What legitimate use cases are there for using a mixer?
With $1.5billion of illicit crypto laundered through Tornado Cash, and $462.3m of that being linked to sanctioned individuals, it’s no wonder that regulators view mixers as a hotspot of criminal activity. This view is compounded not only by Tornado Cash’s links to crime but also by previous enforcement actions and illicit use of other crypto mixing services:
- In May 2019 Dutch and Luxembourg authorities plus Europol shut down Bestmixer.io which had reportedly processed over $200m worth of bitcoin, litecoin and bitcoin cash. Their investigations found that there were illicit sources and destinations for the funds which passed through the service.
- After the great twitter hack of July 2020, roughly half the stolen funds were sent to ChipMixer in an attempt to hide the flow of funds. This wasn’t the first time the service was a destination of choice for stolen funds with the 4,836 BTC from the Binance 2019 hack moving through it.
- In October 2020 the operator of bitcoin mixers Helix and Coin Ninja was hit with a $60m fine by FinCEN for opening an unregistered money services business. The prosecutor called out the heightened risk that the $300m which had passed through the services could be connected to illicit activity.
- In April 2021 the operator of Bitcoin Fog, another well known mixer was arrested and charged by the Department of Justice. Of the $336m which was processed through Bitcoin Fog, it was reported that at least $78m was linked to dark web markets such as Silk Road, Agora, and AlphaBay.
So with all of this evidence that mixers are used for crime, should they just be banned?
In my view — no!
Banning technology because it has the capacity to be used by criminals is a dangerous step. We might not have vans (since they can be used in a getaway from a bank heist), or kitchen knives (since they are used in stabbings), or Whatsapp (as it’s used by terrorists to communicate) and we might not have cash since that’s still the number one choice for criminals to move value in. I suspect there will be some people thinking “But Tara, these are all used predominantly for good rather than evil so you can’t compare them to a mixer!” Which is a fair point, however current figures put Tornado’s illicit use at $1.5billion but the total which has moved through is $7.6billion. So whilst 20% is almost certainly a lower bound and a significant figure, it’s still far short of showing that the majority of activity is illicit.
There’s also legitimate use cases for using a mixer which often get forgotten in the more exciting headlines of bad actors funnelling their ill gotten gains through these services.
Below I’ll break down some of the legitimate use cases I’ve seen but I’m sure there are plenty more:
Donating to charity
Whilst many see a charity donation as something to be proud of and tell the world about, others don’t wish to make it known what good gestures they are making. We have the right to donate anonymously in fiat money (e.g they don’t plaster your name on their website or put it in a brick if you don’t want them to) and so the same financial privacy is expected and desired in the crypto space.
This could be because you don’t want your friends and family to know what charities you donate to — “you’re giving money to pandas but not orphaned children!?”, or because it’s a sensitive topic e.g a charity which personally affects you/your family members, or it could be because there are safety implications of donating to the charity e.g a Russian citizen donating to UkraineDAO. This is especially impactful for people within the public eye where they could alienate their following, or be put at risk if the public knew where they were gifting their funds.
In February 2022 a man from Mumbai was kidnapped and held to a $40m ransom as he was a well known cryptocurrency trader. In November 2021 seven people were arrested in Hong Kong in connection with a week-long kidnapping, which saw a cryptocurrency trader held and brutally beaten by gang members demanding a ransom. In October 2021 a U.K. court sentenced a 22-year-old man to four years in prison for kidnapping a 14-year-old after the minor posted on social media about his successes trading bitcoin, and in 2019 12 individuals were arrested after a US businessman was kidnapped in Costa Rica in an attempt to steal his bitcoin fortune.
People knowing how much crypto you own can be dangerous.
This is the same in the fiat world as in crypto, however your bank doesn’t force you to reveal your balance.
Many crypto citizens therefore use mixing services to hide how they spend their funds in order to ensure their riches are not visible to any nefarious actors who may wish to cause them harm. This is complementary to them having multiple accounts, afterall Vitalik holds his funds in more accounts than just vitalik.eth, however if he’s moving funds from this heavily observed account to ‘top up’ another of his then a mixing service can help break the link.
