What Do Centralized Exchanges Consider as Taint?

[Pmalek]

Ever since I read about Wasabi’s and zkSNACKs’ newest partnership with blockchain analysis companies, I wanted to find out more about what is considered tainted in the eyes of centralized exchanges. So, I asked them about it. Of course, I didn’t expect much, but I got even less than what I thought I would.

Nevertheless, I decided to create this thread and share the little bits of information I found out after contacting some of the best-rated exchanges (spot trading) according to CoinMarketCap.   

I pretended to be a gambler and professional poker player searching for an exchange to buy and trade coins. The message I sent to the CEXs was this one:

Hello,

I am a professional poker player and sports gambler interested in Bitcoin. Over the years, I have had a great deal of success with crypto gambling, which has earned me good profits. 

I regularly invest in new coins and tokens and would love to register an account with your exchange. However, I prefer to stay anonymous when buying and selling my coins because of my profession and activities. 

I am worried about going through KYC, but my biggest worry is that I keep hearing people talk about blockchain “taint” and “tainted” bitcoin. Apparently, some cryptocurrency exchanges block funds that originate from known crypto casinos and sportsbooks. They consider those coins “tainted” or “dirty”, so they confiscate them or freeze them, preventing the users from accessing them or using them on their platform. 

I obviously don’t want that to happen to me, that’s why I am informing you about my activities beforehand. I don’t want to go through KYC. I don’t want my Bitcoin to be considered dirty and tainted. 

What can you tell me about how you analyze Bitcoin transactions and decide whether or not they are tainted? For example, can Bitcoin originating from gambling and sports be deposited and traded on your exchange without being subjected to seizures, account limitations, etc.? Am I, as a gambler, welcome on your site?

Thanks!

And here are some of the answers I received.

#1 Binance

I contacted Binance via live chat. Their response contained nothing of substance, and the agent didn’t even try to answer my questions. He was only advertising how wonderful the exchange is and tried to speak about it and promote it the best way he could. Absolutely useless for this purpose.

#2 FTX

I reached out via email, but there was no response. I then contacted one of their Telegram moderators in their English Telegram group to hear what they had to say. There was nothing useful besides generic messages about how exchanges don’t block coins deposited from casinos and only block funds from certain flagged addresses. He couldn’t comment on anything related to taint.



#3 Coinbase   

I sent them an email and received an automated reply that they would be in touch as soon as possible. After a few hours, I got a reply saying that I should contact them from the email account associated with my Coinbase account. After that, there was no further communication with them.

#4 Kraken

They didn’t answer my questions. Instead, they said they have to verify my identity and that their compliance with KYC and AML regulations requires them to continuously fight fraud, money laundering, etc.



#5 KuCoin   

No valuable information was obtained from KuCoin either. All they said was that I could trade crypto and withdraw up to 1 BTC daily without going through KYC. No info about taint whatsoever.

#6 Huobi Global   

I got no reply to the email I sent.

#7 Gemini   

Gemini was the first exchange that said something meaningful. If the coins originate from gambling, they can’t be deposited and used on Gemini. They analyze their customers' transactions to ensure they don’t come from casinos and sportsbooks because if they do, the accounts will be closed according to their support. Attempts to “conceal” the origin is not allowed. That probably means moving them around a bit between your own addresses or maybe mixing them.



#8 Bitfinex   

The Bitfinex support rep informed me that no KYC is needed to trade on the platform. But the coins can’t be deposited from restricted territories.



#9 Gate.io   

After I sent them my mail, I was told that my inquiry was forwarded to a specialist of theirs who will answer me in due time. But unfortunately, that has still not happened.

#10 Binance.US   

Binance.US answered similarly to Gemini. I was told that transferring money from a gambling platform into a Binance.US account is prohibited.



#11 Coincheck 

Coincheck is a Japanese crypto exchange. Their answer explained that people younger than 20, older than 75, and those who don’t live in Japan can’t register on Coincheck. Additionally, they can’t comment on their regulations publicly.



#12 bitFlyer 

I didn’t receive any reply to the message I sent to this exchange.

#13 Bitstamp 

No reply from Bitstamp either after contacting their support.

