Cryptocurrency Tumblers: A Headache for Regulators?

By Hammad Hanif on ALTCOIN MAGAZINE

Published in

The Capital

8 min readApr 28, 2019

With the Invention & Induction of Bitcoin & Blockchain Technology, Fin-Tech world has witnessed a massive growth in the fields of cryptocurrencies & smart contracts applications. No one can deny the fact & importance of that innovative spectrum which is gradually grabbing the focus of governments, regulatory bodies, blue chips stocks & general public. If Multi Billions Dollars Enterprises are making research on adoption of Blockchain Technology for the ultimate goals of achieving maximum benefits & revenues then at the same time, general masses are also taking utmost interest in cryptocurrencies for the sake of investments as well as for instant & convenient sale/purchase of goods/services. However, governments & regulators have different perspectives. Obviously, they are worried about the potential & possible threats as well as inconveniences which can affect & damage their political & financial stability. With the passage of each day, multiple technological innovations are stepping in the Fin-Tech World and, evidently, some are real threats to our systems. In Cryptocurrency Platforms, one of those nightmares is Tumbler or Mixer. Tumblers are famous tools for increasing the anonymity of cryptocurrencies, especially Bitcoin, since the cryptocurrencies have characteristics of having a public ledger of all transactions. The evolutionary trend of tumblers has made the anonymous applications of Darknet Markets much convenient and the jobs of law enforcement agencies & blockchain forensic analysts much difficult.

So, What is Cryptocurrency Tumbler?

Cryptocurrency tumbler (also referred to as Cryptocurrency Mixer or Blender) is a cryptographic facility offered to mix potentially detectable cryptocurrency funds with that of others, so as to conceal the trail back to the fund’s basic origin.

Mixer (Laundry Service, Tumbler) is a type of anonymizer that obscures the chain of transactions on the blockchain by linking all the transactions in the same Bitcoin address and sending them together in a way that makes them look as if they were sent from another address.
(FATF Report: Virtual Currencies: Key Definitions & Potential KYC/CFT Risks — June 2014)

In Simple Words:

“A cryptocurrency tumbler is a system which mixes transactions in order to make it difficult to trace the origin of the funds.”

Although, generally, this would be considered as an attempt for money laundering, or a barometer of some other possible illicit activity, but blending or tumbling cryptocurrency does not always have a suspicious motive behind it. Nevertheless, All Cryptocurrency exchanges also make it possible to trade one currency for another, which makes it viable for traders to restart their crypto history using an entirely different blockchain. So, predominantly, with the availability of more than 2130 cryptocurrencies & dozens of different exchanges, it’s very easy to perform tumbling manually.

How it works?

A mixer or tumbler sends transactions through a complex, semi-random series of dummy transactions that makes it extremely difficult to link specific virtual coins (addresses) with a particular transaction. Mixer services operate by receiving instructions from a user to send funds to a particular Bitcoin address. The mixing service then blend this transaction with other users’ transactions, such that it becomes unclear to whom the user intended the funds to be directed.

Technically, After sending coins into tumbler, these are entered into a pool of coins along with those of other depositors. Blending Systems then tumbles the said coins along with the others in the pool. The coins one receives as a result are made up of bits from many different sources, thereby clambering their origins and making these untraceable.

In simple words, tumbler breaks the connection between sending and receiving addresses. This is the prime concern of any coin mixer and is essential for crypto-anonymity. Since the blockchain possess permanent ledger of events, all cryptocurrency transactions are recorded by it. By blending or mixing the coins, one becomes able to anonymize information about where to keep coins, where to send these, and where to receive from.

Types:

Technically, there are 2 Types of Cryptocurrency Tumblers i.e. Centralized & Decentralized Tumblers. Let’s have a brief look at the characteristics of both mixers.

Centralized Tumblers:

Centralized tumblers are privately owned services in which cryptocurrency coins are being sent to an address specified by the service which takes a fee from delivered deposit, usually ranging from 1–3%.

There are two main disadvantages with centralized mixers:

1. You are sending money to someone you probably don’t know. They can run away with it and there’s nothing you can do about it.

2. They are probably keeping logs. Not only for debugging purposes, but for actually nefarious ones. Governments and blockchain forensic analysts pay fortunes for such logs, and just like your emails & personal info is for sale by conferences, your mixing history can be extremely valuable because a week of mixing logs can take two weeks off of an auditing & investigating job.

