Crackdown on mixers and privacy tools is ineffective: it may even help criminals

[NotATether]

The criminal complaint alleges that Lichtenstein and Morgan employed numerous sophisticated laundering techniques, including using fictitious identities to set up online accounts; utilizing computer programs to automate transactions, a laundering technique that allows for many transactions to take place in a short period of time; depositing the stolen funds into accounts at a variety of virtual currency exchanges and darknet markets and then withdrawing the funds, which obfuscates the trail of the transaction history by breaking up the fund flow; converting bitcoin to other forms of virtual currency, including anonymity-enhanced virtual currency (AEC), in a practice known as “chain hopping”; and using U.S.-based business accounts to legitimize their banking activity.

Two Arrested for Alleged Conspiracy to Launder $4.5 Billion in Stolen Cryptocurrency

Aaand from reading this it doesn't even sound like they used mixers. They just deposited and withdrew the stolen money into/from various sites, and converted it into altcoins, and so forth.

Isn't Joinmarket.net one of the possible solutions?

It is only one solution now and so it can easily be banned or sanctioned, or de-platformed by Github.

More anonymity services are required, but they must be made by

1) non-US persons
2) people who use pseudonyms online and
3) don't already have mini-fame tied to them elsewhere.

[Z-tight]

Of course if you distrust any state authority no matter what then "no cooperation" is the only thing you can accept, I totally agree with that. But for me there are neutral governments and evil governments.

If restricting their citizens privacy is evil, then i think i can argue that most, if not every government is evil. However, i respect your opinion in trying to come up with something that can work, and a situation were mixers and the government will partly cooperate and they would not have to be shut down, but i am certain that cooperation clearly defeats the purpose of using a mixer and many bitcoiners would not want to use such a service.

[d5000]

- snip -

I'm aware that the type of "regulation" or "agreement" between mixers and authorities I proposed in the OP would mean a backward move in some jurisdictions like EU and US from requiring KYC from such services.

You could argue of course that the tendency always will go against privacy. But that's why I actually included the last part of my OP which talks about educating people and politicians and supporting organizations like EFF. I believe that even in the jurisdiction where already a hard KYC policy exists, a move back is possible if there are political changes. This will take some time, but perhaps at least we can stop them at the status quo. I've written elsewhere that there were actually successful fights of pro-privacy groups in several countries, including for example Germany where a project to store all phone connection data was stopped some years ago (this is for me an example of a "neutral" government). Perhaps in the EU there is still a way to stop AMLD6, even if the likelihood is quite low.

There are however other jurisdictions where some KYC-free crypto services are still possible (Switzerland, for example, or Argentina if the service's revenue is lower than a certain threshold). People should be encouraged to defend the status quo in these countries, or even roll back some recent laws (in Argentina's case, the KYC requirement for bigger services was introduced very recently to comply with the FATF travel rule).

Until this change reaches the point where FATF itself (and thus the majority of major countries) could be influenced to change their policies it will take some time, of course. Some will say it's impossible. However FATF is not a lawmaking body. The groundwork in every country to limit anti-privacy excesses is much more important.

Of course my "proposal" in the OP is immature. This is a forum post, not a scientific paper But perhaps some discussions in this forum can actually reach people active in pro-privacy/civic right organizations and even political parties, for example in the liberal/libertarian spectrum. Perhaps wishful thinking (above all in this subforum ...)

Just for completeness, not to disregard any of your points:

Samourai was actually charged with money laundering, instead of being an unregistered money transmitter.

They actually were charged with three things: money laundering, sanctions evasion and money transmitter. Having read some material about both the Samourai and the Tornado Cash cases, I believe the both first accusations cannot be justified without the "money transmitter" accusation or, alternatively, evidence that they have cooperated with criminal groups. If what they said publicly is all they have, however, evidence is very thin.

[Joinmarket] is only one solution now and so it can easily be banned or sanctioned, or de-platformed by Github.

There are several more linked in Coinjoins.org, for example joinstr.xyz (which is in beta however). (By the way, Github [Microsoft] is not necessary for software development, even if it's an extremely popular service. Git can even work in a P2P fashion).

[hatshepsut93]

I totally agree. 100%

 This is not about preventing money laundering, that is just an excuse to attack Bitcoin. This is about control of the money.