#14 Bithumb 

Bithumb is for Korean traders, and I didn’t find a suitable way to contact them.

#15 OKX 

Their chat support is a bot suggesting different segments from their FAQ. Unfortunately, I Couldn’t get in touch with a real person.

#16 Crypto.com 

I spoke with their live chat support, who said that the exchange doesn’t have a policy on tainted coins. Upon asking a second time if the site will block deposits originating from gambling sites, mixers etc., I was told to wait until they receive clarification from the relevant department. A bit later, I was told that such information couldn’t be provided.



#17 Bybit 

Bybit sent a reply with some information from their TOS. It’s about them having the right to terminate, suspend, or limit exchange accounts of customers when they think it is needed. No details about how they handle taint.




Conclusion 

I wish I had more information, but sadly that’s it. Did I expect to get some detailed info on taint algorithms? No. But I was hoping I would gather some more details. At least, we found out that Binance.US and Gemini don’t allow their users to deposit coins with a gambling background.

[Despairo]

I respect your effort to create this thread.

I did research of those centralized exchanges and gambling sources problem, but I don't find any discussion except this one Bovada to Coinbase (the other discussion already old). Gambling source is one of illicit sources by Chainalysis, so if gambling is prohibited in your jurisdiction and you haven't KYC your account, your funds will be frozen and they will demand KYC.

Please note: Risky services include P2P exchanges, mixing services, high risk exchanges, and gambling sites. Illicit services include ransomware addresses, sanctioned entities, darknet markets, and addresses associated with scams and stolen funds.

Don't get me wrong, if they give full explanation of tainted coins that can lead a further investigation on client's account, they like giving away a trick how to abuse their exchange. That's why most of them didn't response to you and some only give short answer. To be honest I don't believe what does Gemini said above (they will close your account), I have been this forum for few years and most centralized services which mention they will close your account if you broke etc etc, but they will ask your KYC first, then close your account.

Some people tricking centralized exchanges by don't directly send your coins from casino, but they send it to their own wallet first, so:

Casino --> Wallet --> Exchange

If the exchanges hired poor analysis companies, I think this can be solution since they're only look from the address come from, not search more deeply. However the another solution is you shouldn't use centralized exchange to prevent of this problem.

[Pmalek]

Don't get me wrong, if they give full explanation of tainted coins that can lead a further investigation on client's account, they like giving away a trick how to abuse their exchange. That's why most of them didn't response to you and some only give short answer.

None of the support personnel were willing to give away hints in my case. Support agents are used to responding to the same questions over and over again. They don't really know what is going on in the background or how to handle complicated matters. Ask them about some specifics about their Privacy Policy or TOS, and they wont know how to handle it. There are other departments within the company that handle the real stuff, but they reveal their methods only to government agencies and law enforcement, not to regular folks who come knocking.   

[hugeblack]

I think the reason why you did not get a detailed answer is that these platforms are looking for profit, but they are forced to comply with some legal regulations, and therefore they cannot tell you frankly that they will not check the source of the money, but they will freeze it if a problem occurs.

I remember that one of the members of the forum said that one of the platforms asked him to verify the identity and told them that he could not. The response of the other party was, “Submit any papers, we cannot communicate with governments to verify their authenticity,” in other words, they are forced to ask users about identity verification. But no one is looking thoroughly unless there is a problem.

[ABCbits]

I really appreciate your effort. But it's not surprising they have relative poor transparency and customer service who're not able to answer uncommon or specific question.

Some people tricking centralized exchanges by don't directly send your coins from casino, but they send it to their own wallet first, so:

Casino --> Wallet --> Exchange

If the exchanges hired poor analysis companies, I think this can be solution since they're only look from the address come from, not search more deeply. However the another solution is you shouldn't use centralized exchange to prevent of this problem.

That might work for new or small exchange, but on other hands they could accuse you for "conceal" origin of the coin (see Gemini response).

[Potato Chips]

Gambling is actually on coinbase's list of prohibited usage for most countries so they could've just asked where you're from... support these days feels like a lottery.

