What is a Tainted Cryptocurrency?

Taint is a term used to describe the degree to which a cryptocurrency is associated with illicit activity. Taint can be measured by tracking the movement of coins through the blockchain, the public ledger of all cryptocurrency transactions. Coins that have been involved in illegal activity are said to be tainted.

Tainted coins refer to coins which have gone through suspicious transactions e.g. over dark web or those transactions which can be labeled as theft cases.

Due to the nature of the blockchain technology and its electronic ledger, all transactions that ever have been made on the blockchain are traceable, forever. This might concern individuals that they hold cryptocurrencies that are ‘dirty’.

Who declares Tainted Cryptocurrency ?

There is no regulatory authority that after careful consideration declares that a holder or transaction in the past was associated with illegal activities. A victim of a crypto scam might report the associated Bitcoin address to bitcoinabuse.com. This would trigger a warning that the associated address would be tainted. But the accused was never convicted of a crime. Is it fair to block the address, or the cryptocurrency originating from it, before the suspect is actually convicted for the crime by the proper authorities? It might be a signal for further due diligence especially if it would be considered a high risk transaction, but it is not a determinator to block the transaction.

Moreover whenever a huge sum of cryptocurrency is stolen through exchanges or multiple users by using some exploit, due to nature of blockchain all the public ledger wallet addresses and transactions can be verified such wallets are flagged and their movement on the blockchain is monitored. Crypto exchanges blacklist such wallets and if same cryptocurrency ends up on an exchange that user is flagged with ‘suspicious activity’. Depending on the nature various regulatory bodies can unite and start working together while there is NO body which deals and declares wallets or transactions as ‘tainted’ such information is kept private and shared with exchanges or POI on need to know bases. The takedown of AlphaBay and Hansa in 2017 is such an example which was an international cooperation between Federal Bureau of Investigation (FBI), the US Drug Enforcement Agency (DEA) and the Dutch National Police, with the support of Europol. In the meantime hundreds of thousands of transactions were made on the blockchain which were used to assess and eventually find the culprits.

Coin mixers are used to confuse the authorities following such transactions by using some privacy oriented services like TornadoCash, which at times gets them in trouble. Some people use comprehensive projects like Utopia Ecosystem, which has an integrated privacy coin known as Crypton. While bad actors can use such services which leave those who value their privacy in trouble.

A bad actor in bad faith can sell someone tainted cryptocurrency in an OTC (over the counter) deal without the buyer realizing. The point is, just because you can track all transactions on the blockchain, that does not imply that the current owner is in any way involved with the illicit activity in the past.

A THOUGHT: ALL Bitcoin addresses which have received a payment, ever, are “tainted”. Taint in no way affects the value or fungibility of any coin since it is not a measure of any negative characteristic that would be associated with the traditional definition of “tainted”. Actually, there is a serious problem if all your coins do not have some level of taint.

How Crypto gets tainted?

Crypto can get tainted due to:

  • Hacks and theft
  • Proceeds attached to criminal activity and illegal transactions
  • Technological features that increase anonymity – such as the use of peer-to-peer exchange websites, mixing or tumbling services, or anonymity-enhanced cryptocurrencies
  • Geographical risks – criminals can exploit countries with weak, or absent, national measures for virtual assets
  • Transaction patterns – that are irregular, unusual or uncommon can suggest criminal activity
  • Transaction size – if the amount and frequency have no logical business explanation
  • Sender or recipient profiles – unusual behaviour can suggest criminal activity
  • Source of funds or wealth – which can relate to criminal activity

How to Clean Tainted Crypto ?

Hackers use various services to mix their crypto assets and pass them through other wallets in an attempt to leave the authorities on a trail which is humanly impossible to track. Such services are used by normal individuals who just care about their privacy, therefore labeling such services as ‘bad actors’ would be wrong. Tainted cryptocurrency may be cleaned using :

  • Uses Coin mixer / Tumbler Services like TornadoCash, CoinJoin or Coin Mixer
  • Use Submarine Swaps
  • Use Liquid Network
  • Use true Non-KYC Exchanges like crp.is
  • Use Privacy Coins like Monero or Crypton
  • Use Privacy based dark web ecosystem like Utopia

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