And you know what is ironic? Fiat is 800X more often used for money laundering and scams^[1]

...Meanwhile, policies to prevent the 800 times greater use of traditional dollars in criminal activities have not yet been disclosed.

[1]. Fiat Money Outpaces Bitcoin 800:1 for Money Laundering: Report

Fiat is used more often because fiat is used for everything thousands of times more often than Bitcoin. And Bitcoin is not attractive for laundering because it's hard to establish a convincing story of how you got supposedly clean coins.

But you know what Bitcoin is good for? Paying ransoms. A very considerable share of ransomware payments is done in Bitcoin, because it solves the problem of fiat payments - they can't get frozen and have no KYC, so it's a very safe and convenient method for criminals.

[d5000]

But you know what Bitcoin is good for? Paying ransoms. A very considerable share of ransomware payments is done in Bitcoin, because it solves the problem of fiat payments - they can't get frozen and have no KYC, so it's a very safe and convenient method for criminals.

Ransomware is actually a quite good argument in favour of my proposal of an "agreement" between mixers and law enforcement. If you are threatened to pay for ransomware, you can tell the authorities the transaction you made. Perhaps you can even tell a whitehat hacker group and these will contact mixers for you if the ransom attack involves a kind of extorsion you don't want law enforcement to know about.

If the criminal is trying to mix the ransom coins through a mixer which participates on this agreement, then these funds could be very easily frozen. If instead he does an atomic swap or CoinJoins the probability is high he can hide. The easier these tools become to use and the higher the anonymity degree is, the more criminals will choose these options instead of mixers.

Most bigger fishes will of course know about the mixers participating on such an agreement. But criminals are not perfect, they often are not overly competent, above all if they're script kiddies, so there are chances for some to be caught.

[ranochigo]

I believe that even in the jurisdiction where already a hard KYC policy exists, a move back is possible if there are political changes. This will take some time, but perhaps at least we can stop them at the status quo. I've written elsewhere that there were actually successful fights of pro-privacy groups in several countries, including for example Germany where a project to store all phone connection data was stopped some years ago (this is for me an example of a "neutral" government). Perhaps in the EU there is still a way to stop AMLD6, even if the likelihood is quite low.

KYC policy exists for a good reason; to reduce the likelihood of money laundering going undetected and for them to stem it right when the transfer is taking place. It is absolutely necessary, because there is no way platforms would take the initiative to stop these transfers or perform their due diligence to prevent the transfers from taking place on the platform.

Generally, you need to have the data (ie. their real identity) to be able to link and investigate possible money laundering. There is no way around this in the area.

There are however other jurisdictions where some KYC-free crypto services are still possible (Switzerland, for example, or Argentina if the service's revenue is lower than a certain threshold). People should be encouraged to defend the status quo in these countries, or even roll back some recent laws (in Argentina's case, the KYC requirement for bigger services was introduced very recently to comply with the FATF travel rule).

Until this change reaches the point where FATF itself (and thus the majority of major countries) could be influenced to change their policies it will take some time, of course. Some will say it's impossible. However FATF is not a lawmaking body. The groundwork in every country to limit anti-privacy excesses is much more important.

Swiss KYC is quite active, and even if there is no KYC for most services, anything that involves money transfers be it deposits or withdrawal will reveal some information about the customer. If you're talking about normal crypto, for eg. POS payments, services payments, then KYC is of course not necessary. It is prevalent where there is a chance for money laundering to take place.

Just for completeness, not to disregard any of your points:
~
They actually were charged with three things: money laundering, sanctions evasion and money transmitter. Having read some material about both the Samourai and the Tornado Cash cases, I believe the both first accusations cannot be justified without the "money transmitter" accusation or, alternatively, evidence that they have cooperated with criminal groups. If what they said publicly is all they have, however, evidence is very thin.

Thanks. Money transmitter is not illegal, but being an unlicensed money transmitter would be. They lack the capabilities to conduct the appropriate due diligence, evidently and they can potentially aid money launderers in achieving what they want. In the eyes of the government, having the threat of doing so is a good enough reason to charge them with it.

Banks, and all of the financial institutions are also compliant to all of the laws and regulations as stated.

