NCA Calls For Regulation Of Crypto Mixers Used To “Churn Criminal Money”

The UK’s National Crime Agency has called for the regulation of sophisticated blending technology used by criminals to avoid detection when laundering money through cryptocurrencies.

So-called “decentralized crypto mixers,” also known as CoinJoin, can be used to hide transactions that are otherwise traceable on blockchains, publicly searchable digital ledgers where the transfer of cryptocurrencies is recorded.

The open-source software requires multiple parties to sign a digital contract that allows coins from different wallets to be mixed and redistributed, making it difficult to trace the origin of the money.

“They can be used to provide an ‘overlay’ service, shuffling criminal money, obscuring its origins and audit trail, in the same way that a cash business might be used by criminals to legitimize cash through the banking system,” Gary Cathcart, head of investigative finance at the National Crime Agency told the Financial Times.

The warning comes as authorities around the world grow increasingly concerned about the criminal use of cryptocurrency as the new, unregulated sector gains popularity.

The NCA said the regulations would require mixers to comply with money laundering laws, with requirements to carry out customer checks and audit trails of currencies passing through the platforms.

This would allow users’ law enforcement agencies to properly investigate “what is often serious criminal activity” including ransomware attacks, fraud, state-sponsored crime and terrorism, a added Cathcart.

About 15% of all proceeds of crime were routed through mixers in 2021, according to Elliptic, a group that analyzes cryptocurrency transactions.

Well-known services include Wasabi Wallet, Samourai Wallet and Helix, whose American founder Larry Dean Harmon pleaded guilty to money laundering charges in August last year.

Wasabi, which launched in 2018, works in a decentralized way with software anyone can download and use. It’s a flagship product from Gibraltar-based zkSNACKs, which describes itself as “unfairly private”. The company takes a fee on each transaction, amounting to 0.003% multiplied by the number of users shuffling wallets in each round of a transfer – the level of privacy increases with more users.

Proponents of decentralized mixers argue that the public nature of blockchain is akin to a bank sharing your balance and transaction history, which could make users the target of crimes such as fraud.

Elliptic estimates that more than $1 billion in proceeds of crime passed through Wasabi, tracing the wallets of known bad actors.

In 2020, European law enforcement agency Europol published a report on Wasabi, after finding an increase in investigations involving the software. He found that over a three-week period, 30% of bitcoin passing through the platform came from dark web markets. In the broader cryptocurrency market, dark web transactions are estimated to represent only one percent of total transfers, he said.

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Bálint Harmat, chief executive and founder of zkSNACKs, said the claims by the NCA, Europol and Elliptic “did not correspond to reality”.

“The alternative, which is Bitcoin with no security or fungibility, would lead to disastrous unintended consequences,” he added. “We are just a team of developers and economists working hard for a better future.”

Europol also highlighted Samourai Wallet as an emerging “major threat” in 2020, due to its decentralized nature.

Samourai said he believes the “vast majority” of users who use this type of CoinJoin software are law abiding.

“We agree that the use of centralized mixers that take possession and custody of funds should be reviewed and avoided,” the company added in a statement. “However, free and open source software algorithms in which no entity takes custody of the funds cannot be effectively regulated.”

Allison Owen, an analyst who leads the Royal United Services Institute’s work on cryptocurrencies and financial crime, said mixers could be used by governments to evade sanctions.

“People say the blockchain is so transparent when it comes to transaction monitoring, but you still have to make sure the monitoring is happening,” she added.

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NCA Calls For Regulation Of Crypto Mixers Used To “Churn Criminal Money”


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