MEXC Global
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MEXC Global

MEXC Research: Coin Mixers in Crypto Industry: Sin and A Malignant Tumor

Source: Elliptic Co

Benefiting from the “DeFi Summer” boom in 2020, DeFi’s TVL has exceeded $20 billion, and liquidity is not what it used to be, which on the one hand has laid a more solid foundation for the future of open finance, and on the other hand has indirectly facilitated criminal behavior.

Data show that in 2020 DeFi security attacks 60 incidents, losses of $ 250 million, the first half of 2021, the total number of attacks already exceeded the number of last year’s entire year, while the dollar amount of losses has exceeded last year more than three times. The analysis of the SlowMist AML tracking of the funds involved found that about 60% of the funds were transferred by the attackers to mixed currency platforms and about 30% were transferred to exchanges.

For professional hackers, trading on exchanges and over the counter is just the last step to cashing out, the most important foreplay is how to “disappear” in advance in the traceable blockchain network. The existence of “coin mixers” provides a breeding ground for hackers to commit crimes, but not to take on the corresponding obligations. A coin mixer is a service that hides the path of a transaction by mixing tokens, thus hiding the identity of the participants.

Unlike cash, the process of trying to launder stolen crypto assets is slightly more complicated. In traditional money laundering, the process would involve using the stolen money to purchase expensive items, such as gold bars, cars, jewelry, or real estate, which would then be resold. In the virtual world, the process involves moving it back and forth by mixers.

The first step in hacker money laundering is Layering. The hacker will transfer the stolen BTC to an address owned by the money launderer. This address is still not clean enough because it is clearly linked to the address of the person from whom it was stolen. The money launderer then transfers the same number of BTC from other users to a new “clean” address in the hands of the criminals.

The money launderer will not transfer large amounts of virtual currency all at once, however, as this would easily attract attention, and will transfer the clean virtual currency back in smaller amounts and in multiple transactions. The larger the amount of virtual currency in money laundering, the more cautious the operation will be, and the span between each share will be if possible.

This means that the more stolen money that enters the system, the more frequently it is transferred, and the more difficult it is for investigators to trace the path back to its source through the network. In addition, the anonymous nature of virtual currencies makes it much harder to track these stolen funds than cash.

The second step is consolidation, where the illegally obtained funds are injected into a cryptocurrency system, followed immediately by their constant transfer in a virtual shell. Hackers are one step closer to unrestricted and secure access to this ill-gotten wealth.

However, the integration of this stolen money into mainstream exchanges, OTCs, and other cryptocurrency financial systems still presents a risk of exposure, as exchanges and other third parties involved in cryptocurrency trading activities monitor transaction records and may issue Suspicious Activity Reports (SARs).

There are already several teams and companies that offer coin laundering services, where they collect funds from different customers, mix them together, and then return the mixed, laundered funds to the customer. The purpose of doing so is to make it impossible for tracers to establish a strong correlation between the output address and the traced event, thus achieving the goal of erasing the trace.

These coin mixing service providers are explicitly under the banner of increasing transaction privacy, but in reality, they are building a medium for criminals to launder money. To increase the privacy of their transactions, such token blending services generally charge expensive (1–3% of the total) fees, which ordinary users simply will not bear, but are very popular with criminals because their funds are already unknown.

Despite some mixing platforms claim to be decentralized, e.g., platforms based on the CoinJoin protocol, there are always some parts of the service centralized. These platforms will first play a clean pool of funds minus the fee from a well-washed pool after receiving the criminals’ stolen money, because the amount of funds is already different and the receiving address is also different, it is difficult to correlate the two funds. And the team behind the platforms are always centralized. They are the ones who really benefit from all the crimes carried out by the hackers.

After that, this stolen money played by criminals will be mixed and washed with the subsequent funds played after a period of sedimentation, the specific method of mixing and washing is not announced by the platform, and the funds after mixing and washing will be transferred to the pool for the next use. In this way, outsiders achieve the criminals’ need to obscure the source of their funds through this input and output of the confused transactions.

Although the technological barriers to the use of blockchain are getting lower and lower, “encryption” and “decentralization” still seem to be at a very preliminary stage in the current cultural environment. “Anonymity” is very attractive to libertarians, but this attraction remains negative and outside of the law. There may be more cyber violence and dirty underground dealings, and they will be harder to criminalize.

For DeFi, it has sufficiently proven its worth in the blockchain. As of Sept. 30, DeBank data shows that Defi’s TVL is now $108.18 billion, compared to just $17 billion at the beginning of 2021. The prominent smart contract security issue is indeed the biggest challenge for the DeFi industry, especially with the presence of hybrid coin providers causing the entire DeFi industry to be shrouded in a deeper crisis.

It’s time for us to stand out and say “No” to the malignant tumor. With the mixers’ existence, it will eventually harm the industry and all the law-abiding good crypto citizens, like us. We strongly urge the communities and regulators to put more effort to regulate them. Please give us back a clean and real decentralized metaverse.

Note: This article is only for information sharing and does not constitute any investment suggestions.

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Founded in 2018, MEXC Global is a centralized exchange that employs a high-performance mega-transaction matching technology. The CEX platform is run by a team of professionals with extensive financial industries and blockchain technology experience.

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MEXC Global

MEXC Global

Founded in 2018, MEXC Global is a centralized exchange that employs a high-performance mega-transaction matching technology. Visit us at https://www.mexc.com/

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