Now, just to further our discussion a little:
I'd like to pose this question as well. Let's say the community wants to see a legalized mixer, but the key benefits of a mixer is maintained (No KYC, no logs, no freezing of coins, and let's say minimal cooperation with the authorities (see protonmail). How would they operate considering all of the AML/KYC laws? I don't think a pushback from these measures are possible unless met with an alternative that is equally effective at stopping money laundering and terrorist financing.

[GigaBit]

When the government can't find the root of the problem, they do things like crackdowns where I think they're just trying to control users. As we recognize the case with the crypto market. When the market starts to be bullish, there are preparations to file various cases against organizations like the SEC and thus they control the market. As the number of users of Mixer increased, the authorities noticed that closing Mixer would end activities like money laundering, which is completely wrong. Those involved in money laundering will certainly want to recover their money in fiat if the authorities are able to do that properly, the volume of money laundering can be greatly reduced.

[PrivacyG]

I always said this.  Cracking down on Mixers and Privacy solutions is in the advantage of CRIMINALS and the disadvantage of innocent people.

A criminal will NOT care if a Mixer is banned or not.  There will always be at least one such solution available over Tor.  You can find all sorts of weird stuff over there.  Does any body really think a crack down would stop them from creating a simple Mixing Service?

The real toll is taken by us who simply want Privacy and are innocent.  Every single time our Privacy is restricted, it is the only real thing happening.  Our Privacy is increasingly being limited, the leash is shorter every time and criminals only continue to do their thing.  But besides us Bitcoin Talk users, who will even listen?  Governments know this very well.  They know that criminals will not suffer from this.  They know it only affects our Privacy.  They just do not care because I am very confident this is precisely the reason they are cracking down over Mixers.

They tried so many things before.  Cracking down on Mining and trying to convince every body that Bitcoin is more environmentally friendly if it moved to Proof of Stake.  Cracking down on Miners for supposedly disturbing the energy distribution.  Introducing so many difficult regulations to induce fear of mistakenly reporting the wrong thing, not having enough evidence to fill a report or to make us give up using Cryptocurrency at all due to the burden it is to file your Taxes.  Know Your Customer every where so you feel supervised and controlled at all times.  They are doing this knowingly and willingly to us.

I really do believe there will be a time when we will have to move to a more Private place to discuss.  I believe there will be a time when 'The Deep Web' will become a much more comfortable place for us Privacy advocates to hang around than the Clear net.  And like I said before.  This crack down will do nothing to me if I am using Monero in conjunction with Bitcoin.  It will do nothing if Atomic Swaps exist.  By the time they will come after me for Mixing or Atomic Swapping Bitcoin that came from legitimate sources, I just know this world will be so fucked that jail will probably provide more Freedom than the outside world would anyway.

They are tightening the leash onto us and I used to be afraid of the future, but now I have to accept it.  Either we obey or we will have to find alternatives to escape their control.

I will forever be among those who find alternatives to escape.

[Casdinyard]

For a long time now, authorities above all from the US have been closing mixers and other privacy services and tools operators (like Samourai) and arresting their founders and operators.

They may believe these crackdowns help against money laundering. But that is probably not the case.

Why closing mixers is useless

The reason is simple: If a criminal has some technical abilities, then he can hide his traces on blockchains in several ways without even having to use a privacy tool or mixer: He only has to do a lot of transactions mixing in different sources of funds, for example using CoinJoins and exchanges of coins on different blockchains.

One important method to help with that task are atomic swaps, a trustless method to exchange funds coming from a blockchain for funds on another chain. Traditional atomic swaps still provide a link between the transactions on different blockchains. But a few years ago a new kind of atomic swap was developed which uses adaptor signatures and is already used in Bitcoin-Monero swaps. This method makes the swap private.

This also gives a completely safe path for all criminals to hide their on-chain traces (I purposefully avoid the term "money laundering", see the last paragraph): simply do a couple of atomic swaps and transactions, using different blockchains, and it will be extremely difficult -- probably as difficult as to detect funds going through a centralized mixer -- to link these transactions together. This would even work without recurring to "privacy coins" like Monero.

