For a long time now, authorities above all from the US have been closing mixers and other privacy services and tools operators (like Samourai) and arresting their founders and operators.
They may believe these crackdowns help against money laundering. But that is probably not the case.
Why closing mixers is uselessThe reason is simple: If a criminal has some technical abilities, then he can hide his traces on blockchains in several ways without even having to use a privacy tool or mixer: He only has to do a lot of transactions mixing in different sources of funds, for example using CoinJoins and exchanges of coins on different blockchains.
One important method to help with that task are
atomic swaps, a trustless method to exchange funds coming from a blockchain for funds on another chain. Traditional atomic swaps still provide a link between the transactions on different blockchains. But a few years ago a new kind of atomic swap was developed which uses
adaptor signatures and is already used in Bitcoin-Monero swaps. This method makes the swap private.
This also gives a completely safe path for all criminals to hide their on-chain traces (I purposefully avoid the term "money laundering", see the last paragraph): simply do a couple of atomic swaps and transactions, using different blockchains, and it will be extremely difficult -- probably as difficult as to detect funds going through a centralized mixer -- to link these transactions together. This would even work without recurring to "privacy coins" like Monero.
Why a complete crackdown on privacy services would actually help criminalsIn the current crypto services/tools landscape, where mixers are often still centrally or semi-centrally operated, law enforcing authorities have still some chance to stop criminals. For example, a centralized mixer has at least the opportunity to react to orders and petitions of authorities, victims of crime or whitehat hackers. Probably some mixers
do cooperate if they still can intervene.
If criminals however went to completely decentralized methods like atomic swaps, nobody could stop them. Only the trade partners, but be honest, how many traders do chain analysis? So you go from a perhaps 20-50% chance to be able to stop criminal transactions due to cooperating mixers down to perhaps 0.01% of atomic swap users which can at least delay atomic swaps - atomic swaps can never be frozen!
It becomes even worse if we take into account the concept of the
anonymity set. Currently, there are only few people using atomic swaps. So the anonymity set is relatively low: To achieve a high degree of anonymity, you need a large set of transactions (or "funds origins") to mix your funds with. But the current liquidity of these services provides few "funds origins".
But what will happen if there are no centralized or semi-centralized mixers available?
Everybody who wants privacy will use atomic swaps, decentralized CoinJoins and other similar trustless/decentralized services.
Funds going through mixers have mostly been legitimate in many cases. Only in some occasions, where mixer operators probably cooperated with criminals, criminal funds made up a big portion or the majority.
So it's very likely that the anonymity set which can be achieved using atomic swaps will explode. And that will benefit criminals. There will be probably no way to stop them, at least inside the crypto-sphere.
A better approachAuthorities should accept that it is not possible to make it impossible to hide the traces of stolen/hacked/terrorist/sanction-evading funds inside the blockchain world. And the more they view privacy services as enemies, the more difficult it will become to stop criminals. Basically, cryptocurrency should be treated like cash.
Instead, authorities and lawmakers should focus first on the fiat "laundering" operations which emerge when the criminals have converted their funds to fiat, e.g. the creation of fake companies and other traditional methods. Because for "laundering" a criminal needs to end up with "clean" funds, it often doesn't help to have "crypto funds of unclear origin".
But also cooperation with privacy services could help to combat crime. For example, I can imagine a kind of "agreement", preferrently written into clear laws and regulations: A country allows non-KYC mixers, with the requirement that they react to orders and petitions from authorities, whitehat hackers (e.g.
in the way the Security Alliance promotes it) and victims of crime, and block their addresses or freezes the funds until it's clear if they are related to a crime or not. It could also help that services could delay processing of funds, requiring more confirmations for a deposit, giving victims and authorities some more time to react.
Would criminals still use techniques like atomic swaps? Probably. But remember what I wrote about the anonymity set: People who use mixers for privacy and not to hide crimes, would be able to use centralized mixers and privacy tools without having to fear anything. So they would probably not massively switch to atomic swaps, and the atomic swap anonymity set would stay small.
There is also the important related topic of
the negative consequences of the KYC requirement for all kinds of cryptocurrency services, resulting in data of hundreds of millions or perhaps even already billions of people often stored on relatively unsafe servers, being an interesting target for fraudsters due to the possibilities it provides for identity theft. The linked text from 1miau is really worth reading.
In summary: Neither the crackdown on privacy services nor the widespread KYC obligations really help to combat crime.
It may be difficult for an average Bitcoiner to convince their country's authorities of these arguments. But there are possible strategies.
Tell your friends about the harm of crackdowns and KYC requirements. Your friends probably are also voters, and the more people understand these things, the more attractive it becomes for politicians to hear.
Support privacy on social media. And for those wanting to do a bit more:
Participate in pro-privacy organizations like the
Electronic Frontier Foundation or the
Pirate movement.
Edit: I wrote a similar text
in Spanish, and possible will also add a German translation.
I really liked your point that authorities should stop focusing on crypto as the primary focus but to look for the exit point when the funds become clean and turned into fiat and that they should try to find the transfers or large sums of cash via withdrawals from the bank etc. because the funds don't become fully laundered until they reach that point. But Also, the Atomic swaps are a very interesting subject, and I also like that point that cracking down hard on coin mixers are going to be like shooting themselves in the foot. At least with coin mixers if authorities made some kind of deal with them to help them catch criminals it would at least be a tool they could use, but I don't think they see it that way its just a money laundering machine in their eyes. I will have to look more into the atomic swaps, I had no clue those even existed.
