bitter pills in crypto mass adoption?

Examining the double-edged sword of privacy in crypto, we examine how anonymity tools such as mixers and privacy coins are influencing mass adoption amid rising financial crime.

On January 3, 2009, the public had the chance to experience what anonymity in finance truly means, what we know today as cryptocurrency.

Cryptocurrency inventors saw it as a way to save economies from collapsing due to the shortcomings of fiat currencies. Fast forward to today, financial watchdogs are grappling with the use of virtual currencies due to the tendency of scammers to use virtual currencies to make billions of dollars each year.

Of course, there is a view that money launderers like to use cryptocurrency to steal people’s funds, claiming that it is untraceable. Whether through crypto mixers or privacy-focused coins, this sentiment has tarnished crypto’s image, but to what extent? Let’s find out.

Crypto mixers and privacy coins: anonymizing transactions

Before we look at how much crypto mixers and privacy-focused coins have impacted the virtual currency landscape, let’s make one thing clear: cryptocurrency is pseudonymous rather than anonymous. Colloquially, this means that the digital ledgers behind them don’t hide the fact that a transaction was made, they hide exactly who did it.

So in essence, crypto is not completely untraceable. That’s why some developers within the crypto community decided to find a way to completely anonymize transactions, and two ways to do this were crypto mixers and privacy coins.

Crypto mixers or flips are platforms that take potentially related funds and combine them with others, making it difficult to determine the source of specific coins. On the other hand, privacy coins are cryptocurrencies that use some complex features of cryptography, such as stealth addresses, to increase the privacy of their users.

The purpose of privacy-focused coins and cryptocurrency mixers is likely why financial scammers use them to hide where money is going.

Chainalation published a report earlier this year showing that approximately $24.2 billion worth of cryptocurrencies were received by illegal addresses in fiscal year 2023.

Digging deeper into this topic, we can explain the events that support what scammers are thinking when going the crypto route:

Hurricane Cash

According to the European Union’s (EU) Homeland Security Innovation Center, hackers and fraudsters often launder stolen funds using crypto mixing services such as Tornado Cash to hide traceability and avoid detection. The services have greatly slowed regulators’ efforts to lay the groundwork for crypto mass adoption, according to the EU headquarters.

Looking at the case against the co-founder of Tornado Cash, the EU may be pointing in the right direction. Orbit Chain, recently identified by blockchain analytics organization Arkham Intelligence, saw an exploiter transfer approximately $47.7 million to Tornado Cash. The funds are part of the $82 million stolen from the network in January.

We can only guess what the hacker wanted to do with the funds transferred to crypto mixers. Unfortunately, such events worsened the fate of Tornado Cash co-founder Alexey Pertsev, who was sentenced to sixty-four months in prison by a Dutch court in May for money laundering.

Crypto mixers like Tornado Cash are intended to increase the anonymity factor of using virtual currencies. But money launderers and fraudsters have found a way to “break” the service, forcing some open-source software makers to back away from creating them or developing their functionality for fear of prosecution.

Hurricane Cash:

NO ONE HAS OWNED OR USE IT.

On Ethereum, you can write and distribute an unclaimable, unstoppable, unattended open source application that runs on its own forever.

This is new technology. It deserves new laws.

It is UNFAIR to put people in jail for writing code.

— Chris Blec (@ChrisBlec) May 15, 2024

Although the crypto community stands behind Tornado Cash co-founder, privacy advocate Chris Blec stresses the need for new legislation to protect user privacy in emerging blockchain technologies, the damage may already be done.

Privacy coin Monero, money laundering and CSAM monitoring

Privacy coins have their benefits and liabilities, but overall they present an evolution in crypto that enthusiasts want to see progress. These digital assets, such as Monero (XMR), reflect exactly what cryptocurrency users want: privacy and confidentiality.

Unfortunately for society, these two entities are exactly the music money launderers, hackers, and fraudsters want to hear. Thus, they enjoy the features and benefits of using privacy coins.

CSAM cases

Monero is said to be widely used by CSAM (child sexual exploitation material) sellers in fiscal 2023, Chainalytics’ latest crypto crime report says. According to the crypto statistics firm, Monero is playing a more important role in enabling CSAM sellers to launder their money. On-chain earnings rather than just hiding purchases.

Chainalation shared a snapshot of a dark web forum affiliated with CSAM asking for donations in Monero.