Why a complete crackdown on privacy services would actually help criminals

In the current crypto services/tools landscape, where mixers are often still centrally or semi-centrally operated, law enforcing authorities have still some chance to stop criminals. For example, a centralized mixer has at least the opportunity to react to orders and petitions of authorities, victims of crime or whitehat hackers. Probably some mixers do cooperate if they still can intervene.

If criminals however went to completely decentralized methods like atomic swaps, nobody could stop them. Only the trade partners, but be honest, how many traders do chain analysis? So you go from a perhaps 20-50% chance to be able to stop criminal transactions due to cooperating mixers down to perhaps 0.01% of atomic swap users which can at least delay atomic swaps - atomic swaps can never be frozen!

It becomes even worse if we take into account the concept of the anonymity set. Currently, there are only few people using atomic swaps. So the anonymity set is relatively low: To achieve a high degree of anonymity, you need a large set of transactions (or "funds origins") to mix your funds with. But the current liquidity of these services provides few "funds origins".

But what will happen if there are no centralized or semi-centralized mixers available? Everybody who wants privacy will use atomic swaps, decentralized CoinJoins and other similar trustless/decentralized services.

Funds going through mixers have mostly been legitimate in many cases. Only in some occasions, where mixer operators probably cooperated with criminals, criminal funds made up a big portion or the majority.

So it's very likely that the anonymity set which can be achieved using atomic swaps will explode. And that will benefit criminals. There will be probably no way to stop them, at least inside the crypto-sphere.

A better approach

Authorities should accept that it is not possible to make it impossible to hide the traces of stolen/hacked/terrorist/sanction-evading funds inside the blockchain world. And the more they view privacy services as enemies, the more difficult it will become to stop criminals. Basically, cryptocurrency should be treated like cash.

Instead, authorities and lawmakers should focus first on the fiat "laundering" operations which emerge when the criminals have converted their funds to fiat, e.g. the creation of fake companies and other traditional methods. Because for "laundering" a criminal needs to end up with "clean" funds, it often doesn't help to have "crypto funds of unclear origin".

But also cooperation with privacy services could help to combat crime. For example, I can imagine a kind of "agreement", preferrently written into clear laws and regulations: A country allows non-KYC mixers, with the requirement that they react to orders and petitions from authorities, whitehat hackers (e.g. in the way the Security Alliance promotes it) and victims of crime, and block their addresses or freezes the funds until it's clear if they are related to a crime or not. It could also help that services could delay processing of funds, requiring more confirmations for a deposit, giving victims and authorities some more time to react.

Would criminals still use techniques like atomic swaps? Probably. But remember what I wrote about the anonymity set: People who use mixers for privacy and not to hide crimes, would be able to use centralized mixers and privacy tools without having to fear anything. So they would probably not massively switch to atomic swaps, and the atomic swap anonymity set would stay small.

There is also the important related topic of the negative consequences of the KYC requirement for all kinds of cryptocurrency services, resulting in data of hundreds of millions or perhaps even already billions of people often stored on relatively unsafe servers, being an interesting target for fraudsters due to the possibilities it provides for identity theft. The linked text from 1miau is really worth reading.


In summary: Neither the crackdown on privacy services nor the widespread KYC obligations really help to combat crime.

It may be difficult for an average Bitcoiner to convince their country's authorities of these arguments. But there are possible strategies. Tell your friends about the harm of crackdowns and KYC requirements. Your friends probably are also voters, and the more people understand these things, the more attractive it becomes for politicians to hear. Support privacy on social media. And for those wanting to do a bit more: Participate in pro-privacy organizations like the Electronic Frontier Foundation or the Pirate movement.


Edit: I wrote a similar text in Spanish, and possible will also add a German translation.

First time I heard about Atomic Swaps actually, and I reckon since everyone's on a crackdown against mixers, this wouldn't be the last time.

I can see what you're talking about being a massive possibility in the future, especially since hackers and scammers wouldn't stop at mixers, and would most definitely find ways to cover their footprints no matter what. Although my question is, since every hacker we've had so far who stole hundreds of millions worth of crypto eventually ended their transactions on CEXs like binance, and these CEXs having crypto-tracking systems that would allow them to determine which coins are stolen and which are not, I wanna know how potent these Atomic Swaps are against these interventions primarily, cause if I'm not mistaken these are our only lines of defense against hackers getting their dirty paws upon stolen money.

