Zero-Knowledge Proofs in Cross-Chain Smart Contracts
Explore how zero-knowledge proofs enhance privacy and security in cross-chain smart contracts, revolutionizing blockchain transactions.
July 26, 2025
Wallet Finder
July 26, 2025
Crypto mixers, tools designed to make cryptocurrency transactions private, are under intense scrutiny from U.S. regulators. While they help users protect their financial privacy, they’ve also been linked to illegal activities like money laundering and cybercrime. This dual use has led to sanctions, legal actions, and debates about balancing privacy with compliance.
Key points to know:
The future of mixers depends on finding ways to meet compliance requirements while still respecting privacy. New technologies like Privacy Pools and zero-knowledge proofs may help address these challenges.
Crypto mixers are under intense scrutiny, with both operators and users facing serious legal consequences. As regulations tighten, even users seeking privacy for legitimate reasons might find themselves entangled in legal troubles.
Operating a crypto mixer can lead to severe penalties, including long prison sentences and heavy fines. The Department of Justice has made it clear that running a mixer without following proper compliance rules can result in charges like money laundering conspiracy, operating an unlicensed money transmitting business, and breaking the Bank Secrecy Act.
Recent cases highlight the risks. In March 2024, a federal jury convicted the operator of Bitcoin Fog on all charges, accusing the service of processing about $400 million in Bitcoin transactions. Similarly, in August 2021, the operator of the Bitcoin mixer Helix admitted to money laundering conspiracy and forfeited over 4,400 Bitcoin, worth more than $200 million at the time.
Authorities have also shut down mixer services. For instance, in May 2019, Dutch officials, along with Europol and Luxembourg authorities, seized six servers from Bestmixer.io, halting its Bitcoin, Bitcoin Cash, and Litecoin mixing operations. Adding to the pressure, programs like the AML Whistleblower Program offer financial rewards for reporting money laundering violations, creating further risks for mixer operators. The legal challenges vary based on whether the mixer is centralized or decentralized.
The legal risks for mixers depend heavily on their structure, though both centralized and decentralized models face significant enforcement challenges.
Centralized mixers rely on third-party services to collect and mix cryptocurrency, making them easier for law enforcement to target. These services must register as money transmitters with FinCEN, implement AML/KYC programs, and comply with strict reporting and record-keeping requirements. Since centralized mixers have identifiable operators, legal actions can be more direct.
Decentralized mixers, on the other hand, use smart contracts and decentralized apps, removing the need for a single controlling entity. However, developers and promoters of these platforms are not immune to legal action. For example, Tornado Cash developers were indicted for allegedly helping launder over $455 million for North Korea's Lazarus Group, proving that decentralization doesn't shield operators from legal accountability.
International regulations add another layer of complexity. In the U.S., cryptocurrency laws are still evolving, making compliance tricky for mixer operators. This uncertainty often leads to violations being discovered only after sanctions are imposed.
The global nature of cryptocurrency transactions means mixer operators can unknowingly violate another country's laws, such as sanctions or anti-money laundering rules. For example, the U.S. government fined Binance $4.3 billion in 2023 for sanctions violations, showing that physical distance offers no protection from enforcement.
Users also face risks. They might unknowingly handle coins that have passed through mixers, which could lead to compliance issues. In July 2022, nearly 10% of all cryptocurrency held by illicit entities had been laundered through mixers. This highlights the importance of tools like Wallet Finder.ai, which provide blockchain analysis to help users and financial institutions navigate the complex regulatory landscape and avoid potential pitfalls.
Tornado Cash serves as a prime example of how decentralized technology challenges traditional sanctions, sparking debates about privacy protocols in the United States.
On August 8, 2022, the Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash, accusing it of laundering over $7 billion in virtual currency since 2019. This included $455 million stolen by North Korea's Lazarus Group. The platform was also linked to laundering funds from major crypto heists, such as $96 million from the Harmony Bridge Heist on June 24, 2022, and $7.8 million from the Nomad Heist on August 2, 2022.
