Two days ago, the U.S. Treasury imposed sanctions on Tornado Cash – a popular mixer for digital assets which is alleged to have helped launder $7B since its launch 3 years ago. In light of this recent development, we take a brief look at what a digital asset mixer is, why authorities don't like them, and what you can do about it.
In Short Supply
What is arguably the most important and prevalent valued asset in todays world? It isn't USD, Gold, or even Bitcoin (yet). Rather, many would say that it is data/information. We live in an increasingly digital world where every click and purchase is tracked – allowing companies to build extensive profiles on citizens, media to be manipulated, spending habits analyzed, and future actions/reactions forecasted. As a result, financial privacy has become quite rare, resulting in many turning to digital assets in a bid to re-gain a semblance what has been lost.
However, the idea that anonymity is built-in to digital assets is a lingering belief that needs to be extinguished. The majority of blockchains are transparent public ledgers, with each and ever transaction recorded for the world to see. Despite anonymity not being a given, it doesn't mean that it can't be achieved through various means though – Enter mixers/tumblers.
What is a Mixer/Tumbler?
Digital asset mixers/tumblers are services which function with the purpose of obfuscating/obscuring the origin and destination for value transactions. These services are on offer from both centralized entities, and decentralized protocols.
How do They Work?
While the path of BTC can be traced from wallet to wallet, each token is in fact indistinguishable from one another – something known as fungibility. Mixers/tumblers typically work by leveraging this fungibility to provide anonymity by acting as an intermediary in transactions.
These services accept BTC from a variety of transactions, essentially throw them in one big pot, and then complete the transaction by sending off the appropriate amount of BTC to the intended destination. By breaking the chain between origin and destination, combined with the fungibility of BTC allows for anonymity to be provided.
It is important to note that while decentralized mixers can provide true anonymity (or at least plausible deniability), by using a centralized variant you are putting all your trust in the facilitating company. This means hoping that the company not only does not simply steal your asset, but that they do not store any identifying data.
Although it might be obvious at this point, mixers are a two-sided coin. Yes, such services can provide users with a piece of privacy long lost to the digital age. They are also an irresistibly attractive outlet for criminals looking to launder money – which is exactly why they are under attack.
This ability to aid criminal activity has resulted in more than just the recent sanctions placed upon Tornado Cash, and extend to various exchanges blacklisting such services. Two exchanges in particular that have taken stances against such services are Binance, and Paxos – a necessary move to remain complaint with existing Anti-Money Laundering (AML) laws.
Where Can Privacy Advocates Turn to From Here?
With exchanges refusing to work with mixing services, sanctions being placed by government bodies, and a continuing decline in privacy overall, where can digital asset enthusiasts from here?
As it stands, there exist various privacy-oriented blockchains which can be utilized as a stand-in for the now maligned functioning mixers around the world. These include, but are not limited to,
- Utilizes RingCT, Stealth Addresses, Ring Signatures, Transactions over TOR, and more to provide financial privacy.
- Selective privacy features which allow senders to opt for shielded or unshielded transactions
Even these options are becoming difficult to access as exchanges have slowly been delisting privacy coins for multiple years now in a bid to avoid the wrath of regulators.
Then there is the rise of decentralized exchanges (DEXs), and while these may facilitate trading without the need for KYC, the technology is still new. Although they may be a viable candidate for privacy preservation in the future, there are currently too many lapses in security that lead to what feels like hack, after hack, after hack.
Overall, between the trust being placed in a third-party when using a centralized mixer, and the increased attention be paid to such services by authorities around the world, mixers can be a dangerous option to utilize. The unfortunate reality is that we will probably never regain true privacy, and the partial privacy provided by new developments like the Lightning Network may be as good as it gets for the average digital asset enthusiast.
There are many legitimate reasons for maintaining ones privacy. It is a shame that this is often needs to be overlooked in a bid to hold bad actors accountable.