Unmasking the Cryptic Capers of Coin Mixers and Crosschain Bridges 🕵️‍♂️💰

Oh, the Mischief of Coin Mixers! How They Twirl and Conceal Stolen Crypto

Picture this, dear reader: coin mixers, or tumblers, are nothing short of magical contraptions in the crypto realm. They’re akin to a cloak of invisibility for crypto transactions. Hackers, with their mischievous grins, send their ill-gotten gains to a mixer’s address. The mixer, in turn, performs a dance of blending the crypto with coins from other unsuspecting users, thus rendering the identity of each contributor as elusive as a wisp of smoke. Following this enchantment, the mixer redistributes the coins, effectively erasing any trace of their sordid origins.

Take, for instance, a merry band of ten users, each contributing 1 Ether (ETH). They each give and receive a different ETH, their identities lost in the shuffle. The mixers’ ability to veil funds is a double-edged sword: on one hand, it’s a playground for hackers looking to hide stolen loot; on the other, it’s a sanctuary for those seeking financial privacy, a shield against prying eyes. Regardless of the moral ambiguity, mixers remain a favored tool for those craving a touch of anonymity in their crypto dealings.

Hackers, with their diabolical flair, often combine crypto mixing with other laundering techniques such as decentralized exchange (DEX) trading, peel chains, and crypto bridging. DEX trading, you see, is a direct exchange of cryptocurrencies between users on a DEX, bypassing the need for a meddling middleman. Peel chains, on the other hand, are a series of multi-wallet transfers where the hackers send smaller and smaller amounts across each hop, rather than a single, conspicuous lump sum.

In a bold stroke of audacity, North Korea’s Lazarus Group orchestrated a cunning operation involving the theft and subsequent obfuscation of $1.46 billion in cryptocurrency mere days following the high-profile Bybit hack. Using coin mixers and the decentralized crosschain protocol THORChain, North Korea’s Lazarus Group laundered the stolen funds just days after the hack. This, dear reader, is not an isolated escapade. In 2024 alone, Pyongyang-based hackers have reportedly filched $800 million in crypto, funneling the loot through a labyrinth of crypto mixers, intermediary wallets, DEXs, and crosschain bridges with the finesse of a master thief.

North Korean hackers have been responsible for over $5 billion in stolen crypto since 2017, utilizing platforms like Ren Bridge and Avalanche Bridge, often converting funds into Bitcoin (BTC) before employing mixers such as Tornado Cash, Sinbad, YoMix, Wasabi Wallet, and CryptoMixer​. Noteworthy crypto heists by Lazarus Group include WazirX (July 2024), State.com (September 2023), CoinsPaid and Alphapo (July 2023), Harmony Horizon Bridge (June 2022), and Ronin Bridge (March 2022), among others.

Fun Fact: It’s rumored that nefarious organizations like the Lazarus Group run their own private mixers. Identifying wallets linked to these mixers requires a keen eye and a dash of caution, as there’s a significant risk of mistakenly implicating innocents who use them for legitimate reasons or are otherwise uninvolved.

Crosschain Bridges: The Great Enablers of Crypto Laundering 🌉💰

Hackers have discovered the allure of crosschain bridges, utilizing them to facilitate verifiable data transfers across networks, thereby enabling interoperability, often sans the watchful gaze of a centralized intermediary. Through the lock-mint methodology, these crypto bridges secure the original token in a smart contract and subsequently mint a corresponding wrapped version on the target blockchain.

Imagine, if you will, transferring an asset from Ethereum to Solana. The asset is first dispatched to a bridge contract on Ethereum, where it is “locked.” The bridge then whispers to Solana, which creates a “wrapped” version of the asset, allowing it to strut about the Solana network as if it belonged there.

To reverse this sorcery, the wrapped asset is “burned” on Solana. The bridge then notifies the Ethereum blockchain to unlock the original asset, ensuring that supply remains balanced across both chains.