OFAC based its actions on Executive Order 13694, arguing that Tornado Cash "facilitates anonymous transactions by obfuscating their origin, destination, and counterparties". Under Secretary Brian E. Nelson explained:
"Today, Treasury is sanctioning Tornado Cash, a virtual currency mixer that launders the proceeds of cybercrimes, including those committed against victims in the United States. Despite public assurances otherwise, Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risks. Treasury will continue to aggressively pursue actions against mixers that launder virtual currency for criminals and those who assist them."
The sanctions had an immediate impact, with Tornado Cash's transaction volume dropping nearly 85% - from over $2.8 billion (Feb–Jul 2022) to $425 million during the same period in 2023.
This enforcement action sparked significant legal challenges, reshaping how decentralized protocols are regulated.
In November 2024, the Fifth Circuit Court of Appeals ruled that OFAC had exceeded its authority by sanctioning Tornado Cash's immutable smart contracts. The court clarified the distinction between sanctioning individuals or entities and targeting open-source software. It stated:
"Tornado Cash's open-source, self-executing software is not sanctionable under the Act (as opposed to the rogue persons and entities who abuse it)".
Following this ruling, OFAC lifted the sanctions on March 21, 2025. However, the Treasury Department emphasized that this move did not signal a shift away from crypto enforcement. Treasury Secretary Scott Bessent remarked:
"Securing the digital asset industry from abuse by North Korea and other illicit actors is essential to establishing U.S. leadership and ensuring that the American people can benefit from financial innovation and inclusion."
The decision drew mixed reactions. Scott Besent, Coinbase's Chief Legal Officer, voiced concerns:
"Taking Tornado Cash off the sanctions list without resolving the legal issues leaves the industry in limbo. There is no clear definition of what is and is not permissible for developers and the market."
This case has reignited discussions about balancing privacy and regulatory oversight within decentralized finance (DeFi).
The Tornado Cash case offers valuable takeaways for developers and operators of privacy protocols facing U.S. regulations. It highlights that decentralization alone does not shield projects from enforcement actions.
One key lesson is the importance of risk assessment. Nearly 30% of the funds processed through Tornado Cash were tied to illicit activities, emphasizing the need for systems to monitor and address misuse. Legal structure is another critical factor, as the court distinguished between sanctioning software and targeting individuals who misuse it.
Privacy protocols must also find ways to integrate risk mitigation tools without compromising user anonymity. This could involve providing resources to help users understand compliance risks or collaborating with analytics platforms like Wallet Finder.ai to ensure transparency for legitimate transactions.
Community support and legal readiness are equally important. Haseeb Qureshi, co-founder of Dragonfly, explained his stance when defending his investment:
"We made this investment because we believe in open-source privacy-preserving technology."
Strong legal backing and industry alliances can be the difference between surviving regulatory hurdles and shutting down entirely.
As regulatory frameworks continue to develop, privacy protocol developers need to stay informed and actively participate in shaping fair policies. The Tornado Cash case underscores the ongoing challenges at the intersection of privacy, decentralization, and regulation. The journey ahead remains uncertain but critical for the future of DeFi.
The rules and regulations surrounding decentralized finance (DeFi) platforms have become more intricate, especially after several high-profile enforcement actions. Today, these platforms and the analytics tools they rely on face strict compliance requirements. Balancing user privacy with regulatory demands is a tightrope walk, and advanced analytics tools are stepping up to help navigate this challenging landscape.
In the United States, DeFi platforms must follow anti-money laundering (AML) regulations similar to those applied to virtual currency businesses classified as Money Services Businesses (MSBs). FinCEN has made it clear:
"An administrator or exchanger that accepts and transmits a convertible virtual currency or buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN's regulations, unless a limitation to or exemption from the definition applies to the person."
This classification comes with serious responsibilities. Platforms need to implement systems to monitor transactions in real time, identify suspicious activities, and ensure compliance with Know Your Customer (KYC) procedures. They must also follow risk-based approaches and submit regulatory reports as required.
Failing to comply can lead to severe consequences. For instance, the founder of EtherDelta, a decentralized exchange, was fined $300,000 in 2018 for operating without registering as a securities exchange.
