This way, no anti-money laundering alerts are triggered.
It has been found that in the year 2022, a coin mixer had been used to launder roughly 10% of all cryptocurrency held by illegal organizations.
How do coin mixers work?
The coin mixers take your cryptocurrency, mix it with a huge pile of other types of cryptocurrency, and finally send you smaller portions of cryptocurrency to an address you have chosen. It is the total amount that you’ve put in minus 1-3%. The amount subtracted from the total amount is the coin-mixing company’s profit.
They collect, pool, and pseudo-randomly shuffle cryptocurrencies that users deposit.
This is how a coin mixer works:
You must send your crypto to a coin mixing company to use a coin mixer. There are a vast number of such companies in the market today. So, you need to be cautious while sending digital assets and ensure that the firm you’ve chosen is reputable. Otherwise, you can be easily robbed of your funds.
Are coin mixers legal?
The jurisdiction you reside in decides whether using coin-mixing services is legal. According to former US Assistant Attorney General Brian Benczkowski, using mixers to disguise crypto transactions is illegal.
The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) imposed sanctions on Tornado Cash, a crypto-mixer established in 2019. The sanctions were implemented on August 8, 2022, due to the platform’s involvement in multiple money-laundering activities amounting to $7 billion.
In the USA, under the Bank Secrecy Act (BSA), the Financial Crimes Enforcement Network (FinCEN) classifies mixers as money transmitters, mandating registration and adherence to specific requirements.
However, none of the Bitcoin or Ethereum mixers are currently known to follow these rules.
Due to their extensive usage in numerous significant hacks, coin mixers have actually earned themselves a bad reputation which has overshadowed their other potential applications.
List of Popular Cryptocurrency Mixers
- Bitcoin Blender
- Mixer Tumbler
Major Hacks Involving Coin Mixers
- Blender.io, the first Bitcoin mixer ever sanctioned by the OFAC, was allegedly utilized by North Korean state-sponsored hackers known as the Lazarus Group. The hackers targeted the online game Axie Infinity in March 2022, resulting in losses of approximately $620 million. The OFAC stated that Blender.io was involved in processing around $20.5 million of the illicit funds.
- Helix, a Bitcoin mixer operating on the darknet, became the first mixer to face penalties from FinCEN in October 2020 for violating anti-money laundering laws. Larry Dean Harmon, the founder of Helix, was ordered to pay a $60 million civil penalty and pleaded guilty to one count of conspiracy to launder monetary instruments. Helix reportedly processed 354,468 BTC between July 2014 and its shutdown in December 2017.
- Bitcoin Fog, another Bitcoin mixer, earned the label of the “longest-running Bitcoin money-laundering service on the darknet” from the Department of Justice. In April 2021, Roman Sterlingov, a dual Russian-Swedish national, was arrested for his alleged involvement in laundering $336 million in Bitcoin since the service’s launch in 2011.
- Tornado Cash, an Ethereum mixer, was implicated in laundering over $96 million in malicious funds obtained from the June 2022 attack on Harmony’s Horizon bridge. The U.S. Treasury Department also claimed that Tornado Cash was involved in laundering at least $7.8 million from a hack targeting the cross-chain bridge Nomad. Additionally, following the hacking incident at the Singapore-based cryptocurrency exchange Crypto.com in January, on-chain data from PeckShield indicated that 4,600 ETH in stolen funds were laundered through Tornado Cash.
Types of Coin Mixers
Cryptocurrency mixing services can be classified into two broad categories, which are as follows:
1. Custodial coin mixers
Custodial coin mixers or centralized coin mixers emerged in early 2011. They allow users to mix their cryptocurrencies by pooling them together with other users’ funds. These mixers typically operate as centralized platforms where users deposit their coins into a shared pool. The mixer then redistributes the coins, making it difficult to trace their origin.
In a custodial coin mixer, users entrust their funds to the platform, which manages the mixing process on their behalf. The mixing service handles the mixing algorithm, ensuring that the original source of the coins is obscured. This type of mixer is often used to enhance privacy and increase the fungibility of cryptocurrencies by breaking the transaction history.
However, custodial coin mixers also introduce a level of trust, as users must rely on the mixer to faithfully execute the mixing process and protect their funds. If the mixer is compromised or malicious, there is a risk of theft or loss of funds. As a result, it is essential to choose reputable and trustworthy custodial mixers if opting to use such services.
2. Non-custodial coin mixers
In a non-custodial coin mixer, users retain control of their funds throughout the mixing process. Instead of depositing funds into a shared pool, non-custodial mixers utilize smart contracts or cryptographic protocols to enable the mixing of coins directly between users.
These mixers typically work by utilizing techniques such as coin swapping, zero-knowledge proofs, or ring signatures to obfuscate the transaction history and unlink the original source of the coins. By combining the coins of multiple users in a way that is difficult to trace, non-custodial mixers aim to enhance privacy and fungibility.
Since non-custodial coin mixers do not require users to trust a central authority, they offer a higher degree of security and privacy compared to custodial mixers. Users retain control of their private keys and can participate in the mixing process without relying on a third party. However, it is important to note that the effectiveness and security of non-custodial mixers depend on the underlying cryptographic protocols and the implementation of the specific mixer being used.
3. Coin Joins
They are built into private wallets and combine the users’ coins with the currencies of other users in a single transaction. It is a non-custodial coin mixer that does not hold the user’s funds.
4. Smart contract mixers
These are non-custodial coin mixers that only combine the user’s funds in one transaction. In these mixers, users send their funds to the mixer and, in return, receive a cryptographic note. They send this cryptographic note back to withdraw funds to a new address.
These mixers work with service providers called relayers. The purpose of relayers is to enable users to withdraw their cryptos to new addresses without any transaction history or connection to other services.
Like several other aspects of cryptocurrencies and this volatile industry, the process of coin mixing has both sides. Some people think it is a great invention that has contributed in making cryptographic transactions more secure. In contrast, others believe that this process has just glorified the process of money laundering that hackers have taken advantage of.
However, even though criminals take advantage of coin mixing, this process is considered morally neutral. After all, it depends on the user’s actions to decide whether or not something immoral has happened.
Coin mixing is expected to be widely practised as long as it is still legal in many parts of the world. It is also likely that increasingly sophisticated technology will be released more efficiently by combining currencies.