Of course if these swaps are more than capable of obscuring transactions and IDs than Mixers we're fucked, but if it's just on par with mixers, shouldn't we just crack down on them as well? Not that I'm a mixer hater but it's just that I'm a little bit uninformed about shit like this.

[NotATether]

^--- did you have to quote the entire OP? It is very long and makes reading obnoxious.

I'm sure people would just find a way to classify atomic swaps as anonymity-enhancing tools and outlaw them though. That's not to difficult to see.

[Z-tight]

First time I heard about Atomic Swaps actually, and I reckon since everyone's on a crackdown against mixers, this wouldn't be the last time.

Everyone you say, it is only the government that is attacking mixers and any other privacy solution.

cause if I'm not mistaken these are our only lines of defense against hackers getting their dirty paws upon stolen money.

Your only line of defense is to protect your coins, store it in cold storage and add extra layers of security. I don't fully grab what your point is from your post, but if your funds gets stolen, do not expect to get it back.

Of course if these swaps are more than capable of obscuring transactions and IDs than Mixers we're fucked, but if it's just on par with mixers, shouldn't we just crack down on them as well? Not that I'm a mixer hater but it's just that I'm a little bit uninformed about shit like this.

Take note that privacy is not for criminals or people involved in illicit activities, anyone who wants privacy deserves it, even if they have stolen nothing from anyone and have nothing to hide. What's your worry here? Protect your funds yourself and don't store it in centralized exchanges that can be hacked, why do you want a crackdown on privacy solutions?

[d5000]

But besides us Bitcoin Talk users, who will even listen?

That's a challenge I think the Bitcoin community should never give up. Bitcoin was not created to be only useful for a small cult of darkweb enthusiasts. Potentially, it was created as "the currency of the Internet".

My hope is essentially what I recently also wrote in a Monero thread: that a growing number from the already hundreds of millions of Bitcoin users could slowly trickle into the "world of decentralization and privacy". On a first glance, the current situation doesn't look like that: essentially, Bitcoin is about to conquer exactly the opposite group, traditional financial investors who "expose" themselves to the BTC price with ETFs, futures, options and other financial products. This demographic group will be difficult to convince. But the ETF news are also draining new "retail investors" into Bitcoin. Google Trends for example showed quite sizeable interest spikes in March and April particularly. And these users are the ones which can slowly educate themselves, adopt the "not your keys not your coins" model, and eventually be convinced that censorship resistance is an important ideal to fight for.

And once they get more and more, they can become a sizeable political force. In Argentina, it is possible that Bitcoiners helped to decide the 2023 election in favour of a liberal/libertarian candidate.

I have already written that pro-privacy organizations like the EFF are important to continue the fight. One particular thing which worries me is that not all organizations of this group think positively about Bitcoin. I can only speculate about the reasons but the stereotype of the "get rich fast" Bitcoin cult member is quite common in some of them. I think there needs to be more work done to convince these folks that while this stereotype exists, it is much less dominant among Bitcoin users than they think. And that there are good reasons to support a censorship resistant digital money.


@ranochigo: I think there is a general point I simply disagree with you. If I understand you well, you think from a state/government's perspective it will never make sense to allow non-KYC mixers, because a hard KYC requisite is the only way to be able to stop cybercrime. I believe that this is not true. First I would like to refer again to 1miau's text about the dangers of KYC. If the State really wants to protect us from crime, why does he provide a gift to criminals -- lots of personal data stored on thousands of servers -- and a big risk for most people because identity theft is a growing problem, unlike most other types of crime which are declining?

There is an important principle in law which is the principle of Proportionality. If a basic human right of a citizen is limited by a law, the limitation has to be justified. Privacy, which includes that nobody, not even the State, should see what I'm buying with my cryptocurrencies, can be seen as such a basic human right. If a mixer ban is ineffective because it could even result in better possibilities for criminals to launder their funds, then how can such a ban be justified?

The problem in my opinion is often that law enforcement authorities still don't understand the whole possibilities of crypto. I doubt lots of them have heard about atomic swaps, perhaps some more about CoinJoins, but too few. If they don't know that their measures are ineffective they will try to continue the traditional way - more restrictions, more KYC obligations. So it's necessary for crypto advocates to educate them that this is ineffective and they should concentrate on other methods. Like they do when investigating money laundering with cash. And of course my "minimal cooperation" proposal for mixers comes into play here. But this cooperation probably has to include the freezing of funds.

