Someone landed on "Go to jail" (via Pixabay).
Regulation,  United States

When is bitcoin mixing a crime?

Hint: when it’s directly linked to laundering illicit proceeds on darknet markets

Bitcoin mixers, or tumblers, have been around for years. The way they work is you send bitcoin to a service and the service scrambles your bitcoin with other bitcoins, so that in the end, it’s difficult to know the source of the funds—even though the transactions are visible on the blockchain. 

For a long time, bitcoiners considered this a way to ensure privacy. After all, nobody wants their entire financial life advertised on a blockchain. There is also the argument for fungibility—the idea that all bitcoins are equal, and you aren’t responsible for how the bitcoins you received from some anonymous nobody were used in the past. 

The Financial Crimes Enforcement Network qualifies bitcoin mixers as money transmitters, so they have to register with FinCEN and apply for a license to operate on a state-by-state basis. But when does operating a bitcoin mixer constitute money laundering? How about when it is directly linked to obfuscating the source of hundreds of millions of dollars in illicit proceeds? That appears to be the grounds for a recent federal indictment against one software developer and mixer operator. 

Poor Larry

On Feb. 3, Larry Harmon, a 36-year-old Akron, Ohio, man was arrested. A three-count indictment unsealed on Feb. 11 charges him with “money laundering conspiracy, operating an unlicensed money transmitting business and conducting money transmission without a D.C. license.”

According to federal prosecutors, Harmon, a software developer, created and then operated a bitcoin mixer called Helix from 2014 to 2017. 

The problem was, Helix wasn’t simply a bitcoin mixer. It was directly linked to Harmon’s other business, Grams, a search engine for Tor-based darknet markets. The service used a custom API to scrape listings from several markets including the infamous Alpha Bay, which was shut down in mid-2017. Dream Market, Agora Market, and Nucleus were among the others. 

Prosecutors alleged that Helix moved over 350,000 bitcoin—valued at over $300 million at the time of the transactions—on behalf of customers, with the largest volume coming from darknet markets. 

“The sole purpose of Harmon’s operation was to conceal criminal transactions from law enforcement on the Darknet,” prosecutors said.  

Prosecutors argued that Harmon was a flight risk. And the court approved his detention pending trial due to the weight of evidence against him, a lengthy period of incarceration if convicted, and ties outside of the U.S. (He also had a vacation home in Belize.)

Meanwhile, his wife, Margo Harmon, who claims that authorities have seized all of Larry’s crypto wallets and posted forfeiture notices on their home, has started a GoFundme to raise $100,000 for living expenses. At press time, only six people donated a total of $330. (The fundraiser was pulled shortly after this story published.) 

What this means for mixers

Of course, the fear among bitcoiners is that this indictment could impact other bitcoin tumblers. Is it possible all bitcoin mixing services could be considered money laundering tools? 

There was even a concern raised about the software developers themselves—and whether they might be held responsible for the tools they create. Riccardo Spagni, the former lead maintainer of privacy coin Monero, thinks that is kind of a silly idea. 

“He didn’t just write software. He hosted a service AND earned money for it,” Spagni said in speaking of Harmon in a tweet. “I don’t agree that this has implications for developers. If ‘just working on privacy software’ was a problem we’d have seen precedent-setting criminal cases against developers who work on Tor or WhatsApp.”

As for bitcoin mixers, who can say that their main purpose is laundering illegal proceeds? 

William Knottenbelt, researcher at Imperial College London, told MIT Tech Review in May 2018 that tumblers aren’t necessarily a sign of criminal activity. “Some people just do it for privacy reasons,” he said. 

And in any case, there are better ways for criminals to cover their tracks, he said, pointing to Monero and another privacy coin Zcash that reveal a lot less about the transactions recorded on their blockchains.

Forensic firm Chainalysis has said in the past that as much as 40% of all funds on crypto tumblers originates from crypto exchanges, while only 2.7% is sent from darknet markets. Of course, that doesn’t mean that the funds coming off the exchange weren’t used for illicit activities in the past. But a lot of this is difficult to track—and not always easy to prove.  

It was simply unfortunate for Harmon that his funds were so directly linked to darknet market activities, making him an obvious target for prosecution. The moral of the story? If you are going to operate a bitcoin tumbler, don’t advertise yourself as a money laundering service.

(Updated on Feb. 14 at 6:15 p.m. ET to reflect that Margo Harmon’s GoFundme site was pulled.)

Amy Castor has more than 20 years' experience in journalism. Her work on crypto and blockchain has appeared in consumer and trade publications throughout the U.S., including CoinDesk, Forbes, Bitcoin Magazine, and The Block.