HARD WALLET

NCA calls for regulation of crypto mixers used in ‘churning criminal cash’

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

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

The open-source software requires multiple parties to sign a digital contract that allows coins from different wallets to be shuffled and redistributed — making it difficult to trace where the money has originated from.

Gary Cathcart, head of financial investigation at the National Crime Agency told the Financial Times: “They can be used to provide a ‘layering’ service, churning criminal cash, obscuring its origins and audit trail, similar to how a cash business might be used by criminals to legitimise cash through the banking system.”

The warning comes as authorities globally have become more concerned about the criminal use of cryptocurrency, as the new and unregulated sector has grown in popularity.

The NCA said regulation would force mixers to comply with money laundering laws, with an obligation 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, Cathcart added.

Around 15 per cent of all proceeds of crime was routed through mixers in 2021, according to Elliptic, a group that analyses cryptocurrency transactions.

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

Wasabi, which launched in 2018, operates on a decentralised basis with software anyone can download and use. It is a flagship product of Gibraltar-based zkSNACKs, which describes itself as “unfairly private”. The company takes a fee from each transaction, amounting to 0.003 per cent multiplied by the number of users mixing wallets in each round of a transfer — the level of privacy increases with a higher amount of users.

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

Elliptic estimates that more than $1bn worth of proceeds of crime has passed through Wasabi, by tracing wallets of known malicious actors.

In 2020, the EU’s law enforcement agency Europol published a report on Wasabi, after seeing an increase in investigations involving the software. It found that over a three-week period, 30 per cent of bitcoin passing through the platform came from dark web markets. In the wider cryptocurrency market, dark web transactions are estimated to account for only one per cent of total transfers, it said.

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

“The alternative, which is Bitcoin without security and fungibility, would lead to disastrous unforeseen consequences,” he added. “We’re just a team of developers and economists who are working hard for a better future.”

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

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

“We agree that the use of centralised mixers that take possession and custody of funds should be scrutinised and avoided,” the company added in a statement. “However, free and open-source software algorithms in which there is no entity that takes custody of 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 argue the blockchain has so much transparency when it comes to transactions monitoring, but you still need to make sure the monitoring is taking place,” she added.

Traciwininger
Author: Traciwininger

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