Despite their official intent of protecting on-chain user privacy, cryptocurrency mixers like Tornado Cash are allegedly used often by criminals to launder money. While most private-by-default chains remain uncracked by government agencies, they are not smart contract blockchains like Ethereum, and are thus unattractive or impossible targets for hackers.
Because blockchains allow for digital peer-to-peer money transfers without banks or regulatory oversight, they present attractive options for cyber-criminals who otherwise have to transact with physical cash. However, most blockchains are "public", meaning every account's transaction history and token balances are visible to everyone, making blockchains a risky option for money laundering. While this is a great feature for preventing cyber-criminals from having a safe getaway for their crimes and allows techniques like airdropping NFTs to combat crypto scams, it also exposes doxxed users to the risk of being robbed or blackmailed. To protect users' privacy, blockchain developers created cryptocurrency mixers, which take cryptocurrency deposits from many users to "mix" them together, and days later are withdrawn to newly created wallets that have no affiliation to their owners. While officially created with good intentions, "mixers" have since been used primarily as an automated money laundering service connected to many high-profile hacks. Thanks to mixers, a hacker or scammer can hide their history, and then cash out their crypto through legitimate channels.
U.Today reported the United States Department of Treasury has added Tornado Cash to its Specially Designated Nationals list of sanctioned entities, along with dozens of Ethereum addresses. This move has come after many months of high-profile hacks that have witnessed over $1B in cryptocurrencies stolen from many projects, especially blockchain bridges holding hundreds of millions of dollars in crypto, as every hacker used a mixer service in the aftermath to begin the process of laundering the stolen tokens. While mixers are limited in how much they can process due to low liquidity, given enough time they can still safely launder large sums of money.
Mixers Are Not The Solution For Privacy
Privacy is a controversial subject within blockchain, as while it protects friendly users from criminals and corrupt governments it also protects criminals from law enforcement. New users are encouraged to learn the various "attacks" that can steal their crypto, the most common of which are crypto phishing attacks (which are easy to avoid). One of the simplest and most feared attacks is light-heartedly called the "Five Dollar Wrench Attack". The idea is simple: a wealthy crypto holder's identity and address are discovered and/or leaked online, leading to a robber showing up with a physical weapon (like a $5 wrench) to threaten or attack them until they transfer their crypto stash to the robber's crypto wallet. The only protection blockchain users have against armed robbery is the default pseudo-anonymity of crypto wallets and operational security ("opSec") practices, all of which goes out the window when they are compromised.
Blockchain transparency is the reason why Web3 is not safe for mass-adoption, as most users are not savvy enough with blockchain to understand its current security risks, and better solutions are needed to protect users' identities without empowering criminals. While mixers are an effective way to protect users, they are also difficult and inefficient to use, and due to low liquidity cannot process very much crypto at one time. They are also blatant cryptocurrency laundering services, and are not a viable solution to the privacy issue. Advanced protocol-level cryptographic techniques like zero-knowledge proofs hold far more promise, and other second-layer solutions can be built to serve this purpose as well, but it is still too early to know what the long-term solution will be.
Mixers have earned a bad reputation in blockchain as cryptocurrency laundering services used by hackers to get away with cyber-crime, despite the allegedly noble intent behind their creation. Governments sanctioning mixers like Tornado Cash is reasonable, as their benefits to friendly users are outweighed by their benefits to criminals, who are detrimental to everyone.
Sources: U.Today, Department of Treasury