Monday, February 10, 2025
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We invite Connect readers to send questions to connect@elliptic.co for our in-house team of SME regulatory and technical experts to answer with video answers. For the first of these, VP of Policy and Regulatory Affairs David Carlisle discusses the following: Do crypto mixers disable analytics and blockchain compliance?

(We had one or two technical issues recording David’s video, so the transcript is provided below.)

Transcript

Hello, and welcome to this episode of Elliptic’s Ask the Expert series, where we address questions from readers of our Elliptic Connect platform on topics related to cryptocurrency compliance and regulation. I’m David Carlisle – Elliptic’s VP of Policy and Regulatory Affairs – and today I’m going to talk about an issue we often get asked about at Elliptic, a cryptocurrency mixing company.

Specifically, the question we have today is, “Do mixers disable blockchain analytics and regulatory compliance?” Great and very relevant question.

So, for those who may not be that familiar with the concept, hashing services are a type of technology that allows users of cryptoassets like Bitcoin to obfuscate their transactions. Most of you are probably aware that despite some common misconceptions that crypto is completely anonymous or untraceable, crypto is actually very transparent and traceable. This is due to the highly visible nature of blockchains or public ledgers that contain a record of all transactions that we can analyze and track at a company like Elliptic.

Criminals are aware of the fact that their crypto transactions are very public and visible. So, really, from the very beginning of Bitcoin’s history, criminals started using mixers to try to become more anonymous. Mixers work as advertised – they disguise the source or destination of your funds by taking cryptocurrency from multiple users and then redistributing it so that users appear to have new, clean coins and the previous trail of funds is broken. There are two main types of mixing possibilities. First, there are centralized mixers – that is, services that will actually take custody of user funds as part of the mixing process – and second, what we call “privacy wallets,” which take a more decentralized approach to concealing user funds.

These types of technologies are often used by criminals in the money laundering process, and recently we have even seen cases where sanctioned nation-states, such as North Korea, have used mixing services as part of their illicit financial activities. Organizations such as the Financial Action Task Force (FATF) have highlighted mixer transactions as one of the more significant and high-risk activities involving cryptocurrencies.

One of the most common questions we get at Elliptic was what I mentioned earlier: Do mixers render blockchain analytics capabilities like Elliptic useless? And do they make it impossible for crypto companies or financial institutions that process transactions using mixers to comply with regulations?

It may seem counterintuitive, but the answer to that question is no. There are actually several ways that blockchain analytics can be used to identify transactions involving mixers and to enable regulated businesses to manage risks appropriately.

Now, commingling services are generally very successful at obfuscating the ultimate source or destination of a user’s funds – they break through the end-to-end trail of funds that is otherwise highly visible on the blockchain. However, what we can see on the blockchain are the transactions going into the mixer and the transactions going out – you lose sight of the full flow of funds, but you can still see the funds going in and out of the mixer.

That alone is enough to provide law enforcement agencies and compliance teams with critical information about mixers that they can use to take appropriate action.

For example, if a cryptocurrency exchange service uses blockchain analytics, they can see when their customers send cryptocurrency to the mixing service or receive cryptocurrency from the mixing service. A regulated business can take the risk of rating those transactions with Mixer so that their transaction monitoring teams know to review the transactions – and can then use that information as a red flag indicator to assess whether they should file a Suspicious Activity Report (SAR) about the activity in question.

Where they file SARs about activities involving mixers, law enforcement agencies can then use the information in those SARs about the customers involved in those transactions and combine it with information from blockchain analytics to conduct investigations and apprehend criminals.

So really, blockchain gives us enough visibility to allow regulated businesses to engage in monitoring mixer transactions and then act on that information using a risk-based approach.

We’ve actually seen some very high-profile cases involving mixers where information provided by regulated companies has been critical to bringing down criminal networks. One of the best examples of this was in July 2020, when cybercriminals hacked the Twitter accounts of a number of famous individuals such as Elon Musk and Barack Obama and used them to trick other users into sending them Bitcoin. In that case, after receiving Bitcoin from their victims, the criminals laundered the funds through centralized mixers and privacy wallets – and we could see them doing it on the blockchain in real time, but then the trail went cold.

However, after routing the funds through the mixing services, the criminals sent the funds to cryptocurrency exchange firms, which filed SARs about the transactions they saw coming from these services. And in that case, the police were able to use that information to arrest the criminals just 16 days after the hack.

So, despite their best efforts, criminals can’t always hide behind the mixer. Regulated businesses can play an important role in detecting high-risk transactions with them. So it’s important to ensure that you have access to analytical capabilities that can help you do this, and that your compliance team is trained and skilled in identifying red flags involving crypto mixers.

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