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

[AmoreJaz]

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.

I think this is the crux of the matter, there will always be a way for the criminals to continue their business. If the authorities could not stop terrorism financing which most of the funds are not passing through cryptocurrency but charity organizations and foundations and other fiat payment systems, as I have read in some articles, then I doubt there is much they can do to stop criminals. I completely agree with you that the more they fight mixers and other privacy infrastructures, the more they help the bad eggs because, from your explanation, they will just be pushing them into the atomic swap that I am grateful for learning more about it tonight.

Most definitely, they will always find a way how to continue what they are doing. Do remember, mixers were not existent when terrorism and other illegal activities started. It is just that in today's situation, they are finding that mixers is also one good route to hide their privacy. And if this one closes, they will surely find another route. It is not the end of the line for those people who want to continue what they are doing.

[zabzob]

Do you really think that the majority of governments want to lower the crime rate? Definitely no, they don't. It's all just a shitshow. Government itself is a criminal organization because absolutely each of them are very corrupted and mostly care to make themselves rich via different mechanisms.

100% true. The low-to-mid-level gov't hacks who run these take-downs probably believe they're fighting crime, but what they don't know is they're just doing the bidding of the biggest fish in the criminal pond

They don't believe that these crackdowns will help against money laundering because the main money laundering entities are alive, for example JPMorgan Chase, HSBC, Standard Chartered, Deutsche Bank and the list goes on.

Right-on. Some of the entities you list have been caught laundering billions for drug cartels. But since they're "too big to jail", there's nothing to do but allow them to continue business as usual. When relatively small operations like Samurai or Agoradesk become targets, this is not at all about fighting crime, but rather about the biggest crooks in the game taking out their competition.

[NotATether]

[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).

This is a fantastic resource and I may reconsider adding back a list of CoinJoin services on my website.

You can run a Git server on just about any server, but preferably one hosted with a company that doesn't take abuse letters too seriously as they could pull the plug on your account.

[tygeade]

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

Let's put this through practice and what really happens in the whole process.
Users have coins on address A, which is marked as tainted by the authorities. He sends coins ^{from address A} to the newly created address B, and at that moment unknown where and how it was created. After a 1-hour delay, some other coins were sent to the never-used address C, which the user provided.

So, the question is, If the service is well coded and automated, how the hell can anyone recognize in an hour who generated address B, request the blocking of funds, and at the same time the hosted service respond as soon as possible?

I would guess that it is only when the money turns to fiat that it matters. In reality, of course you can spend bitcoin to get something, but the government or the law enforcement will rarely care about it as long as it is within bitcoin world, they will not care about it in the end.

However, the moment you want to turn that into fiat, that is when they will care, because if there is some money that you can't explain in your bank account, they will retrack it and see where that came from, and if it was from a mixer that they can see, then they will consider that as illegal money, could be drug money, could be money laundering, whatever they want to name it. So, if you want to make some fiat, you need to be able to provide proof. Or just keep it at bitcoin, can always do that.

[tread93]

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.

I really liked your point that authorities should stop focusing on crypto as the primary focus but to look for the exit point when the funds become clean and turned into fiat and that they should try to find the transfers or large sums of cash via withdrawals from the bank etc. because the funds don't become fully laundered until they reach that point. But Also, the Atomic swaps are a very interesting subject, and I also like that point that cracking down hard on coin mixers are going to be like shooting themselves in the foot. At least with coin mixers if authorities made some kind of deal with them to help them catch criminals it would at least be a tool they could use, but I don't think they see it that way its just a money laundering machine in their eyes. I will have to look more into the atomic swaps, I had no clue those even existed.

[d5000]

I would guess that it is only when the money turns to fiat that it matters. In reality, of course you can spend bitcoin to get something, but the government or the law enforcement will rarely care about it as long as it is within bitcoin world, they will not care about it in the end.

In my opinion this doesn't have to do much with that it's "within Bitcoin world". Generally the world of retail commerce is so big that it would be impossible to control everything to prevent criminals can spend even a single cent. Normally they concentrate on bigger sums (USD 1000 upwards).

If you can spend the money directly on goods and services, there is thus no need to "launder" it. Criminals usually can buy small goods directly with the stolen (or otherwise illicitly funded) money, because retail merchants are no "obliged subjects", they don't have to do AML checks. So if spending money on retail goods was all they wanted to do, there would also be no need to use cryptocurrencies for anything. They only would have to be fast to prevent that banks freeze their money once the investigation is advancing, or retire cash as soon as possible.

The exception are luxury goods and gold and other materials which are used as a store of value, like platinum. But that's the reason why normally the merchants of these products are "obliged subjects" and have to do AML checks. That also applies to those merchants who accept Bitcoin. So staying inside the "Bitcoin world" would also not bring much of an advantage.