Hackers, however, exploit vulnerabilities within these bridge transactions. They uncover weaknesses that permit the creation of wrapped assets on the target chain without the corresponding locking of original assets on the source chain. They can also manipulate the system to unlock original assets without the requisite burning of wrapped versions. This allows for the pilfering of funds without a legitimate deposit. Let’s delve into the nitty-gritty of their crafty schemes:

• False Deposit Events: A favorite trick of hackers is triggering false deposit events. Crypto bridges typically keep an eagle eye on blockchains for deposit confirmations before issuing corresponding tokens on another chain. Hackers hoodwink the system by fabricating fake deposit events or using worthless tokens. An example of such chicanery is the Qubit hack, where the hackers conjured false deposit events using a legacy function in the code.
• Validator Takeover: Another method is validator takeover, targeting bridges that rely on validator consensus for transaction approval. If hackers manage to seize control of most validators, they can authorize nefarious transfers. In the Ronin Network hack, attackers commandeered five out of nine validators, enabling them to move funds under the radar.
• Fake Deposits: Hackers can exploit vulnerabilities in deposit validation mechanisms. If they can forge a deposit through the validation process, they can withdraw funds under false pretenses. A $320-million loss in the Wormhole attack resulted from a digital signature validation process flaw.

Did you know? Crypto bridges are often vulnerable to attacks due to shoddy engineering. In the Harmony Horizon Bridge hack, the ease with which hackers compromised two out of five validator accounts, gaining access to funds, highlights this Achilles’ heel.

Hackers’ Playbook: The Art of Laundering Stolen Funds 📖💰

Hackers employ crosschain bridges to cloak the origin of funds, thereby heightening their anonymity. They utilize crosschain bridges for money laundering in a tripartite process: placement, layering, and integration.

Let us now unravel the intricate dance of how crypto hackers launder stolen funds:

• Placement: In the placement phase, the rascals introduce their illicit funds into the financial system. They fragment large amounts into smaller transactions to avoid raising suspicion. These funds are then used to purchase cryptocurrencies, often through intermediaries, making it a devilish task for law enforcement to trace their origins.
• Layering: Hackers engage in a dizzying whirlwind of transactions to blur the source of their funds. Some exchanges enforce strict Anti-Money Laundering (AML) measures, while others operate with the laissez-faire attitude of a pirate ship. Hackers capitalize on the latter, utilizing decentralized or loosely regulated platforms to move funds across chains.
• Integration: In this final act, the culprits reintroduce the laundered funds into the legitimate economy. By this point, the crypto has been cycled through various platforms and is no longer directly linked to their nefarious deeds. The miscreants may cash out through fiat off-ramps, use it for seemingly legal transactions, or reinvest in assets like real estate.

Trivia: The inherent lack of interoperability between blockchains creates fragmented data, making it a Herculean task to monitor crosschain activity. This dearth of shared information impedes comprehensive activity tracking.

The Lazarus Group’s Lavish Laundering Extravaganza 🎭💰

Lazarus, in a masterstroke of guile, combined classic money-laundering tricks with modern DeFi and crosschain swaps, crafting one of the most complex laundering cases in crypto history. Investigators, with their Sherlockian prowess, have managed to freeze over $42 million, but the lion’s share of the funds has already vanished into thin air or been converted into fiat via underground channels.

Total Amount Stolen and Asset Breakdown

Bybit’s losses in the hack totaled roughly $1.46 billion. The purloined assets were primarily Ether and Ethereum-based tokens, including:

• 401,347 Ether (ETH): worth approximately $1.12 billion​
• 90,376 Lido Staked Ether (stETH): worth ~$253 million
• 15,000 cmETH (a form of staked/pooled ETH): worth ~$44 million
• 8,000 mETH (another wrapped ETH derivative): worth ~$23 million​

In total, about 401,000 Ether (ETH) and 90,000 Lido Staked Ether (stETH) (plus smaller ETH-derivative tokens) were taken, which the hackers promptly consolidated and converted. According to Nansen’s analysis, the attackers swapped all non-ETH tokens (stETH, cmETH, mETH) into plain ETH soon after the breach​. This gave the hackers dominion over ETH, a native asset that cannot be easily frozen by any central issuer​. The entire loot was then funneled into the attackers’ wallets for laundering.

Laundering Methods Used

Lazarus Group deployed a multi-layered strategy to hide and cash out the $1.46 billion stolen from Bybit. Their methods were as follows:

• Splitting and Dispersing Funds: Immediately following the hack, they fractured 401,000 ETH into 50 wallets to make tracking akin to finding a needle in a haystack. This tactic of distributing funds (approximately $27 million per wallet) is designed to complicate tracking by diffusing the honeypot. Over the next day, those 50 wallets were systematically emptied as Lazarus began moving the ETH into further layers of addresses and services.
• Swapping Tokens via DEXs: They converted stETH, cmETH, and mETH into ETH using DEXs (likely using platforms like Uniswap or Curve).
• Crosschain Bridges: They utilized Chainflip and THORChain to swap ETH into BTC and move funds across chains. Approximately 361,000 ETH (over $900 million) was converted into BTC and distributed across 6,954 Bitcoin addresses (averaging ~1.7 BTC per address) to further muddy the waters.

