​“Secret weapon.” Analyst accuses ChipMixer of ties to the US government

What’s new? The analyst nicknamed FatMan, who investigated the collapse of the Terra ecosystem, said that crypto mixer ChipMixer is a project of the US government. According to him, the service was created to deanonymize transactions and crack bitcoin privacy. FatMan noted that the US authorities are doing everything they can to have access to flows of information on the Internet, which includes data on the digital currency sector.

🧵 Today, I'm sharing my long-standing theory behind a US government covert operation designed to partially crack Bitcoin privacy and deanonymize transactions. I believe that popular Bitcoin mixer ChipMixer is actually a United States government honeypot. Here's why. — FatMan (@FatManTerra) November 23, 2022

FatMan’s analytics. The expert noted that the use of cryptocurrencies increased dramatically in 2016 and 2017. Then, according to FatMan, governments realized that anonymous digital assets would allow criminals to move large amounts of money in a way that made capital controls useless. So in May 2017, ChipMixer was founded. A new anonymous account on the Bitcoin Talk forum was behind the service. ChipMixer quickly gained popularity by offering a wide range of services, a user-friendly interface, and supposedly true anonymity.

FatMan noted that ChipMixer was released on a “pay what you want” model, which he said was uncommon for mixers. Users were not charged a mandatory fee to mix crypto assets and instead could donate to the website. The analyst called such a business model unviable.

FatMan noted that ChipMixer’s expenses are pretty suspect. With zero revenue, ChipMixer paid out several large alpha tester bounties, bought advertising space on the forum, and ran a major signature campaign, with expenses running into the tens or hundreds of bitcoins, the investigator explained.

After examining ChipMixer’s history, FatMan realized that the project is funded by an extremely wealthy organization that does not care about profitability. According to the analyst, it has enough money to make the service popular. “Millions spent, but revenue coming solely from small donations,” the expert explained.

FatMan stressed that running a centralized bitcoin mixer is illegal, and the risk/reward ratio does not matter if you don’t care about making a profit. “UHNW individuals will all tell you that committing loss-making crimes for the sake of altruism isn't ever worth the risk of jail time,” FatMan reasons.

According to the analyst, $10 million is a serious amount for most, but not for US intelligence agencies such as the Central Intelligence Agency or the National Security Agency. FatMan wondered how much the government would be willing to pay to gain access to data from an anonymous, decentralized payments network, sometimes used by criminals to launder huge sums of money.

In crypto, there are more effective methods of mixing, such as CoinJoins or zero-knowledge proofs (zk-SNARK), the analyst writes. The most popular crypto mixer was Tornado Cash, which provided users with complete anonymity even from the service operator.

On August 8, the US Office of Foreign Assets Control (OFAC), part of the Treasury Department, put Tornado Cash on the sanctions list. Later, the service’s developer, Alexey Pertsev, was placed under arrest in the Netherlands. In the US, Tornado Cash was also linked to the DPRK’s nuclear program.

According to the online sleuth, this happened because the authorities felt a serious threat due to the emergence of real anonymity provided by the crypto mixer. “There is no data to subpoena from an open source protocol,” FatMan explained.

On the other hand, while ChipMixer does provide external anonymity, there is one big difference from services that provide similar services. The operator of the service has full access to every transaction. Despite the availability of privacy technology, ChipMixer still runs a model where the owner has access to all transaction data.

ChipMixer was used by highly skilled hackers, including those behind the Binance and Ronin Bridge hacks. The US Treasury Department linked the attack on the latter with a group from the DPRK Lazarus. FatMan also notes that some hackers were even identified and caught after using ChipMixer.

Many large mixers have shut down due to lawsuits or unprofitability. Tornado Cash has been sanctioned, and its developers have been unfairly accused, FatMan writes. Nevertheless, ChipMixer is running smoothly, and no regulatory action has been taken against the service. That is what made FatMan suspicious about the crypto mixer’s ties to the US government. The analyst called ChipMixer “a secret weapon that nobody knows about and can be used when necessary.”