[ranochigo]

If I understand you well, you think from a state/government's perspective it will never make sense to allow non-KYC mixers, because a hard KYC requisite is the only way to be able to stop cybercrime. I believe that this is not true. First I would like to refer again to 1miau's text about the dangers of KYC. If the State really wants to protect us from crime, why does he provide a gift to criminals -- lots of personal data stored on thousands of servers -- and a big risk for most people because identity theft is a growing problem, unlike most other types of crime which are declining?

Correct, KYC doesn't stop money laundering or terrorist financing. However, KYC does make it harder by the logic of requiring the users to identify themselves to transmit funds. That by itself provides them with the ability to track and otherwise shutdown many crime syndicates and ensures that those who are regulated are accountable of their operations. If governments cares about your privacy, then the world would be pretty different today; Edward Snowden wouldn't have anything to share, there wouldn't be NSA, significant number of terrorist attacks wouldn't be twarted, etc. It is far easier to just impose a blanket ban than a soft KYC, which doesn't benefit the community either.

Identity theft is a whole other topic; that has to do with the multitude of mismanagement of individual organisations rather than the government. GDPR and other similar laws are enacted precisely to tackle this problem. If done properly, KYC is not an issue with proper data security and governance and this shouldn't be the reason why we shy away from KYC; organizations should do better to protect our personal data. FWIW, I've had the opportunity to see how data governance works in competent organizations and I don't see how identity theft would be a problem for them, as opposed to certain less competent companies.

There is an important principle in law which is the principle of Proportionality. If a basic human right of a citizen is limited by a law, the limitation has to be justified. Privacy, which includes that nobody, not even the State, should see what I'm buying with my cryptocurrencies, can be seen as such a basic human right. If a mixer ban is ineffective because it could even result in better possibilities for criminals to launder their funds, then how can such a ban be justified?

You can expect proportionality to be thrown out in court for cases involving surveillance or national security, as historically seen by v. NSA for surveillance related lawsuits.

A ban on conventional mixers doesn't result in better opportunities for criminals to launder their funds; atomic swaps or other anonymizing methods were always available to all and it is widely and easily accessible for everyone. Banning these centralized mixers never really increased or otherwise exacerbated the rates of money laundering, decentralized mixers has always been preferred as opposed to centralized mixers. Even for the average Joe, this is the way to go.

For the record, I'm not advocating against privacy. Giving basic rights to the citizens seems to be detrimental in the eyes of the government and if they are able to make money laundering harder, then I don't think they would be reversing their decisions anytime soon.

The problem in my opinion is often that law enforcement authorities still don't understand the whole possibilities of crypto. I doubt lots of them have heard about atomic swaps, perhaps some more about CoinJoins, but too few. If they don't know that their measures are ineffective they will try to continue the traditional way - more restrictions, more KYC obligations. So it's necessary for crypto advocates to educate them that this is ineffective and they should concentrate on other methods. Like they do when investigating money laundering with cash. And of course my "minimal cooperation" proposal for mixers comes into play here. But this cooperation probably has to include the freezing of funds.

Lawmakers might not, but they probably wouldn't care. However, inaction is seen as incompetence.

KYC and AML policies has resulted in banks being able to detect and stop these transactions. These are policies proven effective in the real world, and whenever it seems to fail, they punish the banks and smack them with a lawsuit. I bet this would happen if you were to legalize mixers. My question is: How do you answer the points about how criminal proceeds has been funnelled over through mixers, and the steps taken towards stemming them. Given that these aren't detectable, save for the large ones, how should we ensure that the principles of Bitcoin is upheld (no censorship, fungibility, etc).

If we were to continue with mixers and lawmakers discovers that criminal proceeds were to be funnelled through the mixer, then would the mixer be liable (and thereby should the owners be shouldering responsibilities) or should we just blame it on the privacy restrictions that affects how a mixer can conduct due diligence? If not, then why should banks be treated any differently than them?