Over $75 million in Bybit hack proceeds were swapped through eXch within days​. Because eXch allows users to convert ETH into other cryptocurrencies, like BTC or even privacy coins such as Monero (XMR), with no traceable linkage, any funds passing through it often vanish into the ether.

• DeFi Platforms and DEX Launchpads: The Pump.fun launchpad/DEX on Solana became unwittingly embroiled in a money-laundering operation when hackers used it to launch the QinShihuang token. The platform’s lack of preventive filters allowed hackers to create tokens and pair them with liquidity. This innovative technique effectively “mixed” $26 million without using a traditional mixer. Once the scheme was uncovered, Pump.fun’s developers sprang into action, blocking the token on their front-end UI to halt further trades. While other DeFi platforms like Uniswap and PancakeSwap also facilitated the token swaps, they were not complicit in the laundering.
• OTC and P2P Networks: Although not explicitly named in public reports, it’s strongly suspected that unregulated over-the-counter (OTC) brokers and peer-to-peer (P2P) trading networks were involved in the final conversion of these stolen funds to cash. Lazarus has historically relied on Chinese and Russian OTC desks to convert crypto to fiat (for example, selling BTC for Chinese yuan in cash).

Fun Fact: Of the stolen crypto, exchanges have frozen $42.8 million worth of funds, but the North Korean threat actor has laundered all of the stolen 499,395 ETH, primarily through THORChain.

Investigative Wizardry: Unraveling Crosschain Crypto Fraud 🔎💰

To combat crosschain fraud involving coin mixing, investigators employ a holistic approach and wield specialized tools to track illicit transactions. This differs from legacy explorers that focus solely on single-chain analytics.

Consider this scenario: a spyware group extorts funds in Bitcoin and moves them to Ethereum via a crosschain bridge. Instead of cashing out, they swap the funds for a privacy coin using a DEX. Traditional tools would require law enforcement to follow each step manually, leading to delays and potential errors.

With automated crosschain tracking, investigators can trace transactions in a single interface, pinpoint the DEX used, and swiftly contact exchanges. This expedites investigations and improves the odds of recovering stolen assets.

Notable features of such crosschain investigative tools, such as those offered by Elliptic and Chainalysis:

• Crosschain Hopping Detection: It flags instances where criminals transfer funds between blockchains to evade detection. By mapping these transactions, investigators can maintain a comprehensive view of the laundering trail.
• Attribution and Entity Identification: The capability of linking addresses to known entities, such as exchanges or DeFi platforms, assists law enforcement in determining where stolen funds may have been processed.
• Automated Investigation Board: An automated investigation board simplifies the process by visualizing connections between multiple addresses across different chains. This enables investigators to swiftly identify laundering patterns and trace the movement of illicit funds.
• VASP Directory Integration: For cases where illicit funds reach centralized exchanges (CEXs), virtual asset service providers (VASPs) directory integration allows investigators to contact exchanges, request account information, or freeze assets before they are fully laundered.

Now, let us explore how investigators attempt to ensnare the culprits using such tools. Several strategies include:

• Blockchain Analysis: Investigators meticulously trace the flow of funds across various blockchains like Ethereum, BNB Smart Chain, Arbitrum, and Polygon. This involves analyzing transaction histories, identifying patterns, and mapping the movement of assets through different wallets and exchanges.
• Following the Money Trail: Even with the anonymity provided by mixers and crosschain transactions, investigators endeavor to follow the money trail by tracing funds to CEXs where they might be converted to fiat currency. This often involves collaborating with international law enforcement agencies to track funds across borders.
• Crosschain Bridge Monitoring: Investigators keep a watchful eye on bridge transactions for anomalies, such as unusually large transfers or suspicious patterns. They scrutinize the smart contract code of bridges for vulnerabilities that could be exploited by hackers.
• Analyzing Onchain and Offchain Data: Investigators analyze both onchain (blockchain) and offchain (layer 2s, social media, forums, dark web) data to gather intelligence about potential fraud. This can include monitoring discussions about exploits, vulnerabilities, and potential scams.
• Forensic Analysis: When devices are seized from suspects, forensic teams can analyze the devices for crypto wallets, transaction history, and other evidence.