Another key requirement is screening transactions against the Specially Designated Nationals and Blocked Entities List (SDN List) maintained by OFAC. The sanctions on Tornado Cash highlighted just how tricky this can be, as platforms struggled to handle transactions linked to the mixer.
Platforms must also watch for high-risk activities, such as large transfers, rapid movements of funds, or transactions that use techniques to obscure their origin. Regular risk assessments are essential to stay ahead of potential money laundering threats.
Analytics tools are a lifeline for DeFi platforms dealing with these complex rules. Blockchain’s transparency allows on-chain analytics tools to track and analyze transactions, spotting patterns that might indicate illegal activities.
For example, tools like Wallet Finder.ai can monitor wallets, analyze trading behaviors, and send alerts about high-risk addresses. These tools make it easier for compliance teams to focus on the transactions that need the most attention.
AI-powered analytics has improved the accuracy of monitoring systems, cutting down on false positives that can overwhelm compliance teams. Between 2019 and 2021, DeFi faced over 75 attacks and fraudulent incidents, leading to losses of $8 billion. This highlights the need for analytics tools that can scale with transaction growth and adapt to new threats.
Effective AML systems combine monitoring, identity verification, and case management to create a secure environment for both users and platforms. While these tools strengthen compliance efforts, they also bring up the ongoing challenge of balancing privacy with regulatory oversight.
One of the biggest challenges for DeFi platforms is finding the right balance between maintaining user privacy and meeting strict regulatory requirements. The core principles of DeFi - anonymity and permissionless access - can clash with these demands. This tension is reflected in user confidence: only 33% of Americans are ready to use cryptocurrency, and just 36% feel moderately confident in its reliability and safety.
To address this, platforms are exploring new approaches. Privacy-enhancing technologies (PETs) aim to protect user data while still allowing for the necessary compliance monitoring. Some platforms are also using on-chain KYC solutions and Decentralized Identity (DID) protocols to verify users’ identities without compromising their privacy. Additionally, third-party KYC providers can handle identity verification, keeping sensitive user data separate from the platform.
Standardized identity verification protocols are another promising solution. These could help platforms meet KYC requirements while respecting users' anonymity and data protection. This balance is especially critical when considering crypto mixers, which present unique challenges for regulators and platforms alike.
Experts believe that combining thoughtful regulation with technology could help DeFi grow as a secure and viable alternative to traditional finance. Some suggest embedding compliance mechanisms directly into smart contracts, such as automated transaction screening and reporting. Others propose DAO-based governance frameworks, where the community helps shape compliance policies.
With over $169 billion locked in decentralized lending protocols as of 2024, the stakes are high. Resolving the privacy-versus-compliance debate will be a key factor in determining the future of DeFi and its broader adoption.
The rules around crypto mixers are changing fast, as lawmakers and agencies try to balance privacy with stopping financial crimes. As the industry evolves, new challenges, laws, and technologies are shaping the road ahead. Let’s dive into some of the key developments.
One big question regulators face is: How do you protect privacy without letting bad actors misuse these tools? The numbers show the stakes. In 2023, scams in cryptocurrency investments led to losses of about $3.96 billion, a 53% jump from 2022. Meanwhile, around $67 million worth of coins flowed through mixers that same year.
Cases like Tornado Cash highlight the issue. These platforms handle large amounts of transactions but can also be used for illegal activities. This creates a tough challenge for regulators: how to stop misuse without harming legitimate privacy needs.
Some new tech solutions are offering hope. Privacy Pools allow users to prove their funds aren’t linked to illegal activities without exposing their full transaction history. Another approach, Selective De-Anonymization (SeDe), helps identify unlawful transactions while keeping law-abiding users’ data private.
"We argue that advances in cryptography and blockchain technology can overcome the false binary choice between privacy and compliance, via blockchain‐native solutions that permit on‐chain compliance programmable and tailored to jurisdictional needs and enforced by consensus rules." - Shlomit Azgad-Tromer, Joey Garcia, and Eran Tromer
These advances suggest that we might not have to choose between privacy and compliance after all. Instead, we could see solutions that protect both.
