Bitcoin Tumbling: For Privacy Advocates or Money Launderers?

Journalist:
Evander Smart @EvanderSmart
February 16, 2015

Can you make solid parallels between accounting or financial practices in the fiat currency world and the digital currency world? In a less and less private world, is seeking privacy in your digital financial transactions wrong? Can you “launder money” in the digital realm if Bitcoin is not actually, legally money? These grey area questions are coming up more and more as Bitcoin changes the way courts, business, lawyers, and entire countries define money.

If you listen to someone explain a Bitcoin transaction tumbling operation, or “Prima facie”, a technique that gained global exposure in Silk Road’s Ross Ulbricht trial, it bears some similarity to traditional money laundering strategies.

Does tumbling make Bitcoin anonymous?

The layering of accounts within trusts and off-shore shell companies is comparable to layers of encryption or the levels of complexity offered by circulating your bitcoins from one wallet provider to another. The actual mixing together of transactions to make them harder to trace sounds like the “smurfing” of deposits. Large cash sums are split up and placed into the financial system by groups of individuals to avoid generating suspicious transaction reports. Are these practices illegal in nature? Is the bitcoin market so small and unregulated that they just haven’t been criminalized yet?

Unlike other currencies, every single Bitcoin transaction is stored on a publicly accessible ledger, making using Bitcoin alone for illegal means a pretty poor medium of exchange. Altcoins like Darkcoin or Cloakcoin would hide your identity better and is their reason for being, to maximize privacy. Bitcoin can comply with anti-money laundering provisions with it’s public record making its transparency an asset. Bitcoin is simply too risky to use alone if you are an intelligent criminal.

This is where the grey area comes in. If you are a criminal looking for more secrecy, a Bitcoin mixing service, or security-minded altcoin, can help you navigate around such traditional laws built for traditional fiat currencies. Privacy-minded owners seem to use these means to a different end, either for the right to privacy or tax avoidance, as countries like the United Sates now tax Bitcoin.

If you wanted to dissect a mixing program, it could be done. It just will take much longer than a traditional Bitcoin transaction. You can make it so arduous, that no one will bother going through the effort required. An investigator could look for common currency flow patterns.

“If 1.2 bitcoin left Silk Road to an unknown address, and Ulbricht received 1.1752157 bitcoin five hours later, this is suggestive. Add in thousands of such coincidental transactions and a pattern will emerge,” notes one bitcoin user.

Also read Computer Scientists Strengthen Bitcoin Anonymity with CoinShuffle

These tumblers produce groups of “independent” addresses that can be traced back to a single owner. Even if a tumbler uses multiple independent pools of bitcoin, each pool can be identified. After tracing back the deposit amount, you then would have to work through the address list of involved miners, exchanges, and so on, until you can find the transaction for that particular amount.

Whatever the case, bitcoin tumbling services are readily available, asking between 1% and 3% of transaction values to subsume times and amounts within a load of other transactions. Companies like Bitcoin Fog are looking to stand a cut above the rest.

The company’s website states:

“There have been a couple of similar services before, and as we see it, the problem with most of them was that they were not professional enough, not secure enough, and not taken seriously, thus becoming subjects to easy hacking and other problems. We on the other hand, are here for the long run. Our team consists of professional, secure web application developers with 5-10 years’ experience, and we have built this solution from scratch with security being our number one concern.”

After creating and investing in a Bitcoin Fog account, withdrawals are broken into a set of payouts, dependent on the amount invested, and the size of the payouts are randomly adjusted. The timing of those payouts will be randomly spread out over a period that you can set within the account.

Can you throw the baby out with the bathwater? Privacy advocates and money launderers are strange bedfellows within this industry. In fiat currency, paper trails are common in any financial account. Digital currency mixing services may remove these until government steps in, and drives these services off-shore, or into the black market. This is a great spot for altcoins like Darkcoin or Cloakcoin and shows that there are niches within the cryptocurrency industry that need development.

Having high security and privacy shouldn’t make you a future digital criminal in the eyes of the government, although anything the government doesn’t have their fingers on is becoming public domain. Depending on your locale, these services may legally phased out, just like Bitcoin itself. There is plenty of room for growth and attrition in the Bitcoin industry, but major regulations would be difficult to justify legally if Bitcoin is not legally considered money. Countries worldwide are deciding if they want to open that Pandora’s Box.

Images from Shutterstock.

Have you used a Bitcoin tumbler or mixer? Do you think it’s a legal practice, or a shady way to handle currency? Share above and comment below.

Last modified (UTC): February 16, 2015 13:12

Evander Smart @EvanderSmart

Evander Smart wants to get you talking, get you thinking, get you learning about Bitcoin, "The Future of Money". He has two Bitcoin video training courses on Udemy.com called "Bitcoin for Beginners". Go to EvanderSmart.com to get the latest on Evander and the latest Bitcoin news.