The US Financial Crimes Enforcement Network (FinCEN) has issued its first-ever financial penalty against a Bitcoin mixer. FinCEN, the US Treasury Department's bureau focused on money laundering and national security, found that Larry Dean Harmon, the creator, and operator of crypto-tumblers Helix and Coin Ninja, willfully violated the Bank Secrecy Act (BSA) registration, program, and reporting requirements. As a result, Harmon was hit with a US$60 million civil penalty, and is being prosecuted in the U.S. District Court for the District of Columbia.
A quick refresher on crypto-tumblers/mixers. In their purest form, tumblers/mizers are a service that mixes different digital asset inputs and outputs to obscure their origin and enhance user privacy. Because most digital assets are inherently pseudonymous, mixers arose out of a desire by some users to protect their privacy.
Moving on, FinCEN have alleged that:
From June 2014 through December 2017, Helix conducted over 1,225,000 transactions for its customers and was associated with virtual currency wallet addresses that sent or received over $311 million dollars. FinCEN’s investigation has identified at least 356,000 bitcoin transactions through Helix. Mr. Harmon operated Helix as a bitcoin mixer, or tumbler, and advertised its services in the darkest spaces of the internet as a way for customers to anonymously pay for things like drugs, guns, and child pornography.
Concerningly, FinCEN links Harmon and the use of Helix and Coin Ninja with child exploitation website 'Welcome to Video', which was taken down in a Department of Justice investigation in late 2019 and which relied on blockchain tracking of payments to identify wrongdoers. According to FinCEN, Helix was used to conduct:
at least 73 bitcoin transactions worth over $2,000 directly with Welcome to Video. Mr. Harmon failed to file a SAR on these transaction (sic).
In comments on the charges, Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division has causes a significant stir by saying:
This indictment underscores that seeking to obscure virtual currency transactions in this way is a crime, and that the Department can and will ensure that such crime doesn’t pay.
Of course, international regulators have never taken a particularly warm view of crypto mixing services. In mid-2019, the Dutch Financial Crime Investigative Service seized the website of popular Bitcoin mixing service, Bestmixer.io. Working with Europol, the authorities seized six services based in Luxembourg and the Netherlands. Europol alleges that most of the cryptocurrency passing through Bestmixer has “a criminal origin or destination”. Before its takedown, Bestmixer tumbled around 27,000 Bitcoins.
While money laundering is of course illegal, there is no specific law (in Australia, or as far as we are aware, the US) which renders the mixing of digital assets as a services illegal. On the contrary, FinCEN's suggests that mixers, so long as they are appropriately licensed and comply with their AML/CTF obligations, could be legal, based on their comment that:
An anonymizing services provider is a money transmitter under FinCEN regulations because it accepts and transmits convertible virtual currencies.
Or put another way, if the anonymizing service keeps the public identification of users secret, but still permits reporting to regulators, the service is more likely to be acceptable.
The significant penalty, and even more significant illegality of Harmon's conduct is more accurately characterised by how brazen/negligent his actions were. In FinCEN's words:
the investigation demonstrated that Mr. Harmon deliberately disregarded his obligations under the BSA and implemented practices that allowed Helix to circumvent the BSA’s requirements. This included a failure to collect and verify customer names, addresses, and other identifiers on over 1.2 million transactions. Harmon, operating through Helix, actively deleted even the minimal customer information he did collect. The investigation revealed that Mr. Harmon engaged in transactions with narcotics traffickers, counterfeiters and fraudsters, as well as other criminals.
Notwithstanding the now questionable legality of crypto mixing as a whole, this is the first-ever financial penalty against a major Bitcoin mixer.
As a result, we can expect to see international regulators, including AUSTRAC in Australia, to be closely monitoring any mixing services being undertaken in their jurisdictions.