As technology evolves, lawmakers are rethinking regulations. In the U.S., Congress is working on laws that could change how crypto mixers operate. The House recently passed the CLARITY Act with strong bipartisan support, signaling momentum for clearer crypto rules.
Chairman Hill outlined some of the priorities for this legislation:
"We are taking historic steps to ensure the United States remains the world's leader in innovation and I look forward to 'Crypto Week' in the House. After years of dedicated work in Congress on digital assets, we are advancing landmark legislation to establish a clear regulatory framework for digital assets that safeguards consumers and investors, provides rules for the issuance and operation of dollar-backed payment stablecoins, and permanently blocks the creation of a Central Bank Digital Currency (CBDC) to safeguard Americans' financial privacy." - Chairman Hill
The SEC is also stepping up, holding 169 meetings with experts and industry leaders through its Crypto Task Force. Meanwhile, the DOJ has shifted its focus to cases involving financial harm, drug trafficking, organized crime, and terrorism. For example, in 2025, the DOJ and CFTC closed probes into Polymarket, and the SEC temporarily paused its lawsuit against Justin Sun.
Developers of privacy-enhancing tools are under pressure. Regulatory crackdowns, like the sentencing of Tornado Cash developer Alexey Pertsev to 64 months in prison by a Dutch court for money laundering, have sent shockwaves through the community. Similarly, the DOJ’s arrest of two people behind Samourai Wallet, a mixer allegedly involved in over $2 billion in illegal transactions, has raised fears about personal liability.
However, there are signs of a shift. Banking regulators are easing some earlier policies, such as removing "reputational risk" assessments from their procedures. This could signal a move away from a blanket rejection of privacy-focused tools.
To move forward, developers may need to build compliance features directly into their systems. For example, multi-party de-anonymization systems can help prevent abuse while maintaining accountability. Zero-knowledge proofs also allow users to meet regulatory requirements without exposing sensitive details.
"In our solution, users' privacy is protected because of strong guarantees against the collusion of any privacy revoker using multi-party computation schemes. Simultaneously, the compliance features enable the publicly verified request of the privacy revoker to be propagated and executed to reveal suspect transactions only when a sufficient number of independent participants agree to the privacy revocation request." - Amit Chaudhary and Hamish Ivey-Law
The future of crypto mixers might depend on how quickly developers can introduce these privacy-friendly compliance tools. If they don’t, regulators could resort to blanket bans. Tools like Wallet Finder.ai, which tracks wallet performance and compliance in real time, show that the infrastructure for better monitoring is already here. The challenge now is to balance financial security with the need for privacy.
Using crypto mixers, even when the intent is purely for privacy, can put users at legal risk. Authorities often keep a close watch on these activities because of concerns about money laundering, sanctions violations, and other unlawful practices. In the U.S., using or running unlicensed mixers can trigger investigations, hefty fines, or other penalties, as regulators are increasingly cracking down on these services.
Although protecting privacy is a legitimate goal, users should know that recent proposals in the U.S. suggest banning unlicensed mixers for up to two years. Staying updated on local laws and compliance rules is crucial to avoid any unexpected legal trouble.
Centralized crypto mixers are generally simpler to regulate because they’re controlled by a single entity. This setup allows them to maintain records and enforce compliance more easily. However, this centralized nature also makes them vulnerable to legal actions or sanctions, as authorities can directly target the organization running the mixer.
Decentralized mixers work differently. They use smart contracts and distributed networks, prioritizing privacy and making regulation more challenging. While these mixers face less direct oversight, large transactions through them can still attract attention under anti-money laundering (AML) and anti-structuring laws. This scrutiny can lead to legal complications. Each type of mixer carries its own risks, so it’s important to understand how they align with compliance requirements.
Emerging technologies such as zero-knowledge proofs (ZKPs) and modular architectures are opening new doors for privacy-focused compliance. These tools make it possible to confirm the legitimacy of transactions without exposing private details, creating a balance between protecting user privacy and meeting regulatory requirements.
With these innovations, crypto mixers and privacy protocols can navigate legal hurdles more effectively while preserving user confidence and staying aligned with compliance expectations.
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