Bitter Pills in Crypto Mass Adoption?

We examine the double-edged sword of privacy in crypto, analyzing how anonymity tools like privacy mixers and coins have impacted mass adoption amid the rise in financial crimes.

On January 3, 2009, the public had the chance to experience what anonymity in finance really meant — something we now know as cryptocurrency.

The inventors of cryptography saw it as a way to save economies from collapse due to the shortcomings of fiat currencies. Fast forward to the present, financial watchdogs are fighting against the use of virtual currencies due to the trend of fraudsters use them to earn billions of dollars every year.

Certainly, there is the notion that money launderers like to use cryptography to steal people’s funds because they are supposedly untraceable. Whether through crypto mixers or privacy coins, the sentiment has tarnished the image of crypto, but to what extent? Let’s find out.

Crypto Mixers and Privacy Coins: Anonymizing Transactions

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

So in essence, encryption is not completely undetectable. And that’s why some developers in the crypto community decided to create a way to completely anonymize transactions, and two ways to do this were through crypto mixers and privacy coins.

Crypto mixers, or tumblers, are platforms that take potentially associated funds and pool them with others to make it difficult to establish the origin of certain coins. On the other hand, privacy coins are cryptocurrencies that employ certain sophisticated cryptographic features, such as stealth addresses, to increase obscurity for their users.

The purpose of privacy coins and crypto mixers is likely why financial fraudsters use them to hide where their money is going.

Chainalysis launched a report earlier this year, showing that there was an estimated $24.2 billion worth of cryptocurrencies received by illicit addresses in fiscal 2023.

Looking deeper into this, we can uncover events that support what scammers think when they go the crypto route:

Tornado Money

According to the European Union (EU) Innovation Center for Homeland Security, hackers and scammers often launder stolen funds using crypto mixing services like Tornado Cash to hide traceability and avoid detection. According to the EU center, services have greatly slowed down the efforts of regulators to create the foundation for mass adoption of crypto.

Looking at the case brought against the co-founder of Tornado Cash, perhaps the EU is pointing the finger in the right direction. Recently identified by blockchain analytics entity Arkham Intelligence, Orbit Chain saw an explorer move around $47.7 million into Tornado Cash. The funds are a portion of the $82 million stolen from the network in January.

We can only speculate what the hacker wants to do with the funds transferred to the crypto mixers. Unfortunately, such incidents fueled the fate of Tornado Cash co-founder Alexey Pertsev, who was condemned to sixty-four months for money laundering in May by a Dutch court.

Crypto mixers like Tornado Cash were created to increase the anonymity factor of using virtual currencies. However, money launderers and scammers have found a way to “corrupt” the service, forcing some open source software makers to give up creating them or improving their functionality to to fear of accusation.

Although the crypto community is supporting the Tornado Cash co-founder, with privacy advocate Chris Blec emphasizing the need for new legislation to safeguard user privacy in emerging blockchain technologies, the damage may already have been done.

Monero Privacy Coin, Money Laundering and CSAM Watch

Privacy coins have their merits and liabilities, but overall they present a development in cryptography that enthusiasts want to see advance. These digital assets, for example, Monero (XMR), echo exactly what cryptocurrency users want in its entirety: confidentiality and discretion.

Unfortunately for the community, these two entities are exactly the music that money launderers, hackers and scammers want to hear. Thus, they take advantage of the features and advantages of using privacy coins.

Child sexual abuse cases

In Chainalysis’ recent crypto crime report, Monero was reportedly widely used by CSAM (child sexual abuse material) providers in the financial year 2023. According to the crypto statistics firm, Monero plays a more significant role in enabling CSAM providers launder their earnings online rather than just obscuring the purchases themselves.

Chainalysis shared a snapshot of a CSAM-affiliated dark web forum asking for Monero donations.

A screenshot showing a CSAM vendor asking for XMR donations | Source: Chainalysis

They believe vendors are asking for Monero because it takes advantage of instant exchanges. Instant exchangers operate without holding users’ funds and generally do not support crypto-to-fiat currency conversions. However, unlike decentralized financial protocols, they are centrally managed by a single organization.

Additionally, these exchanges leverage the liquidity of multiple exchanges to offer competitive pricing and facilitate direct cryptocurrency-to-crypto exchanges between users’ wallets, often performing on-chain transactions. challenger track back. Combined with lax know-your-customer (KYC) requirements, these platforms can be advantageous for hiding the origin of cryptocurrency transactions.

Player scams

In 2021, the gaming community faced hackers who stole their fortunes by installing malware in very popular titles. The malware, dubbed crackanoshit was used by cybercriminals to extract the powers of computers around the world and use them to mine cryptocurrencies.

Since gaming platforms are often quite powerful by design, their processing powers became a good giveaway that hackers were unable to approve, and they made over $2 million worth of Monero from the illicit activity.

A Reddit post about Crackanosh | Source: Reddit

Why did they choose to mine Monero? Well, it could be because it is easier to mine than cryptocurrencies like Bitcoin. However, perhaps it is because with Monero, they could easily exchange digital currencies for fiat and live happily ever after.

Tales may make us feel that Monero does more harm than good, and that is not the case. Privacy coins were developed to improve the functionality and use cases of the cryptocurrency industry. But scammers and money launderers have tarnished their reputations and brought greater scrutiny from financial and regulatory watchdogs.

Improving Crypto’s Reputation: What We Can Do

Recently, the CEO of blockchain data analytics company Bitrace, Isabel SHI, gave her thoughts on crypto crimes at an event held at the Hong Kong Polytechnic University.

Isabel began by analyzing 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 illegal purposes.

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

Furthermore, Isabel highlighted that the permissionless and borderless nature of cryptocurrencies allows transactions to be conducted globally at any time, making them particularly attractive to criminals.

From Bitrace and Isabel’s view, we can see that fraudulent trends arise from gaps present in blockchain ecosystems. And to stop them, we may need to employ certain parameters that will not only eliminate the problem of attracting money launderers and scammers but also provide reasons for crypto mixers and privacy coins to prosper without a bad name.

Here’s what cryptocurrency mixers and privacy coin developers can do to prevent money launderers, hackers, and scammers from using their services for illicit activities and drive mass adoption of cryptocurrencies:

Crypto mixers

• Developers must implement strict KYC verification processes to authenticate users and prevent anonymous transactions.
• Companies can collaborate with regulatory authorities 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 promptly.
• Since few users know how to use cups responsibly, companies must educate them about the consequences of illicit activities to promote ethical behavior.

Privacy Coins

• Developers can conduct regular audits and publicly disclose development activities to build trust with regulators and stakeholders.
• Collaborating with law enforcement authorities to share information about suspicious transactions and combat misuse effectively will strengthen regulation.
• Implementation of optional auditability or compliance features to serve users who prioritize regulatory compliance.
• Educating the community about the benefits of privacy while emphasizing responsible use will discourage illicit activity.

Privacy Slows Adoption, But Still Important

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

However, the necessary actions must be taken by developers, who must increase controls and cooperate with the bodies that regulate these areas. However, as the world changes and new technologies emerge, achieving the critical rate of cryptocurrency adoption, even with such protection elements, is quite achievable.

By recognizing that privacy and regulation can coexist, the outlook for cryptocurrencies can remain positive for both regulators and cryptocurrency users.

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