Real-World Case Studies: Crypto Laundering in Action 📝💰

Let us now delve into two real-world examples of crypto laundering. The DMM hack showcases the use of crypto mixers for hiding the origin of funds, while the XT.com hack illustrates how hackers employed crypto bridges for laundering funds.

DMM Hack

The DMM hack in May 2024 exemplified how hackers use various obfuscation techniques to mask their tracks. In May 2024, Japanese crypto exchange DMM suffered a colossal hack, losing 4,502 BTC, worth $305 million at the time. The hackers used sophisticated laundering methods, including peel chains and coin mixers, to shroud the transaction trail.

The hackers also manipulated withdrawal timing to further disrupt blockchain analysis. They deliberately delayed withdrawals to add another layer of obfuscation, hindering attempts by investigators to match deposits and withdrawals by their time stamps.

XT.com Hack

In November 2024, crypto exchange XT.com fell victim to a security breach, resulting in the loss of $1.7 million. Attackers initially targeted assets on the Optimism and Polygon networks, subsequently utilizing crosschain bridges to transfer the stolen funds to Ethereum.

This tactic of moving assets across multiple blockchains exploited the complexities inherent in tracking funds across diverse networks, thereby hindering investigative efforts. Such crosschain maneuvers highlight the challenges faced by security teams in tracking and recovering illicitly obtained digital assets.

The Regulator’s Dilemma: Crypto Mixers Under Scrutiny 🕵️‍♂️🔍💰

Crypto mixers, designed to obscure transaction trails, have come under increased regulatory scrutiny due to their role in laundering illicit funds. The Office of Foreign Assets Control (OFAC) has sanctioned multiple mixers linked to cybercrime and national security threats in the US.

Blender.io made history as the first-ever sanctioned mixer in 2022 after laundering $20.5 million from the Axie Infinity hack. Despite its temporary closure, it resurfaced as Sinbad.io, which was sanctioned within a year for facilitating money laundering in high-profile hacks, including the Atomic Wallet and Horizon Bridge breaches.

Tornado Cash, a non-custodial Ethereum-based mixer launched in 2019 by Alexey Pertsev and Roman Storm, was sanctioned by the US Treasury in 2022. However, a court overturned the sanctions in a January 2022 ruling. Pertsev was sentenced to five years and four months in prison for laundering by Dutch judges.

The Financial Crimes Enforcement Network (FinCEN) categorizes mixers as money transmitters, requiring compliance with AML laws. The US Department of Justice has aggressively pursued offenders, notably sanctioning Tornado Cash for laundering over $7 billion. Despite such measures, the ever-evolving nature of crypto mixers continues to challenge regulators and law enforcement agencies worldwide.

The Financial Action Task Force (FATF), an intergovernmental body dedicated to deterring money laundering activities, has marked mixer usage as a red flag for illicit activities. The European Banking Authority and the Australian Transaction Reports and Analysis Centre have established rules for reporting requirements. The Joint Money Laundering Steering Group, a private body of financial sector organizations, also issues guidelines for members for the prevention of money laundering.

However, enforcement encounters hurdles in holding developers accountable. Legal debates persist on whether developers should be held liable if they did not directly assist in laundering post-sanctioning.

The Future of Privacy vs. Security in Crypto: Finding the Golden Mean 🌟💰

Crypto will need to navigate the treacherous waters between privacy and security. While technologies like zero-knowledge (ZK) proofs will enable users to transact privately without compromising the blockchain’s integrity, they must also align with stricter AML regulations to ensure compliance while preserving user anonymity.

While privacy advocates champion financial sovereignty and protection from surveillance, security proponents emphasize the need for transparency and regulatory compliance to maintain market integrity.

This delicate balance is likely to be achieved through technological advancements such as ZK-proofs, differential privacy, and federated learning, which offer potential solutions for enhancing privacy without sacrificing security. Simultaneously, governments will continue to develop regulatory frameworks that seek to strike a balance, potentially through tiered approaches that offer varying levels of privacy.

Ultimately, the path forward necessitates collaboration between developers, regulators, and users to create a sustainable ecosystem that safeguards individual privacy while thwarting illicit activities and fostering trust.