Dutch police arrest Tornado Cash developer, highlighting illegality of ‘coin mixers’

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Trouble for coin mixers is beginning to snowball, with reports of a 29-year-old Tornado Cash protocol developer being arrested in the Netherlands this week. Just a few days ago, the United States Treasury’s Office of Foreign Assets Control (OFAC) placed formal sanctions on Tornado Cash and blacklisted Ethereum addresses that had interacted with it.

According to online reports, the Dutch Fiscal Information and Investigation Service (FIOD) arrested developer Alexey Pertsev and has not ruled out further arrests in the Tornado Cash matter. FIOD said the coin mixer had been used to launder over a billion dollars in criminal proceeds, including a hacker group with connections to North Korea.

FIOD also said it would look into other distributed organizational (DAO) structures that may facilitate money laundering, hinting that Pertsev’s arrest may be just the tip of the iceberg.

What’s notable about Pertsev’s arrest is that he appears to be an open-source software developer who wrote code for a mixing protocol rather than someone directly involved in criminal activity. However, it highlights the growing sense that software developers should bear some responsibility for how their work is used, whether they handle any funds themselves or not, and whether they were directly involved in any criminal activity directly or not.

The developer community—or at least its most vocal representatives—strongly disagrees with this notion. 

Tornado Cash is a service that “mixes” transactions on the Ethereum network, effectively separating their input and output points. The mixing technique is designed to confuse blockchain forensics investigators who use public transaction records to follow payments from address to address, and identify real-world individuals behind them.

Ostensibly a tool to promote financial privacy, coin mixers have existed for almost as long as Bitcoin and exist on most blockchain networks. Their features also make them popular for hiding money trails in criminal activities, mostly proceeds from cyber attacks and thefts from online exchanges/wallets, as well as darknet market purchases. In the past, they were notoriously untrustworthy and, by nature, had no guarantees money a user sent into a mixer would come out the other end. This made any mixer with a famous name and large user base somewhat more reliable.

Coin mixers are frequently accused of money laundering—since that’s effectively their main feature. Someone who has spoken out against such services several times over the years is Bitcoin creator Dr. Craig S. Wright, who maintains that mixing legitimate transactions with criminal activity contaminates all transactions in the pool since they become indiscernable from one another. He has accused BTC’s recent implementation of “Taproot” of integrating coin mixing into the BTC protocol, obfuscating inputs and outputs in a way that puts every user on the BTC network at risk.

Bitcoin, he says, is already private by design since it separates real-life identities from transaction information. However, this does not mean full anonymity is desirable. Trust is essential to commerce and society, meaning that transactions must have some kind of audit trail—if wrongdoing is detected, there must be a way for determined investigators to “unmask” parties to transactions.

Dr. Wright has also suggested that software developers who work on blockchain protocols are fiduciaries under most countries’ laws. This would include all developers and not just those working on privacy, obfuscation, or coin mixing. Losses may occur on a blockchain network due to protocol rule alterations, or developers may not have included adequate safeguards against major digital asset thefts. This view remains highly controversial in the blockchain space and is fairly unpopular among software developers, though authorities in some major jurisdictions have begun to explore the idea.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple,
Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.