The Cryptocurrency Tumblers: Risks, Legality and Oversight

The Cryptocurrency Tumblers: Risks, Legality and Oversight.

Services known as Cryptocurrency “Tumblers” mix identifiable (alternatively known as “tainted”) cryptocurrency funds, with untainted pools of funds, so as to obfuscate the trail behind the cryptocurrencies. In other words, they obfuscate the origin, possession, and movement of cryptocurrencies, although the extent to which they do so is a function of the process of tumbling, both in terms of encryption and mixing strategy. Cryptocurrencies are gaining increased importance (Chohan 2017a, 2017c), even as their legality is not a fait accompli in all jurisdictions (Chohan 2017b), and the notions of regulation, accountability, and oversight (Chohan 2017f, 2017g, 2017h, 2017i, 2017j, 2017k) particularly for cryptocurrencies themselves (Chohan 2017d, 2017e) are an area that requires urgent academic and practitioner attention. The Tumbler specifically raises questions about the need for oversight, accountability, and regulation because they may have a propensity to abuse by nefarious elements who revel in the obfuscation of their cryptocurrency trails. However, the Tumbler is but a manifestation of the cryptoanarchist roots (see discussion in Chohan 2017d) of cryptocurrencies, helping to keep these devises in accord with the original emancipatory principles of cryptoanarchism.
As such, the Tumblers embody the very problem at the root of cryptoanarchism in practice. If misused, the freedom, privacy and secrecy of the individual allows them to take anti-social or nefarious actions against other individuals or collectives. Yet, the true spirit of cryptocurrencies is to seize the freedom of technology and preserve the privacy of the individual. Chohan (2017d) discusses the cryptoanarchist principles that are infused into the development of these

instruments, and this discussion paper applies the context of the Cryptocurrency Tumbler to better illustrate the problem.
A Tumbler (alternatively called a “mixing service”) will dilute, co-mesh, and mix identifiable cryptocurrency funds with other funds for a fee of 1-3%. Tumblers are a product of the cryptoanarchist aspiration to bolster the anonymity of popular cryptocurrencies, including the most popular one: Bitcoin (“Bitcoin Tumbler”), as these popular cryptocurrencies provide a public ledger of all transactions. A parallel of the mixing service in traditional systems would be reflected in the Panama Papers and offshore haven movement of capital (Chohan 2017l), which make the tracing of the flow of funds extremely difficult as the money moves across various jurisdictions, obfuscating the trail of funds considerably.
While mixing helps protect privacy, it is also susceptible to the set of risks usually subsumed within the category of anti-money laundering (AML) problems. Mixing legal with illegal funds is the quintessential backdrop of AML problems, which is why adherents of better regulation and oversight from an anti-crime stance would argue that Tumblers should be criminalized for their possible use in nefarious activities, including organized crime and terrorism.The actual use of mixing in this way is limited by the function of time, complexity, and levels of encryption. From an ex-ante regulatory standpoint, criminalizing the use of Tumblers would preclude some amount of engagement, but from an ex-post standpoint, task forces would need to be engaged in the tracing of the use of Tumblers.
There are recent precedents for the use of tumbling nefariously, as when blacklisted “tainted” deposits originating from stolen bitcoins have been found. In any case, the existence of tumblers

has made the anonymous use of darknet markets easier and the job of law enforcement, oversight, and regulation much harder. The oversight and accountability aspect of this requires much future research.
However, the discussion should not be limited to Tumblers per se, as there are alternative approaches to tumbling that can be used to (1) preserve the cryptoanarchist principles of these devises, or put in the opposite light (2) to misuse cryptocurrencies for untoward ends. Alternatives include newer and proposed coin implementations such as Cloakcoin, Dash, PIVX and Zcoin, which have built-in mixing services as a part of their blockchain network. Among these, highly noteworthy is the Zcoin cryptocurrency, which provides the most complete and secure degree of anonymity by using cutting-edge Zerocoin, which represents a type of Zero-Knowledge proof method (see Chohan 2017a, 2017d), with anonymity sets in the region of thousands (as opposed to the low hundreds) for a Tumbler. The Zerocoin anonymizing function is built on Bitcoin Core code as an additional layer which allows selective anonymization as required. A contrasting example is the Dark Wallet client software for bitcoin, which was built to natively mix transactions between users to achieve the same effect without relying on a centralized service, and in this sense its decentralization is more representative of Cryptoanarchism (2017d). Yet another example is the Monero cryptocurrency, which provides complete anonymity without the need for a Tumbler, due to its privacy centric design, utilizing ring signatures to keep the entire blockchain secure and untraceable. These specific examples are less important than noting the fact that alternatives exist to the Tumbler model.

In sum, there is a dichotomy between the need to identify risks, including those of an AML nature, through some sort of accountability, risk-management, or oversight element. However, for cryptocurrencies to adhere to the original spirit of Cryptoanarchism, there is a need for devises such as Tumblers, to protect privacy and preserve the freedoms of the individual. This dichotomy is exemplified by Tumblers, although newer and other manifestations will arise the process of evolution of cryptocurrencies. Future research must examine the dichotomy of this sort further, particularly by situating cryptocurrencies within the accountability literature.