One of the Bankless team recently highlighted that they had previously used a mixing service to trade outside of the view of their hundreds of thousands of followers. This was because they didn’t want their actions to be copied and construed as investment advice — especially if things went south. As such they could move funds from their known accounts through a mixer and then make the trades without the watchful eyes.
Being Paid in Crypto
Most of us receive our salaries in fiat, however there are those who get all or part of their salary in crypto. If a business pays out to each employee directly then it’s possible to check on chain and figure out who’s paid what e.g Address X got 4ETH this month and since I can see that they then bought that NFT and I know Sharon put that as her twitter profile, that means she’s being paid more than me!
Companies can use mixers to send salaries to their employees and obscure who’s being paid what, which offers the same level of financial privacy we get in fiat — unless you’re a Swedish company and have all your salary information open (#progressive).
Using Your NFT as a Verified Profile Picture
Setting your favourite expensive jpeg as a twitter profile can be a mark of ‘cool’ however it also reveals a lot about you! After all, in a few clicks I can find that image out of the likely 10,000 in the collection, go to etherscan to filter by the tokenID and boom I know what your Ethereum account is.
I can now follow all your web3 activity.
Unless you’re using a mixer when you move funds into and out from that account. Then I still know what NFTs you have but I can’t see how you’re spending your ERC20s or your ether. I also can’t figure out if you’re sending funds onto another account which is your main one (Re:balance hiding noted above) so this can help protect against those risks too.
A DAO vote could be for an upgrade which has the community consensus or it could be a controversial vote. You may be making a decision which you feel is in the best interests of yourself, the project or the ecosystem as a whole but not want everyone to know what you’re voting for. In that case, using a mixer after you’ve bought the governance tokens and voting from an unconnected account to any known accounts can help to keep your voting preference private. This right to privacy mirrors the real world where our vote towards the local mayor, an MP or in an industry ballot is kept secret.
Transacting with Journalists, Dissidents and the Oppressed
In many countries speaking out against your government can be a death sentence. So too can funding those who oppose those in power. Crypto helps provide a route outside the traditional banking system to pay journalists in authoritarian regimes to get their truth out, or to fund initiatives supporting women in countries which oppress them or to pay for medical bills of dissidents. However as the industry now knows, most cryptocurrencies can be easily traced and so unless you’re going to be able to organise the support in a privacy coin, many must use easy to obtain assets like bitcoin and ether. As such mixers can be used to help obscure the source and destination of funds to ensure the money can get safely in the hands of the recipient without them or the sender being discovered by the authoritarian or dangerous power.
With the above examples of legitimate use cases for mixers I’m not intending to say that all mixing activity is legitimate. It certainly isn’t, and there’s well documented use of these services by some of the most dangerous actors and nation states on the planet. However what I do want to highlight is that by banning mixing services outright, we prevent this legitimate activity from happening. Whilst some may see this as a necessary consequence of stopping bad actors, I’d like to think that as a community we can work out more creative ways to stop these bad actors whilst still allowing for financial privacy. I won’t pretend to have a fully thought through solution to this but what’s clear to me is that mixers are one step along a journey for criminals and the end destination is almost always needing to swap their crypto for fiat. As such I think we should be doubling down our regulation, responsibility and mitigations on the gatekeepers of fiat — the centralised exchanges — to ensure their KYC and AML procedures stop bad actors joining their platforms and moving in and out illicit funds.
This is supported by some great research from Chainalysis who showed that a notable portion of funds moving into mixers was from centralised exchanges:
Sadly there are no figures for the destination from mixers however I would assume that centralised services also feature highly.
Going forward, the legality of mixing services appears to be in questions and with the recent OFAC sanction on Tornado cash, anyone who’s ever used a mixer now has the Sword of Damocles over them. However I think it’s important that we don’t forget these legitimate use cases for mixers and the overarching need and right to financial privacy which we’re afforded in the real world and should therefore see transition over to web3.
[All views expressed herein are my own and do not represent that of any employers whether past, present or future]
Originally published at https://www.linkedin.com.