For customers who reside outside the United States of America, United Kingdom, European Economic Area, Japan and Singapore:

1. Prohibited Use. You may not use your Coinbase Account to engage in the following categories of activity ("Prohibited Uses"). The specific types of use listed below are representative, but not exhaustive. If you are uncertain as to whether or not your use of Coinbase Services or the Coinbase Platform involves a Prohibited Use or have questions about how these requirements apply to you, please submit a support request at: https://help.coinbase.com.

...(E) Gambling: Lotteries; bidding fee auctions; sports forecasting or odds making; fantasy sports leagues with cash prizes; internet gaming; contests; sweepstakes; games of chance.

and take note of:

3. Conditional Use. Express written consent and approval from Coinbase must be obtained prior to using Coinbase Services for the following categories of business and/or use ("Conditional Uses"). Consent may be requested by contacting us at: https://help.coinbase.com.

...(C) Games of Skill: Games which are not defined as gambling under this Agreement or by law, but which require an entry fee and award a prize; and

[noorman0]

-snip-
Don't get me wrong, if they give full explanation of tainted coins that can lead a further investigation on client's account, they like giving away a trick how to abuse their exchange. That's why most of them didn't response to you and some only give short answer.

I think so too, and crypto.com's answer should be the final answer for a service that is still under regulation. Explaining the method of analyzing tainted coins to customers in detail is like creating their own loopholes which will eventually get them in legal trouble because many violators are circumventing the rules.

After all, the exchanges would rather freeze your account than help you avoid freezing.

[mk4]

That might work for new or small exchange, but on other hands they could accuse you for "conceal" origin of the coin (see Gemini response).

Pretty much this. Especially if the exchange is in cahoots with Chainalysis(as in the company that's the best with chain analysis as far as I know), then it's probably a very safe assumption that just doing 1 address hop before depositing to the exchange won't do the trick. Not sure if depositing to an exchange without KYC will do the trick (in the hopes of your withdrawal coming from another wallet address), but it poses an additional risk.

[Despairo]

That might work for new or small exchange, but on other hands they could accuse you for "conceal" origin of the coin (see Gemini response).

Not really, based on my friends experience and some users in this forum as regular gambler, they're fine using that method until now. Moreover some people usually directly send their coins to CEX and no faced any problem, they're using big and popular centralized exchanges e.g. Binance and Kucoin. I think these CEX didn't froze gambler funds because the legal law didn't really strict about gambling sources, perhaps in the future we will see a change from those CEX just like how Binance propose mandatory KYC.

Anyway I think "conceal" origin is really complicated since any coins that we get isn't 100% free from high illicit sources. Let's say someone is trading via P2P in this forum and all went smooth, but when you send your coins to Gemini. Gemini froze your funds and accuse your funds come from gambling, the thing is you're not a gambler and realized the guy you traded is using gambling sources. I don't know how far Gemini will track your coins to see you're conceal the origin since I believe most of coins already linked with high illicit sources.

[Pmalek]

Some people tricking centralized exchanges by don't directly send your coins from casino, but they send it to their own wallet first, so:

Casino --> Wallet --> Exchange

If the exchanges hired poor analysis companies, I think this can be solution since they're only look from the address come from, not search more deeply.

I guess it's about how you do it and how much time has passed between those transactions. Let's assume you wanted to transfer $500 worth of Bitcoin from a casino to a CEX and you want to hide the origin of the coins by sending them to one of your wallets first, there are different ways to do it.

Withdraw more than you intend to deposit to your own private wallet days/weeks before sending to the CEX. If the two transactions (from the casino to your wallet and from your wallet to the CEX) confirm in a short period of time one after the other (one block between them for example) it might be obvious that it's the same person initiating them. So it's better to wait. It also doesn't look good if the CEX can see that $500 left a casino, landed in some 3rd-party wallet, and then the same amount minus the fees was immediately transferred to the CEX.   

Anyway I think "conceal" origin is really complicated since any coins that we get isn't 100% free from high illicit sources. Let's say someone is trading via P2P in this forum and all went smooth, but when you send your coins to Gemini. Gemini froze your funds and accuse your funds come from gambling, the thing is you're not a gambler and realized the guy you traded is using gambling sources. I don't know how far Gemini will track your coins to see you're conceal the origin since I believe most of coins already linked with high illicit sources.

