This past month an interesting piece caught my attention – an alleged $366m bitcoin mixer was busted after analysis of 10 years of blockchain data. It triggered many thoughts about topics that I’ve been writing about in this blog for quite some time now, instantly forming them into a real-life fascinating example. Concepts like financial crimes, specifically anti-money laundering (AML), online privacy, immutability and more, all in the context of blockchain.
In April of this year, US authorities arrested the alleged mastermind behind “Bitcoin Fog”, a darknet bitcoin “mixer” suspected of assisting in the laundering of over BTC 1.2M(!), estimated at $336m occurred when law enforcement was able to identify the suspect’s home address and phone number in 2019, and eventually some of his online accounts which led later to proving the alleged illegal activities. At a glance, it seems like another case in which an offline mistake (exposing private details) ended in the fall of illegal online activity, but I think it’s more interesting than that. In fact – I think it carries a very strong message, and perhaps some comfort level for law enforcement: What happens on the blockchain stays on the blockchain!
First though, let me explain what “mixers”, or “tumblers”, are and why someone would use them. For the sake of simplicity, I use “bitcoin”, in this context, as a general term for most popularly used cryptocurrencies except for privacy coins (Monero, Zcash and others). So, in any bitcoin transaction, the sending address transfers a certain amount to the receiving address. All of these details are time-stamped and immutability documented on the ledger. This raises significant privacy issues as it exposes the parties’ entire transaction history (and future) to one another. Once the person behind the pseudo-private public address is exposed, there goes her anonymity to anyone who can link her real identity with a blockchain address. Furthermore, the blockchain never forgets, so it is there to stay and cannot be deleted… This is where mixers come in.
Mixers allow the sender to hide her address. Without going into detail, mixers break up a single transaction into many smaller ones, which are then transferred through multiple addresses before they reach their destination. Imagine a brown paper bag. You and I and ten of our friends each put an identical coin in it, and then shake the bag…when you retrieve your coin – neither you nor I nor any of our friends can tell if you received your original coin or if you received mine.
So for instance, if Alice wants to send Bob BTC 1, she may send it to him directly or use a mixer. Putting aside the transaction fees, while in the former method Bob will simply receive BTC 1, and we will all know it was from Alice, in the latter he’ll receive hundreds, or even thousands, of transactions for different addresses, adding up to BTC 1. As a result, it would then be very difficult for Bob to determine which address belongs to Alice.
Like most things on the Internet, mixers come in all sizes, shapes and forms. Ranging from high-end services, like the one mentioned above, to multiple public mixers available online and many popular wallet applications that provide built-in mixing features. Naturally, they mostly differ in their sophistication and accordingly the level of privacy they provide. There are multiple reasons why someone would choose to use one, and not all of them are necessarily induced by illegal motives.
The key thing to remember is that using a mixer by itself is not illegal. As with any AML law enforcement activity, as long as the source of the funds is clean, it is up to the person to determine how to transfer them from A to B. Having said that, often where there is smoke there’s fire. Meaning that the length someone is willing to go to hide her identity might disclose her intentions. For instance, you might wonder why someone would create a complex corporate structure, made out of multiple shell companies in selected tax havens, just to repay a small debt to a friend. Similarly, though not identical logic applies for mixers.
Due to mixers’ abundance, ease of use and sophistication, there are many actors who would make tremendous efforts to determine whether a specific transaction was mixed, and ultimately aim to track its source address. Among them are law enforcement agencies, exchanges, custodians and others. In the future, I safely assume it will also be central banks, banks, insurance companies and all sorts of financial institutions and other entities who will accept cryptocurrencies as a means of payment. Mainly to ensure a clean source of funds.
While conceptually it is easy to understand how backtracing of transactions work, in practice it is extremely complicated. It is digital forensics in action, which requires meticulously analyzing the ledger and reverse-engineering bits and pieces of multiple transactions in an attempt to rebuild them into a single one. Most times this service is used only to determine whether a transaction was mixed and then block or approve it, respectively. Exchanges, for example, analyze incoming deposits for this purpose. These algorithms try to identify and establish patterns that may indicate that a mixer was involved. In other cases, it is required to track the source address, for example for law enforcement purposes. The best metaphor I can think of for the latter task is trying to solve a 10,000 piece puzzle, only to find out that before you actually start putting the pieces together you need to first look for them all around town.
To summarize, this is a classic game of cat and mouse. While one side tries to extend the lead, the other one tries even harder to keep up. Still, it would be far too simplistic to consider this just as a battle of good vs. evil, because not all mixer developers act with nefarious intent. Some are involved out of academic pursuit or genuine concern for online privacy. The chasers in this game, law enforcement, usually have the lower hand. However, circling back to my initial point – in this game law enforcement has a huge advantage because of the blockchain’s immutability: What happens on the blockchain stays on the blockchain!, therefore the evidence is piling up even as we speak. In the future, mixer detection algorithms will surely improve, making today’s elusive illegal activity detection possible to decipher. Though it may take time, such as in the case of Bitcoin Fog, justice will be served through technology, hard work of law enforcement and… blockchain’s immutability.
Netta Korin is a cofounder of Orbs. Prior to Orbs Netta worked for many years on Wall Street as a hedge fund manager. She later held senior positions in the Israeli government, including Senior Advisor in the Israeli Ministry of Defense to General Yoav (Poly) Mordechai, Head of CoGAT, and Senior Advisor to Deputy Minister Dr. Michael Oren in the Prime Minister’s Office in Israel, focusing on Palestinian issues. Netta has held board positions in several non-profit foundations in both Israel and the United States. She also founded The Hexa Foundation with the aim of promoting blockchain for social impact and harnessing the mind power of the Orbs ecosystem and network to help solve the region’s and the world’s most pressing humanitarian problems.
For more information please contact Netta Korin (firstname.lastname@example.org)