I think that this topic has brought up numerous points about how privacy is important, and how we should balance the importance of privacy and stemming the funds from dubious origins. However, I personally don't think regulating mixers would be the way to go. It would be difficult to try to convince them otherwise, and a waste of effort because it would inevitably result in draconian restrictions and regulations if it happens. Keeping it decentralized and difficult to shutdown makes the most sense.

[3kpk3]

Good writeup op, but let's be real. Only a small percentage of crypto investors are aware of all this complicated stuff and even they listen to their respective governments when it comes to avoiding banned products like mixers etc.

This forum itself is a great example to justify whatever I stated. World governments are also filled with people who are too dumb to properly understand whatever you stated.

[buwaytress]

Great points, and I think it serves a question, but probably not the right question. I don't think these crackdowns are to deter criminals. They know who they were pursuing, and they wanted them down, so they clamped down on whomever and whatever they thought were connected.

The bigwigs surely know since Silk Road crypto makes up a tiny fraction of all money laundering. They also surely know by now, after capturing so many mixers, they've not got hordes of criminals, but the one or two they were pursuing. This is probably why they haven't outright cracked down on every mixer, everywhere.

The accompanying ridiculousness of litigation, and perhaps later, blanket bans, etc are simply tying up procedure, not policy. Could be wrong, but that's I think the reality of the situation. It isn't as philosophical or as existential as even I wondered at first.

[d5000]

Correct, KYC doesn't stop money laundering or terrorist financing. However, KYC does make it harder by the logic of requiring the users to identify themselves to transmit funds.

I understand this point in the world of fiat, because in this case a real risk exists that criminals end up with seemingly "clean" money in the case of "cooperating" banks/fintechs, and I think in this case KYC/AML requirements are mostly reasonable. In a crypto setting (crypto-to-crypto, like mixers and exchanges) the KYC requirement however doesn't help because of the point I'm making in the OP - mixers don't deliver "clean" money, only "crypto-assets of unidentifiable origin", and atomic swaps and CoinJoins can deliver the same thing.

Identity theft is a whole other topic; that has to do with the multitude of mismanagement of individual organisations rather than the government. GDPR and other similar laws are enacted precisely to tackle this problem.

My opinion is a bit different: the more KYC you require, the more identity theft you'll provoke, because you're opening a new attack vector. And there will always be a spectrum of "safer" and "unsafer" services. It's possible that many organizations are handling data security well. But there will be always an arms race between blackhats and these organisations and even those handling it well today may lose tomorrow. Software is never perfect, the problems of bugs and vulnerabilities haven't been "fixed one for all time" even 50 years after personal computers became omnipresent, and cybercrime is at least as successful as it was 10-20 years ago despite of technological progress and increased quality management. I think it's as easy at it sounds: The more organizations are required to store users data, the more hacks there will be, even if the "error rate" was falling due to increased requirements (e.g. due to GDPR-style laws).

You can expect proportionality to be thrown out in court for cases involving surveillance or national security, as historically seen by v. NSA for surveillance related lawsuits.

That's again why it's important to act against these excesses.

A ban on conventional mixers doesn't result in better opportunities for criminals to launder their funds; atomic swaps or other anonymizing methods were always available to all and it is widely and easily accessible for everyone.

I think the logic expecting an increasing anonymity set/degree for decentralized privacy tools is reasonable if the number of (trustworthy) mixers decreases. Liquidity above all for atomic swaps is still low.

For the record, I'm not advocating against privacy. Giving basic rights to the citizens seems to be detrimental in the eyes of the government and if they are able to make money laundering harder, then I don't think they would be reversing their decisions anytime soon.

Yep, I didn't interpret that you were actually against privacy

However, the consequence of your argumentation is that you're ok with a "two-tier" crypto ecosystem: a KYC-bound "legal" tier and a "grey" tier composed of "unregulated" mixers and offshore services. The problem is that this "grey" tier is increasingly driven into a darker shade of grey due to increasing legal attacks, and also is getting bigger (see Samourai's Whirlpool, which should normally a perfectly legal "messaging service" as afaik it never signs transactions, but is now under attack), without that helping with the fight against crime, but mainly impacting normal users looking for privacy.

This is why I wrote before that the status quo is unsatisfying. I could have agreed with maintaining the status quo five years ago (before e.g. AMLD6 was a thing) but I think we'll not return to that if a mentality change isn't happening.