Screenshot showing a CSAM vendor requesting XMR donations | Source: Chainaliz

They believe sellers want Monero because it benefits from instant exchanges. Instant exchangers operate without holding users’ funds and generally do not support crypto-to-fiat conversions. However, unlike decentralized finance protocols, they are managed centrally by a single organization.

Moreover, these exchanges use liquidity from multiple exchanges to offer competitive prices and facilitate direct crypto-to-crypto exchanges between users’ wallets, often making on-chain transactions difficult to track. Combined with flexible know-your-customer (KYC) requirements, these platforms can be advantageous for obscuring the origin of cryptocurrency transactions.

defrauding players

In 2021, the gaming community faced hackers who usurped their fortunes by installing malware on very popular games. The malware, called Crackanosh, has been used by cybercriminals to drain the power of computers around the world and use them to mine cryptocurrency.

Since gaming hardware is generally quite powerful by design, their processing power has become a good proposition for hackers to pass up, and they have earned over $2 million in Monero from illegal activity.

A Reddit post about Crackanosh | Source: Reddit

Why did they choose to mine Monero? This may be because it is easier to mine than cryptos like Bitcoin. But maybe it’s because, thanks to Monero, they can easily convert their digital currencies into fiat money and live happily ever after.

Stories might make us feel like Monero is doing more harm than good, but that’s simply not the case. Privacy coins were developed to improve the functionality and use cases of the crypto industry. But fraudsters and money launderers have tarnished their reputations and drawn increased scrutiny from financial and regulatory watchdogs.

Improving crypto’s reputation: what we can do

Recently, Isabel SHI, CEO of blockchain data analysis company Bitrace, expressed her views on crypto crimes at an event held at Hong Kong Polytechnic University.

Bitrace CEO Isabel SHI was invited to the Hong Kong Polytechnic University to give a presentation titled “Cryptocurrency in Crime and Money Laundering”. She explored why cryptocurrencies are widely used in criminal activities, introduced new types of crimes caused by cryptocurrencies…

— Wu Blockchain (@WuBlockchain) June 23, 2024

Isabel began by examining the reasons behind the widespread use of cryptocurrencies in criminal activities. She emphasized that anonymity, decentralization and ease of cross-border transfers make cryptocurrencies inherently suitable for illicit purposes.

The CEO noted that on-chain addresses do not require KYC verification, so transactions are masked from real-world identities. He also noted that the decentralized nature of cryptocurrencies ensures that only those with private keys can access their assets.

Additionally, Isabel emphasized that the permissionless and borderless nature of cryptocurrencies allows transactions to be carried out globally at any time, making them particularly attractive to criminals.

Based on Bitrace and Isabel’s insight, we can see that fraud trends are caused by gaps in blockchain ecosystems. And to stop them, we may need to use certain parameters that will not only eliminate the problem of attracting money launderers and fraudsters, but also provide grounds for crypto mixers and privacy-focused coins to thrive without gaining a bad name.

Here’s what crypto mixers and privacy-focused coin developers can do to prevent money launderers, hackers, and fraudsters from using services for illegal activities and leading to mass adoption of cryptocurrency:

Crypto mixers Developers must implement strict KYC verification processes to verify the identity of users and discourage anonymous transactions. Companies can cooperate with regulators and comply with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations. Integrating blockchain analysis tools can help crypto mixers and the community monitor transactions for suspicious patterns and intervene immediately. Because many users do not know how to use cups responsibly, companies need to educate them on the consequences of illegal activities to encourage ethical behavior. Privacy coins Developers can conduct regular audits and publicly disclose development activities to build trust with regulators and stakeholders. Sharing information about suspicious transactions and cooperating with law enforcement to effectively combat abuse will strengthen regulation. Implementation of optional auditability or compliance features to appeal to users who prioritize regulatory compliance. Educating the community on the benefits of privacy while emphasizing responsible use will deter illegal activity. Privacy slows adoption but still matters

Although the use of crypto mixers and privacy coins has been a problem in the mass adoption of cryptocurrencies, their contribution to improving financial privacy cannot be ignored. While it offers a desirable feature to some users, anonymity issues have been linked to regulatory compliance and illegal activities.

However, the necessary actions still need to be taken by developers, who must increase controls and cooperate with the institutions that regulate these areas. But as the world changes and new technologies emerge, it is quite possible to reach the critical cryptocurrency adoption rate even with such protective elements.

Recognizing that privacy and regulation can coexist, the outlook for cryptocurrencies may remain positive for both regulators and crypto users.