I think in that particular case, you would have to prove to the support that you are not the one who gambled with those coins, you just purchased them from an alleged gambler. You might be required to show proof where and how you purchased them for them to unfreeze your account or allow you to withdraw the "problematic" funds.

[ABCbits]

That might work for new or small exchange, but on other hands they could accuse you for "conceal" origin of the coin (see Gemini response).

Pretty much this. Especially if the exchange is in cahoots with Chainalysis(as in the company that's the best with chain analysis as far as I know), then it's probably a very safe assumption that just doing 1 address hop before depositing to the exchange won't do the trick. Not sure if depositing to an exchange without KYC will do the trick (in the hopes of your withdrawal coming from another wallet address), but it poses an additional risk.

Chainalysis is the most popular company, we don't know if it's best chain analysis when other company keep a low profile. But i agree 1 hop is unlikely to deceive them if they hire decent chain analysis service.

That might work for new or small exchange, but on other hands they could accuse you for "conceal" origin of the coin (see Gemini response).

Not really, based on my friends experience and some users in this forum as regular gambler, they're fine using that method until now. Moreover some people usually directly send their coins to CEX and no faced any problem, they're using big and popular centralized exchanges e.g. Binance and Kucoin. I think these CEX didn't froze gambler funds because the legal law didn't really strict about gambling sources, perhaps in the future we will see a change from those CEX just like how Binance propose mandatory KYC.

I'll keep that in mind, but the risk still exist.

[o_e_l_e_o]

Don't get me wrong, if they give full explanation of tainted coins that can lead a further investigation on client's account, they like giving away a trick how to abuse their exchange.

Further, if they tell everyone "This is how we decide what is tainted", and then later change their minds about something and decide something else is tainted, then you can guarantee they would have angry users complaining that their non-tainted coins suddenly became tainted and their accounts were locked.

No exchange will every give you a straight answer on this, partly because it is so completely arbitrary and meaningless, partly because they want to be able to change things at any time, and partly because they don't care about you and only care about their own profits.

I guess it's about how you do it and how much time has passed between those transactions.

Waiting x amount of time between transactions does nothing to fool blockchain analysis, neither does simply hopping between addresses. They can still see exactly where your coins came from in both cases. Whether or not enough time or enough hops are enough for an exchange to decide certain tainted coins are no longer tainted is anybody's guess, but given the entire thing is so arbitrary then you can't guarantee it in any way.

Don't want to be subjected to taint? Don't use centralized exchanges. Simple.

[PX-Z]

So in conclusion, these exchanges that doesn't have any clear response is obviously that they will charge and restrict itss users once caught sending funds from gambling or mixed coins to their platform.

To be fairly safe, avoid sending "tainted" coins to any of these exchanges.

As an often gambling signature participants, what i usually do when the reward is sent to the casino account is

Casino --> Wallet --> Exchange

While most of these exchanges are playing trap cards. Even they dont have any specific policy regarding this kind of deposited coins, once they detect their users depositing their so called "tainted" coins, they will just provide you some policy that they have the rights to restrict the account because of etc. and etc.

[o_e_l_e_o]

To be fairly safe, avoid sending "tainted" coins to any of these exchanges.

To be completely safe, stop using exchanges which are anti-bitcoin, anti-privacy, and pro-censorship, by selectively enforcing nonsense metrics with no basis in reality which make bitcoin non-fungible.

I never understand why people's conclusion from the issue of centralized exchanges arbitrary confiscating coins is "Make sure you play by their rules!" rather than far more sensibly "Why in your right mind would you send your coins to an exchange which might steal them?".

[PX-Z]

To be completely safe, stop using exchanges which are anti-bitcoin, anti-privacy, and pro-censorship, by selectively enforcing nonsense metrics with no basis in reality which make bitcoin non-fungible.

I feel like this is not an option for everyone and to the majority. Many will choose having good time registration/trade to a centralized exchange while confidently giving their personal info than struggling to use and cope to a not user/beginner-friendly DEX.

[Despairo]

I feel like this is not an option for everyone and to the majority. Many will choose having good time registration/trade to a centralized exchange while confidently giving their personal info than struggling to use and cope to a not user/beginner-friendly DEX.

