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The murky world of cryptocurrency mixers

Cryptocurrency blending services are a controversial topic in the industry. Some advocate the privacy features of these protocols, while others claim that they are mainly used for illicit purposes.

For platforms like Tornado Cash, the mainstream verdict is “guilty as charged.” The infamous decentralized mixing protocol was sanctioned by the United States Office of Foreign Assets Control (OFAC) in August 2022, essentially making it illegal for anyone to use the service.

Tornado Cash remains a controversial issue and one of its developers, Alexey Pertsev, controversially remains in custody in the Netherlands while investigators try to build a case against the Russian developer and his alleged role in the mixer’s operation.

In a literal sense, one’s loss is another’s gain, and that appears to be the case, according to a report by blockchain analytics firm Elliptic for cryptocurrency mixers.

A blow to money laundering operations

As highlighted in its analysis, Elliptic reveals that over $7 billion worth of cryptocurrencies were processed by Tornado Cash. An estimated $1.54 billion in illicit cryptocurrency was laundered through the platform, with a user base that included state-run hackers from North Korea’s Lazarus Group, among others.

In the wake of OFAC sanctions, Tornado Cash liquidity pools’ holdings dropped by 60%, which is said to have drastically reduced the platform’s anonymity potential for large-scale money laundering operations.

With the alleged closure of Tornado Cash, a number of alternative mixing services have been identified as potential threats to cryptocurrency service providers and law enforcement officers. Elliptic highlights six different logs used as blenders after Tornado Cash was banned.

Not all blenders are used for illegal purposes

Elliptic’s report lays out how these mixer protocols work in different ways, providing potential users with a variety of results. A top-down view shows that these obfuscation logs mixed over $41 million in cryptocurrency, which pales in comparison to the total amount processed by Tornado Cash.

Ether (ETH), BNB (BNB), Wrapped Ether (wETH) and Tether (USDT) are the most commonly mixed tokens as they can be used in the context of decentralized finance (DeFi). Elliptic numbers specifically exclude polygon-based tokens.

Two specific protocols have the highest mixing capacity of the tools analyzed and therefore account for three quarters of the mixed cryptocurrency.

The first is Railgun, a decentralized protocol that Elliptic says is aimed at professional traders and DeFi users looking to hide investment strategies. The Railgun Privacy System removes wallet addresses from transactions on public blockchains using zero-knowledge proof technology. It claims to be ERC-20 token compatible and has no shuffle limit.

Cyclone Protocol is the second protocol, a tornado cash fork that announces a series of improvements said to include yield farming for anonymity pool contributors. Elliptic reports that Cyclone is capable of shuffling 100 ETH/100,000 USDT in one instance and is available on IoTEX, Ethereum, BNB Smart Chain and Polygon.

Aside from Cyclone, which Elliptic highlights in its report as the riskiest protocol among the six protocols, the funds mixed by these services “reflect largely legitimate DeFi trading activity.”

Just $40,000 in commingled funds have been traced to DeFi thefts, suggesting that current activity reflects a lack of adoption of these alternative commingling protocols by nefarious actors and criminal elements.

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Despite the fact that a relatively small amount of cryptocurrency has been mixed by nefarious players, Elliptic still issues a cautionary tale targeting some of the highlighted services.

Cyclone Protocol is identified as the highest risk service under the Tornado Cash Sanctions. The service’s high transaction limit, large available liquidity in its shuffle pools, and its ability to process Tornado Cash’s eponymous governance token (TORN) are causes for concern, according to Elliptic:

“It’s confirmed to be used to launder at least some of the proceeds from DeFi exploits, the large amount of funds it’s processed since then and the apparent absence of its development team to address concerns only compound those risks .”

Buccaneer V3 (BV3) was rated as a “medium to high” risk tool. The Ethereum-based token (BUCC) allows users to “bury” funds for an indefinite period of time without having to mix, pool, or iterate through transactions. A deception mode displays fictitious BUCC balances on user interfaces as a deception technique.

The service could be attractive for illicit use cases as it uses a gas station network to pay transaction fees by claiming a small portion of the BUCC transferred. This could allow users to avoid using regulation-compliant cryptocurrency exchanges and services:

“BV3 therefore claims that it solves the ‘funding problem’ – the problem that usually needs to be addressed in order to source ETH to pay for transaction fees, typically from a centralized KYC exchange.”

A caveat from Elliptic is that BV3 uses technology that is still being tested and its features and capabilities have yet to be fully realized. The remaining four protocols all exhibit factors that Elliptic believe will prevent large-scale illegal use.

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