In 2022, the US Treasury Department sanctioned one of the most popular coin mixers, Tornado Cash. The move effectively banned Americans from accessing it. You may be wondering what a coin mixer is. Don’t worry; this article will define it and discuss its legal and illegal uses.
What are Coin Mixers, and Why Do People Use Them?
Coin mixers are platforms that let users obscure a transaction’s origin and destination. Users usually transfer cryptocurrencies to these platforms, where they are combined with other coins, and then the mixed tokens are sent to a receiver address, making it difficult to establish a connection between the recipient and the sender.
Coin mixers have numerous legit use cases. However, they have also been used illegally by cyber criminals, making them a target for various law enforcement agencies. While authorities claim that these platforms are only used for money laundering, privacy advocates, on the other hand, argue that coin mixers provide the needed privacy in conducting crypto transactions, especially in scenarios where an individual’s activities, such as journalism or protest, can endanger their lives.
In regard to claims of money laundering, the US Treasury Department released a report last year stating that criminals have utilized Tornado Cash to launder over $7 billion in stolen funds since 2019. However, blockchain analytics company Elliptic disputed the report arguing that only $1.4 billion of the quoted figure was obtained through illegal activities.
As per the Treasury Department’s report, the famous northern Korean criminal group Lazarus laundered around $103 million worth of crypto assets through Tornado Cash. The funds were stolen from Horizon Harmony Bridge last June.
How Does Tornado Cash Work?
It is worth mentioning that Tornado Cash is still in operation, although its services are not available in the United States. Here is how the platform works:
The coin mixer uses smart contracts to facilitate deposits and withdrawals. Note that users cannot use the same blockchain address to deposit and withdraw funds. Smart contracts on Tornado Cash are used as pools, where deposited cryptocurrencies are mixed together. Once the tokens are removed from the pools, the link between the sender and receiver gets broken, thus obscuring the transaction.
To start using Tornado Cash, you are required to connect your crypto wallet to the protocol. Supported wallets include Walletconnect and Metamask. Once the wallet is connected, it is time to deposit some cryptocurrencies. The tokens accepted for deposits include DAI, USDT, WBTC, cDAI, ETH, and USDC.
There are several networks you can use to deposit funds into Tornado Cash smart contracts. Some of them include Binance Smart Chain, Polygon, and Ethereum.
After making a deposit, a private note is automatically generated to be used when withdrawing funds. That said, ensure you write down that note.
It takes a few minutes for your tokens to be mixed, and once they are ready for withdrawal, you will be asked to provide a receiver address. After pasting it, the next step involves inputting the private note you wrote down earlier. Once done, confirm the withdrawal. And that’s it; you have successfully obscured your transaction.
All the popular coin mixers available in the market today are non-custodial. This means no one controls the funds or the wallet. Since these platforms lack intermediaries, they have become appealing to bad actors who use them to hide the movements of stolen funds.
Legit Use Cases of Coin Mixers
Let’s say you are a business person who wishes to transfer USDC to a charity group in Nigeria, and you do not want anyone to trace the donation back to you. To achieve this, you will need a coin mixer.
So you visit the coin mixer platform and deposit the amount of USDC you want to donate. After the tokens are mixed, you enter the withdrawal address plus the private note and then sign the transaction. There you go; you have now made your donation anonymously.
Several prominent individuals in the crypto industry have revealed using Tornado Cash to make donations. Ethereum co-founder Vitalik Buterin is one of them.
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