I partially agree with your opinion DEX had less volume/trade than CEX, but the rest I have to disagree.

DEX is easier and fast to set up rather than CEX, because in CEX you need to complete your KYC; take a selfie, driving license, your ID etc and you need to wait few hours or even few days until they approve. If they think your photo are blurred, you need to go back from the previous step and it's time consuming. While in DEX you don't need to wait the centralized party, all depends on you, if you followed correctly the step, few hours your account already done and you can start to buy Bitcoin.

If you ever did P2P trade on any P2P (custodial or non custodial), then you're completely much understand how it's work. I can vouch Bisq since it's the fully 100% DEX, the next is hodlhodl and localcryptos (not DEX but P2P no KYC). The cons of Bisq is they need small amount Bitcoin before trade for their security deposit, this would be a problem for pure newbie which doesn't have any Bitcoin yet. While the cons of both holdhold and localcryptos we need to create an account, this isn't good for anyone who really had privacy concern. Their services can save our data sent to them from our connections.

There are some guides of those P2P platforms.
1. https://docs.bisq.network/getting-started.html
2. https://bitcoiner.guide/hodlhodl/
3. https://localcryptos.com/#how-to-trade

[Pmalek]

Waiting x amount of time between transactions does nothing to fool blockchain analysis, neither does simply hopping between addresses. They can still see exactly where your coins came from in both cases. Whether or not enough time or enough hops are enough for an exchange to decide certain tainted coins are no longer tainted is anybody's guess, but given the entire thing is so arbitrary then you can't guarantee it in any way.

What if they are not your coins anymore? You withdraw your coins from a casino to your private wallet. That's step #1. In step #2, you exchange those coins (or one part of the withdrawn coins) for some other asset and send it to a wallet address provided by the buyer. The exchange wouldn't know that the coins have changed hands here. I assume blockchain analysis companies wouldn't either. Even better if there was a step #3 where the coins move from private wallet to private wallet of the other user before being deposited into an exchange.   

[o_e_l_e_o]

I feel like this is not an option for everyone and to the majority. Many will choose having good time registration/trade to a centralized exchange while confidently giving their personal info than struggling to use and cope to a not user/beginner-friendly DEX.

If there is a centralized exchange which serves your country/state/jurisdiction, then there must be enough of demand for it and so there must be a not insignificant number of other bitcoin users in your country/state/jurisdiction, some of whom would be happy to trade peer to peer. And given you can use payment processors such as Cash App, Zelle, Western Union, etc., you can trade peer to peer with people anywhere in the world.

Trading peer to peer is obviously different than using a centralized exchange, but I wouldn't argue it is any more complicated per se. And it obviously comes with significant advantages over centralized exchanges which makes it all worth it.

The exchange wouldn't know that the coins have changed hands here.

This is one of the reasons why I argue that taint is completely meaningless. As soon as coins are involved in a transaction - any transaction - then they could have changed hands in a perfectly legal transaction such as the purchase of some goods from a vendor or a peer to peer trade. At that point, claiming that the coins are still tainted is just plain wrong. If we applied this same nonsense to fiat, then every cent in your bank account could be seized on grounds that someone else somewhere once used it at some point for something shady, even if you earned it in a completely legal way, such as from your employer.

[PrimeNumber7]

Exchanges are not going to necessarily to look at "taint" percentages (which are often wildly inaccurate). If the exchange has good reason to believe that you are depositing money from certain prohibited sources (as outlined in their agreement with you), they will reject the deposit and/or close your account.

The threshold for the above is likely proprietary information and is subject to change. Also, if they gain possession of certain information they would not normally use, they will likely use said information if it is reliable.

[y5]

Exchanges are not going to necessarily to look at "taint" percentages (which are often wildly inaccurate). If the exchange has good reason to believe that you are depositing money from certain prohibited sources (as outlined in their agreement with you), they will reject the deposit and/or close your account.
...

I don´t think that they will reject the deposit. At most exchanges cryptocurrency deposits are fully automated.
Therefore the funds will be credited to your exchange account even if they are tainted.

It is more likely that the account will get frozen after the deposit or they will at least ask you
to prove that you obtained the cryptocurrency from a legitimate source.