The Official Journal of The Law Society of Hong Kong – (July 2022)
What is a Bitcoin Tumbler? How to Make Your Crypto Transactions MoreAnonymous? |
Legal (Money Laundering and Structuring) Risks |
What are Privacy Coins?
“Work until your bank account looks like a phone number, they say… CHECKING ACCOUNT SUMMARY… Available Balance: $9.11… close enough”– Joshua Chu
One of the biggest misconceptions about Bitcoin is the belief that transactions
are anonymous and untraceable. The reality is that as all Bitcoin transactions are recorded on the Blockchain, hence public, this means that anyone can see and track where all the money is going. For example, when a person sends a recipient (e.g., you) BTC, they can simply click on your wallet address and view:
1. How much money you have;
2. Who else has paid you; and
3. Where you have been spending your money.
Thus, not only are bitcoin transactions far more transparent, it also represents a huge privacy concern (e.g., just imagine your bank decides to publish all of your bank statements). To illustrate:
1. A millionaire, they probably don’t want their neighbour/wives/in-law/girlfriends to know about their balance (kidnapping and other risks aside); OR
2. For someone without any money (like the author), they probably don’t want the entire world to know that their bank balance is $9.11 either.
What is a Bitcoin Tumbler? |
A Bitcoin Tumbler or Cryptocurrency Tumbler is a service that mixes a cryptocurrency transaction with other transactions thereby eliminating the possibility of a third party discovering where the transaction originated. As the blockchain is a public record, it is well known that with proper analytics, a sender’s wallet can be uncovered and, whereby it becomes relatively easy to reveal the owner’s name thereafter.
Where a sender is concerned of being identified when sending crypto token OR a recipient desires plausibility deniability, they may turn to a tumbler. In essence, a tumbler operates like a virtual private network (“VPN”), which hides the sending address from the receiving party.
The virtual assets are sent to the tumbler, and the tumbler relays the transaction, thus hiding the sender’s address. The amount of cryptos may be split up to further randomize such transactions.
Security Via Popularity
One key factor to note is that a tumbler will only be effective where it achieves critical mass. For example, where there are only two individuals using a tumbler, it will be relatively easy for the public to discern who’s crypto belongs to who.
However, with the soaring value of virtual assets, it has been noted that the number of people turning to tumblers is increasing (presumably to keep their cryptos away from prying neighbour/wives/in-law/girlfriends). The odds of an easy trace are therefore much lower. Such odds are of course exponentially compounded where cryptos goes through a tumbler multiple times.
Are Cryptocurrency Tumblers Illegal?
| Scrutiny from Regulators
Tumblers, just like VPNs are merely technology (e.g., pieces of code), and as such, are not illegal per se. That said, the use of technology in a certain manner may attract legal liabilities.
For example, Roman Sterlingov, the CEO of Bitcoin Fog, had been arrested in the United States for running a Bitcoin mixer platform on the alleged charges of:
1. Unlicenced money transmission;
2. Money laundering; and
3. Money transmission without a licence.
As crypto is novel, both the U.S. Federal Prosecutors and the Courts will have to navigate a number of issues including whether the alleged offence have more to do with the bitcoin tumbler that Roman was running, OR instead, more traditionally, how Roman was dealing with the money in his custody.’
Further, it remains to be seen how regulators and law enforcement can deal with the users as, all users are anonymous. All a user needs to gain access to Bitcoin Fog was a username and password. As such, it is unlikely feasible for the government (for now) to go after the users. Instead, the operators are the prime targets.
“Small business has Uncle Sam as a partner… who puts up no money, does no work, and wants 30 or 40%...”
– Irwin Schiff
That said, more clamp down can be anticipated as governments, by their nature, will not like tumblers as tumblers effectively remove a third party’s ability to regulate, control and track money.
Existing Laws in Hong Kong
Just like in the U.S., the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, Cap 615 (“AMLO”) is well position to take enforcement actions against tumblers. Again, the angle of prosecution is likely from whether the activities of the tumblers involve money laundering.
Whilst existing tumblers are ill-equipped to defend themselves from such claims, tumblers can mitigate certain risks by implementing AML measures (including ascertaining source of funds ensuring they are not derived from illicit activities). After all, there are non-criminal users of tumbler services.
What are Privacy Coins?
Therefore, if you are worried about money laundering and structuring risks, but also want the benefits of anonymous cryptocurrency trading, an attractive option may come in the form of privacy coins which are essentially cryptocurrencies that preserve anonymity by obscuring the flow of money across their networks.
Privacy coins allow transactions to be conducted anonymously (hence privacy from neighbour/wives/in-law/girlfriends) without the issues associated with the use of tumblers.
Peeling away the privacy-preserving technology, privacy coins will appear similar to cryptos like bitcoin. They run on blockchains, have decentralized ledgers and are maintained by a network of anonymous validators. It is the advanced privacy techniques that differentiate privacy coins from traditional cryptos. Zcash and Monero are the largest privacy coins by market capitalization.
In a nutshell, the intention of the tumblers is to create privacy around the crypto you own (at least to similar levels to that of having cash in bank where your statements are not viewable in public). The way that tumblers operate is simply by mixing up various cryptocurrency funds. The purpose may range from hiding embarrassing purchase of exotic adult articles from your friends to just not wishing your partner finding out about a pregnancy test you just bought.
– Joshua Chu, Chief Risk Officer,Coinllectibles™
– Erin Ching, Deputy Lead, WomenUnbounded Mentorship Programme