As the Dutch proverb goes: “The soup is not eaten as hot as it is served.” Meaning: The threat is often not carried through as thoroughly as initially presented.
Bitcoin Magazine recently reported that the investigative arm of the Dutch tax authority — the FIOD — wants to lower the bar for prosecution of unlicensed bitcoin traders. As part of that effort, the FIOD aims to have mixing services recognized as money-laundering indicators. Users of mixing services would be assumed guilty, Dutch financial newspaper Financieele Dagblad (FD) wrote, unless they could prove otherwise.
The FIOD has now nuanced these reports. Speaking to Bitcoin Magazine, the press officer for the tax authority explained that recognizing something as a money laundering indicator does not mean it will be illegal in and of itself.
“But it does mean it indicates money laundering,” he added.
Expanding on this reasoning, the press officer explained that the tax agency established a money-laundering typology that includes several factors.
These include, for example, the location where a transaction is made; a public space like a McDonald’s is more suspect than a regular office. “Similarly, whether or not the exchanger keeps an administration, what kind of compensation he charges, how the customer is verified, whether physical cash is used, the amounts involved, visibility of the exchanger on public websites or official government records, and whether communication happened in encrypted form,” the press officer said.
And soon, perhaps, also the use of bitcoin mixers.
Bitcoin can be used relatively anonymously. This has made the digital currency a popular means of exchange on darknet markets like AlphaBay and Silk Road, and is also increasingly used for other cybercrimes, such as ransomware. In a report published last year, Europol — the law enforcement agency of the European Union — said more than 40 percent of online transactions for illegal ends is made with bitcoin.
Darknet market merchants typically do exchange their earned bitcoins for fiat currencies. While trading bitcoin for fiat is itself not illegal in The Netherlands, most exchanges apply strict Anti–Money Laundering (AML) and Know Your Customer (KYC) standards. This is usually required by the banks they work with.
Darknet merchants, therefore, often prefer to exchange their bitcoins at what the FIOD refers to as “bitcoincashers”: exchanges and dealers that do not comply with such rules. They often offer their services via largely unregulated websites like LocalBitcoins.com, and typically meet up in person to trade bitcoins for cash fiat currency. These bitcoincashers then sell the bitcoins at a regular exchange or brokerage.
That’s where some bitcoincashers are caught. If they deposit large amounts and tick too many boxes in the above-mentioned money-laundering typology, an investigation can be started against them. And since all bitcoin transactions are traceable on the blockchain, in some cases, this investigation also leads to the original criminals and their crime.
That’s why bitcoincashers as well as the darknet merchants and cybercriminals increasingly make use of bitcoin mixers. On hosted sites, like bitmixer.io, these mixers exchange bitcoins for different bitcoins, to cut all links on the blockchain.
If these mixers themselves become a money-laundering indicator, using them would no longer shield the bitcoincashers as effectively.
Within the Bitcoin community itself, many are concerned with the lack of privacy offered by Bitcoin. Not all bitcoin users want the world to know where they spend their money, what they earn or how much they own — even if they’re not breaking any laws.
As such, a series of new mixing instruments have been developed and designed over the past few years. These include JoinMarket, ValueShuffle and TumbleBit, while alternative digital currencies offering increased privacy, like Monero and Zcash, have gained in popularity too.
When asked by Bitcoin Magazine, the FIOD spokesperson did acknowledge that bitcoin mixing can also be done for perfectly valid, privacy-related reasons.
He noted, however, “We believe these use cases do not represent a majority. Compare it to the 500 euro note. This is legal tender (for now). However, when someone pays you with a 500 euro bill you are going to find that suspicious. We believe the same is true for mixing bitcoins.”