(This also answers the problem I have with your last paragraph).

KYC and AML policies has resulted in banks being able to detect and stop these transactions. These are policies proven effective in the real world, and whenever it seems to fail, they punish the banks and smack them with a lawsuit. I bet this would happen if you were to legalize mixers. My question is: How do you answer the points about how criminal proceeds has been funnelled over through mixers, and the steps taken towards stemming them. Given that these aren't detectable, save for the large ones, how should we ensure that the principles of Bitcoin is upheld (no censorship, fungibility, etc).

We could imagine a policy of "either KYC or delay and react". Basically similar to the recent regulations of harassment in social media.

Mixers could be required to provide a communication channel for freezing requests. In addition to authorities (=police) in an ongoing investigation, if a Bitcoin/crypto user can demostrate that coins were stolen or taken as a ransom (signing a message with the private key used for the transaction), then a "cooperating" mixer has to retain this information and freeze funds which are directly connected with them. In addition, this class of "minimally cooperating" mixers could be required to delay all funds for an hour (close to the 6 confirmations) before they are transferred to the withdrawal address. We could even think about a protocol which includes a timelock and an IF_ELSE clause in the withdrawal transaction, where the user would only be able to move the funds after several hours, and previously the mixer could transfer it back. Taproot would allow that in a reasonably private way.

Such a policy would lead to time pressure for the criminal. Of course the criminal would then probably try to CoinJoin/atomic swap before, but the mixer's importance in the "laundering" process would then decrease. Most mixers of this class would never be used by criminals or only by the "small fishes", and thus could concentrate on the legal "privacy" market. For someone wanting to increase the privacy of his coins, the "delay" process would not be a problem.

The mixer would be liable only if he fails to demostrate that he did everything to try to freeze these funds: react in time to the "freezing request" and/or not implementing the "delay" protocol.

This is of course only an idea, and the work to convince the authorities that his may be a better approach would probably be very hard, but perhaps it can be done if public pressure (from voters) goes in that direction.

[franky1]

Mixers could be required to provide a communication channel for freezing requests. In addition to authorities (=police) in an ongoing investigation, if a Bitcoin/crypto user can demostrate that coins were stolen or taken as a ransom (signing a message with the private key used for the transaction), then a "cooperating" mixer has to retain this information and freeze funds which are directly connected with them. In addition, this class of "minimally cooperating" mixers could be required to delay all funds for an hour (close to the 6 confirmations) before they are transferred to the withdrawal address. We could even think about a protocol which includes a timelock and an IF_ELSE clause in the withdrawal transaction, where the user would only be able to move the funds after several hours, and previously the mixer could transfer it back. Taproot would allow that in a reasonably private way.

Such a policy would lead to time pressure for the criminal. Of course the criminal would then probably try to CoinJoin/atomic swap before, but the mixer's importance in the "laundering" process would then decrease. Most mixers of this class would never be used by criminals or only by the "small fishes", and thus could concentrate on the legal "privacy" market. For someone wanting to increase the privacy of his coins, the "delay" process would not be a problem.

The mixer would be liable only if he fails to demostrate that he did everything to try to freeze these funds: react in time to the "freezing request" and/or not implementing the "delay" protocol.

This is of course only an idea, and the work to convince the authorities that his may be a better approach would probably be very hard, but perhaps it can be done if public pressure (from voters) goes in that direction.

mixers and coinjoins that have a manager/coordinator that processes the funds on behalf of others for a fee will be classed as MSB (money service businesses)

if they do not register and get licenced as a MSB. that can cause trouble for the service manager/coordinator
if they do get licenced they then have to log, monitor, investigate and report on their customers(amongst other requirements)
if a action of the customer or the funds of the customer are suspicious to a point of illicit acts. they have to report it to authorities and its the authorities that would then get a court order to allow the service to withhold releasing funds back to the customer

no regulated service can just seize funds without a court order. most they can do without a court order is switch off the internal service for that customer, ask that customer to withdraw funds and then be banned from returning

unregulated services can seize funds without a court order but they are then liable for theft, however they probably are too hiding behind proxies and stuff to not allow the customer to know who the service is to chase the service for that theft