(Bloomberg) --

Crypto protocols that allow digital-asset traders to obfuscate their transaction activity should be more regulated, the U.K.’s National Crime Agency said.

Decentralized mixers such as Wasabi Wallet and Tornado Cash use smart contracts to break the visible chain of transactions between a sender and receiver. Crypto advocates say the tools offer more privacy than trading directly on public blockchains like Bitcoin and Ethereum. Regulators have expressed concerns about their potential for aiding criminal activity and sanctions evasion.

The NCA has called for such mixers to be subject to regulation which would mandate them to carry out know-your-customer checks and record audit trails of the tokens passing through their platforms, the Financial Times reported earlier on Tuesday.

“When it comes to crypto transactions, the owner’s identity is already obscured, and the reality is that prying eyes would need additional, hard to get information, to determine a wallet’s balance and its owner,” Gary Cathcart, head of financial investigations at the NCA, said in a statement. “The argument on privacy is therefore a weak one.”  

Read More Crypto Mixer Tornado Cash Doesn’t Plan to Comply With Sanctions

Cathcart said tighter rules would provide comfort to consumers and allow law enforcement to obtain judge-approved court orders for investigative purposes. This would help authorities differentiate between mixers being used for privacy and where they might be used to enable serious criminal activity such as ransomware attacks and international terrorism.

Sanctions Evasion

Guidance from the Financial Action Task Force in October noted the rise in popularity of mixers and tumblers, as well as anonymity-enhanced cryptocurrencies, decentralized platforms and privacy wallets. It said anti-money laundering and counter-proliferation financing regulation should apply to any virtual asset service provider offering these tools.

Governments and regulators have expressed concerns that such platforms might be useful in helping sanctioned Russian entities evade restrictions by transacting in cryptocurrencies. 

Crypto forensics firm Elliptic said on Monday it found a digital wallet with millions of dollars in crypto which could be linked to sanctioned individuals, while more than 15 million cryptocurrency addresses were tied to criminal activity in Russia.

“The overall volume of crypto-related money laundering is still low when compared to the wider economy,” said Cathcart. “The threat lies with the exponential adoption of cryptocurrencies, and the criminal activity that we will inevitably encounter through that.”

The NCA didn’t single out any individual mixers in its statement, or make any reference to attempts by Russian entities to circumvent sanctions. 

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