Cryptocurrency tumbler and its users (Part I)

Today let’s explore the use of cryptocurrency tumblers, and how this can be a double-edged sword, always depending on who is using it. Let’s start with the basics

What is a cryptocurrency tumbler?

Instead of giving you a definition let me try to explain to you first what problem this type of service solves. In the end that is why services are created, to solve specific problems, or a deficiency in a tool. In our case that tool would be bitcoin blockchain. Ok, let’s paint the following scenario for you

Kim’s plan

Note: This is a fictitious situation with some similarity to reality. Just in case someone asks me if I know Kim.

sketch

Let’s suppose you are called Kim, Kim from North Korea(is related somehow, don’t cancel me). Now you, Kim from North Korea, interact with a darknet marketplace selling some illicit products, or hiring someone to make an illicit activity for you. Really bad stuff, but you are Kim from North Korea, you don’t care, you are fearless and you think you are protected by Big Brother. Now, Kim wants to get his bitcoins out of the Silk Road, cash it out. Kim himself is from North Korea, he cannot possibly create an account in an exchange with his documents, I mean passport or ID card. I know this first hand, given that I lived 27 years having a Cuban passport only. Our countries are banned from all exchanges that require KYC(Know Your Customers).

Now, but Kim has a plan, he has a friend who does have another citizenship, or that has an account in a given exchange with all its KYC provided in the exchange. So Kim, get his bitcoins out of The Silk Road, and transfer these bitcoins to his friend. Let’s call him Lee, how Lee and Kim meet each other is a mystery and not important. So now, Lee actually has the bitcoins on his wallet

alt_text

Lee is ready to put the bitcoins on the exchange, the problem is as follows. All the transactions on bitcoin blockchain **ARE PUBLIC. **Everyone, absolutely everyone can read it,

including of course the FBI. Now in the transactions you don’t have your name labeled or anything that identifies you, what really identifies you or gives away your identity is when you start interacting with an exchange. On the eyes of the FBI this story happens like this sketch

alt_text

Given that serious exchanges are legit companies, they have to avoid users using their platform for money laundering activities. So they normally report in some way to authorities about their wallets. Now it is just an easy piece for the FBI to know(maybe not catch) that Kim is one of the users of the Silk Road darknet marketplace. They have all the information about Lee, given that Lee is registered in the exchange with his passport. With a little pressure they will know who Kim is too.

The problem

Now, in this situation, you may have noticed that there are actually two issues:

  1. All the transactions on bitcoin blockchain(and most of them as well) are public. So anyone can read your history of transactions, to which wallets you’ve operated in the past. Your name is not in the transaction, but can be obtained with the second point.

  2. Using exchanges that require KYC without obfuscating your transactions first. In case of course you have reasons to obfuscate your transaction.

One solution

Now here is where cryptocurrency mixers come into play. A cryptocurrency tumbler or mixing service according to Wikipedia:

Is a service that mixes potentially identifiable or “tainted” cryptocurrency funds with others, so as to obscure the trail back to the fund’s original source.[1]

There are several mixing services out there. If you are curious, use your friend Google, he knows more than one for sure.

Pros and cons of using a mixing service

Why you would like to use a mixing service is up to you, personally I like the idea of staying completely private, but I’m not naive. I know that in most of the cases the use of these services is for money laundering.

Cons

I’ll start with the cons, because I really think they are way more important than the pros.

  1. Most of them are centralized, meaning that one guy or entity is running the infrastructure of that mixing service. If for some reason he decides to run away with the money you deposit there, say bye-bye to your money. Another possible problem is that this guy or entity has a lousy setup leaking information to the public. In general the problems are associated with centralization, but most exchanges are also centralized and you don’t have access to your private keys so it is not so uncommon.

  2. The transaction you will be trying to make from A to B will have some delays, in order to obfuscate it more.

  3. Requires mixers to be online

  4. Anonymity sets are generally low and reliant on the number of mixers

  5. Amounts are still completely visible

Some of these cons were taken from Firo coin comparison.

Pros

  1. You get anonymity on your transactions. Is a big plus as well.

Final notes

Is always up to you and your situation if you really need to use these types of services. My personal note would be to Do Your Own Research always before sending any digital assets in a blockchain. Apart from that, there are better alternatives than to use a centralized cryptocurrency mixing service. For example, the use of cryptocurrency that uses Zero Knowledge Proofs or Ring Signatures. On further blogs I’ll try to cover both of these cryptography methods.