Illegal crypto move to mixers with a rate of doubling in 2022

More money transferred to crypto-mixing services in 2022 will come from addresses linked to illegal activity, as government agencies may be forced to take action against incompatible mixers or impose more sanctions.

The 30-day moving average of value received by mixers reached a record high of nearly $ 52 million in crypto on April 19, according to a Chainalysis report published Thursday. This figure is about double the incoming volume at the same time in 2021.

Perhaps more specifically, the blockchain data platform revealed, illegal addresses make up 23% of the funds sent to mixers so far in 2022, up from 12% last year.

Mixers or tumblers, such as Tornado Cash, are services that allow users to hide the transaction history of certain cryptocurrencies by merging them and mixing them with other users’ funds. Industry monitors have noticed that although they can be used for illegal activity, many believe that it is a crucial tool for financial privacy.

Almost 10% of all funds sent from illegal addresses are sent to mixers, the report showed. No other address type – such as one associated with different types of exchanges or gambling platforms – reached a 0.3% mixer share.

The Russian darknet market Hydra accounts for half of all funds transferred to these services from sanctioned entities this year, according to Chainalysis. Almost all of the remaining funds that go to mixers are North Korean government-affiliated Lazarus Group and Blender.io, which account for 30% and 19%, respectively.

Research director for chain analysis Kim Grauer said that the most striking result of the report was the large increase in the use of mixers for the North Korean-affiliated cybercrime groups.

“This alone is driving a massive increase in the use of mixers this year, showing that regulators and law enforcement should have the tools and resources they need to better understand the national security risk mixers pose and investigate illegal activity,” she told Blockworks.

Forbes reported in February that Chainalysis has a “former secret forensic tool” that was able to demix transactions related to the 2016 DAO hack and track their production to four exchanges.

Tuesday’s report noted that Chainalysis “continues to improve the ability to demix certain mix transactions and see users’ original source of funds.”

Grauer declined to comment on the company’s demixing capabilities.

Several mixers – including Tornado Cash – and other decentralized financial platforms are taking advantage of privacy technology, such as zk-SNARK, to ensure anonymity remains intact, said NetSPI Chief Technology Officer Travis Hoyt.

“If Chainalysis can actually reverse or derive transactions that are protected with this type of technology, it will question some of the basic mechanics of how some blockchains work, as well as some of the mix and [decentralized finance] platforms, “Hoyt told Blockworks.

Combat the use of mixers for illegal activities

The hacker, who exploited the Ronin Network for about $ 625 million in March, originally transferred thousands of ethers to Tornado Cash.

Also that month, federal prosecutors in Florida seized crypto for about $ 34 million, and German authorities confiscated bitcoin worth $ 25 million. Alleged criminals used mixed services in both cases to mask transactions.

More recently, about a third of the $ 100 million stolen last month from Horizon Bridge – a cross-chain interoperability platform between Ethereum, Binance Smart Chain (BSC) and Harmony blockchain networks – was also transferred to a Tornado Cash address.

Grauer said that mixers in the United States, like other crypto companies, are required to register as money services (MSBs) under the guidance of the Financial Crimes Enforcement Network.

Tornado Cash is an immutable smart contract, not a business, but the service includes a compliance tool, which allows any legal user to prove the origin and destination of funds if required by law enforcement agencies.

A right to privacy is enshrined in Article 12 of the UN Declaration of Human Rights, and its preservation is a natural concern for any user of a public, unchanging blockchain.

But Chainalysis is not aware that any mixers are currently following the anti-money laundering and anti-terrorist financing regulations that MSBs are subject to in most jurisdictions, Grauer added.

“The increase in the use of nation-state actors in particular may lead public agencies to take action against incompatible mixers or even impose sanctions, as they have done in the past,” Grauer said.

The US Treasury’s Office of Foreign Assets Control (OFAC) sanctioned Hydra in April, adding more than 100 of its crypto addresses to the specially designated national list as identifiers. In May, OFAC sanctioned the virtual currency mixer Blender.io.

“These platforms are agnostic towards borders, and while [US] frameworks may apply to certain citizens and the legal jurisdictions they are in, they will not apply to everyone, Hoyt said. “This means it can be very difficult to try to regulate them.”

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