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Can Crypto Mixers Evolve to Sidestep Prosecution by U.S. Authorities?

Tornado Cash made headlines in August 2022 when the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned it, raising questions about the role of cryptocurrency mixers in ensuring financial privacy. This debate intensified as Sinbad.io, another major player, faced OFAC sanctions for facilitating illicit transactions, particularly those involving the Lazarus hacking group.

While mixers offer a legitimate service by enhancing the privacy of cryptocurrency transactions, concerns arise when criminals exploit them to launder large sums, potentially jeopardizing the services’ legitimate use by individuals seeking financial privacy.

Contrary to the misconception that cryptocurrencies guarantee complete anonymity, most top cryptocurrencies operate on open ledgers where transactions are publicly recorded. For instance, Bitcoin provides pseudo-anonymity by not revealing the owner’s identity through addresses. However, if a unique transfer is linked to an individual’s identity, all past and future transactions can be traced.

Crypto mixers such as Tornado Cash were created to address this issue by anonymizing transactions. There are scenarios where individuals may need financial privacy, such as making cryptocurrency payments for daily needs without revealing transaction details. Mixers can break the link between the sender and recipient, ensuring privacy.

Beyond everyday transactions, financial privacy becomes crucial in situations such as keeping salaries confidential or safeguarding against criminals targeting personal wealth. In extreme cases, mixers can play a role in protecting individuals from oppressive regimes by ensuring donations to support causes such as LGBTQ+ or critical journalists remain anonymous.

However, the closure of Sinbad and Tornado Cash by U.S. authorities highlights the challenge of maintaining anonymity in the face of regulatory scrutiny. The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) expressed its intent to target mixers as a primary concern for money laundering, aiming to increase transparency and combat malicious exploitation by groups such as the DPRK and Hamas.

The issue for authorities may not solely be the mixer services but rather their association with major clients. Chain alysis data revealed that Sinbad managed more than $24 million of stolen funds from the Lazarus Group, indicating potential misuse of the mixer.

Taking down international mixers poses challenges, as evident from the continued operation of Sinbad’s dark website. Tornado Cash has also relaunched with compliance mechanisms in the clearnet. Despite this, the pursuit by U.S. authorities may lead to the end of illicit mixer activities.

In a February 2023 statement, Sinbad’s pseudonymous founder, Mehdi, defended the mixer as a legitimate privacy-preserving project, comparing it to other privacy-focused cryptocurrencies and tools, including Tor browser, Zcash, Monero and Wasabi.

The question arises: Can mixers address misuse without compromising their core values? Some argue for implementing barriers to block certain groups, but the challenge lies in balancing privacy with regulatory scrutiny. The idea of adopting Know Your Customer standards contradicts the purpose of mixers.

A Mixero spokesperson rejected such standards, emphasizing the clash between anonymity ideology and antimoney laundering tools. However, others suggest that mixers could avoid enforcement actions by implementing robust antimoney laundering and counterterrorism financing programs.

Financial privacy, considered by many in the cryptocurrency space as a human right, faces challenges as governing bodies vary in recognizing it. While privacy laws exist, the explicit inclusion of financial privacy remains debatable. In Europe, protections under the Convention for the Protection of Human Rights and Fundamental Rights and the General Data Protection Regulation are more explicit than in the United States, where financial privacy is regulated through state and federal laws.

In essence, mixers have garnered an unfavorable image due to potential misuse, prompting the need for strategies to prevent illicit actors’ entry. Their survival may hinge on finding a balance between privacy protection and regulation compliance.

Crypto exchanges such as Coinbase Global Inc. (NASDAQ: COIN) are likely to follow these development affecting crypto mixers as any regulatory changes could affect their clients or even the exchanges themselves.

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