Cryptocurrency Mixers Pt. 1: From Privacy Tool to Billion-Dollar Laundering Machine

In just the first half of 2020, over $8 Billion in transaction volume passed through cryptocurrency mixers. Major exchanges such as Binance have become increasingly wary of any affiliation with mixer transactions. But what exactly is a cryptocurrency mixer? What does it do? How does it work?

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Figure 1: All of the world’s leading exchanges experience significant exposure to mixer inflow and outflow

CoinJoin, Wasabi, Whirlpool, and more. Most have heard these names, many more have used these and other services, but taking a deeper look into their methods will help us all better understand why exactly they are so controversial.

The Fundamentals

For the most part, cryptocurrency mixers do exactly what their names would imply: they provide services that mix and shuffle cryptocurrency. For a small fee, mixers allow users to obscure the exact chain of custody of their funds and, consequently, secure their privacy.

Utilizing these services is quite simple, typically consisting of the following steps or something similar:

  1. Enter the address you’d like your shuffled coins to be sent to.
  2. Select your desired mixing time, the longer the time, the more thorough the mix.
  3. Pay a small fee (typically 2–5%)

Mixers come in both custodial and non-custodial forms, but by and large utilize the same methods. Funds are split into small chunks then shuttled through thousands of micro-transactions before eventually reconvening, potentially passing in and out of a comingled pool of other mixed funds in the process.

How It Works

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Figure 2. Noncustodial mixers like Wasabi represent likely the most common mixing tools in use today.

A typical mix like CoinJoin involves several peers collaborating to join their coins into a single transaction. Each peer inputs funds and specifies a unique address as an output, leading to a set of outputs that cannot be concretely attributed to any of the contributing peers. The concept has been around since the early days of Bitcoin, originally formalized by the great Greg Maxwell.

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Figure 3. A simplified illustration of atypical mixer transaction

Consequently, the privacy of the peers is preserved. As each output is of exactly equal value regardless of variance between inputs, no output can be directly attributed to an individual peer’s input.

Services like Wasabi facilitate this process, enabling trustless and private Schnorr blind signature Coinjoin according to the ZeroLink fungibility framework. Wasabi neither takes possession of the coins themselves nor possesses visibility into the mixing process, a fact that is central to the ongoing debate concerning mixer legality.

The Legal Status of Mixers

At the heart of nearly every major crypto-laundering attempt, any serious illicit movement of criminally-implicated funds, you will find an abundance of mixer transactions.

The 2019 PlusToken ponzi scheme, which saw over $6 Billion in ill-gotten funds pilfered from unsuspecting investors, featured over 19000 BTC forced through the Wasabi mixer before being merged and liquidated through exchanges worldwide.

Cryptocurrency mixers can be used to provide privacy for all, including criminals.

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Figure 4. An illustration of Plustoken affiliated BTC flowing through mixers to exchanges

The majority of international governing bodies take a clear stance on the legality of mixers.

In filings before the United States District Court for the District of Columbia, the U.S. Department of Justice charged that Larry Harmon, owner and operator of BTC mixer Helix, was in fact running a money-laundering and transmitting business.

In the eyes of the law, custodial mixing services are no different from professional money-laundering services.

While noncustodial mixing services like Wasabi shield themselves from similar legal action by never taking possession of mixed funds, operating purely by the intent and action of their users alone, they are nevertheless under scrutiny. By the latest definitions of FinCEN (the Financial Crimes Enforcement Network), their developers are technically exempt from legal action. However the users themselves are liable for their actions, and can be found to be in violation of the Funds Travel Rule simply by intent to conceal either sender or receiver of funds.

Reasonable Enforcement

Most mixer transactions are not performed with money laundering intent. Most acts of money laundering intent on the blockchain involve mixer transactions. These two fundamental truths form the crux of the cryptocurrency mixer debate:

Does the privacy offered by cryptocurrency mixers outweigh their role in the billion-dollar crypto-laundering epidemic?

What is more important, the privacy of the people or the pursuit of criminals?

What do you think? Let us know in the comments!

Stay tuned for Part 2!

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Written by

Blockchain data analytics firm providing security, risk, and compliance solutions.

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