What Are Coin Mixers And How Are They Used For Money Laundering

Coin mixers or crypto mixers or cryptocurrency tumblers is a service that allows users to 'mix' their cryptocurrencies with cryptocurrencies from various addresses, making them untraceable.

These mixers have often been criticized for their use in multiple money laundering cases. One of the most famous crypto mixers is Tornado Cash.

In order to understand what a crypto mixer does, you need to imagine a swimming pool filled with money. This could be a pool of $100 bills or a pool of Ether (ETH) tokens. So, when you deposit your $100 bill or Ether into the pool and take out a bill or token of the same denomination from the other end, you essentially receive the same amount you put in. However, the origin of the money you now hold in your hands has changed.

Suppose millions of users do the same, and there are millions of ETH in the coin mixer. When you get your crypto from the other side, it could be the ETH of any one of the users who has put their funds in the mixer. This is how a cryptocurrency tumbler works.

Using a cryptocurrency mixer makes it difficult to clearly trace the whereabouts of the funds. Just like, to use another example, if you walk into a mall with a green bag and there are hundreds of green bags and you exchange a green bag with another, it is practically impossible to know which one's yours.

All the funds are lumped together in mixers and the distribution of these funds takes place at random intervals, making it the perfect tool for cryptocurrency money laundering. The mixer charges a fee for mixing the funds, which typically ranges from 1%-3%.

However, mixers were not introduced for laundering money. Initially, mixers were introduced to introduce privacy in the world of cryptocurrency because most of these blockchain-based tokens have public ledgers.

As mentioned above, Tornado Cash has become a major cryptocurrency mixer. As per the official website of the mixer, it breaks the on-chain link between the deposit and withdrawal to “improve transaction privacy."

"Whenever ETH is withdrawn by the new address, there is no way to link the withdrawal to the deposit, ensuring complete privacy," says the website.

In order to operate, the user does not need to log in or provide Tornado Cash with any personal information. All they need is an Ethereum Name Service (ENS) domain along with a random key generated by Tornado Cash.

Interestingly, Bill Callahan, a retired Drug Enforcement Agency agent, pointed out to CoinDesk in January that obfuscating money is not the same as money laundering. In the real world, people can have private cash transactions without anyone else other than the receiver and the sender knowing it.

Tornado Cash co-founder Roman Semenov told Bloomberg earlier this year that the service falls under "anonymizing software providers," which excludes it from money transmitter regulations in the U.S. where Know Your Customer or KYC is required.

“All we do is write code and publish it on GitHub,” Semenov added. “This is pretty close to the definition of free speech so writing code cannot be illegal.”

Despite Semenov's claims, it is important to note that 7.5% of the stolen funds from the biggest hack in the history of decentralized finance (DeFi), the Ronin Bridge hack, in which investors lost $624 million, were laundered through Tornado Cash. This data was pointed out by blockchain security firm PeckShield.

As per an April Twitter post from the mixer, it has blocked the addresses related to the Axie Infinity's Ronin Bridge hack.