Decentralized Tumblers:

Decentralized mixers are available on more advanced blockchain platforms, like those which support smart contracts e.g. Ethereum Network.
A decentralized mixer is an automatic one which lives on the blockchain. It has no master, apart from the one who withdraws the fee built into it (and in 99% of the cases, that’s the whole extent of his power).

There are two main drawbacks with decentralized mixers too:

1. These are technically difficult to use. The instructions for using these mixers seems like a PhD material to most non-technical users.

2. There needs to be enough users to make it viable. If there are too few users, or if the mixer is too seldom used, then the transactions can be easily traced through either pure observation or the process of elimination.

What are the Core Features of Tumblers?

Following are some of the main characteristics of Cryptocurrency or Bitcoin tumblers:

Anonymity.
Security.
No Maintenance of Logs Record.
Fair Fees.
Speedy Transactions.
Availability of Multiple Addresses.

Examples of Famous Bitcoin or Cryptocurrency Tumblers:

Following are the most famous Cryptocurrency or Bitcoin Tumblers, widely used by crypto community, for blending of coins:

Cryptocurrency Tumblers & Darkweb Partnership:

It is a crystal clear fact that tumbler services and unregulated exchanges are some of notorious tools for cleaning filthy cryptocurrency stuff. Bitcoin or Crypto tumblers ostensibly clean dirty cryptocurrency by bouncing it between various addresses, before recombining the full amount through a Bitcoin wallet hosted on the dark web.
It requires one Bitcoin wallet hosted on the Clearnet, (a fancy word for the standard internet). Also, you should open two or more Bitcoin wallets that run exclusively on the dark web (there are a few of these wallets available, but be cautious!). And of course, some Bitcoin to mix.
To start, Bitcoin is sent from a clearnet wallet to one of the hidden TOR wallets. These kinds of transactions are called hops, and can be done multiple times across dark web Bitcoin addresses, adding a layer of obfuscation with every hop.
Similarly, Unregulated cryptocurrency exchanges (those without Know-Your-Customer and Anti-Money-Laundering (KYC/AML) procedures, such as identity verification) can also be used to clean Bitcoin, even without using a cryptocurrency mixing service in advance.

Cryptocurrency Tumblers & 03 Stages of Money Laundering:

If we further explore the functionality & application of tumblers then one alarming fact divulges, which is its accurate resemblance with 03 stages of money laundering process i.e. placement, layering & integration. In Placement phase, criminal & illicit crypto proceed is being deposited into tumbler. Later on, origin of proceed is being concealed through Layering. And finally, an apparent legal origin of criminal proceeds is being generated in Integration Phase. Now, even the Crypto Proceeds from Ransomeware, Hacking & Drug trafficking also seems to be legitimate & genuine after transformational process of blending. So, Crypto Tumblers are posing serious risks & threats in the evolving & emerging Fin-Tech World due to its anonymous & money laundering features.

Regulatory Overviews:

Tax bureaus, governments, and LEAs depend on blockchain analysis to track down and identify everyone who uses bitcoin and other cryptocurrencies and with the introduction of “Tumbler Creatures”; it has become a nightmare for watchdogs to spot the trails of illegitimate crypto proceeds.
But just how regulators are unable to ban bitcoin, they are equally unable to ban bitcoin or crypto tumblers. It is because of the availability of VPN services that are increasing across the internet.
Even in the United States, there is no regulation regarding the prohibition of said blenders. The reason for this may be because the U.S views bitcoin as property and not as a currency. If it were adjudged a currency, then lawmakers would go all-out to classify this activity like money laundering. Until lawmakers come to a solid conclusion as to what Cryptocurrency actually is, crypto blenders will remain legal. But it is safe to envisage that tumbler services will either be heavily regulated or made illegal in the upcoming future.

The forthcoming G-20 Summit in Japan as well as in process FATF Regulations for Virtual Assets will definitely set the standards for all crypto related stuff as described comprehensively in my previous blog titled “Fate of Cryptocurrencies: Legitimate or Illegal?”

So, what are your opinions about the applications of Cryptocurrency or Bitcoin Tumblers? Are these kinds of services presenting a high risk scenario for the Crypto World? Should it be dragged under regulatory frameworks or not? Keep commenting your views and do not forget to applause & share this article in your social circles. :)

References:

https://www.fatf-gafi.org
https://crypto.bi/tape/blog/tumbler
https://en.wikipedia.org/wiki/Cryptocurrency_tumbler
https://audithor.io/bitcoin-mixers
https://ultramixer.net
https://mixertumbler.com
https://news.bitcoin.com
https://thenextweb.com