Concern over the quantity of cryptocurrency hackers funding their attacks through centralized exchanges is growing.
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Hackers must first fund their wallets in order to pay the transaction fees required to launch attacks. But since a public ledger is transparent, they must carefully consider how to accomplish this without becoming associated with the crime.
Tornado Cash was once the go-to method for erasing evidence, utilized by both privacy advocates and hackers.
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It now seems that hackers frequently choose to fund their accounts by avoiding the know-your-customer (KYC) processes of exchanges.
According to an analysis of funding sources for recent attacks conducted by blockchain monitoring company Forta Network, Tornado Cash—the hacker’s preferred method of payment—now accounts for just under half of the hacks that were examined, with centralized exchanges (CEXs) providing funds in a third of the cases.
Additional funding sources included the 3.3% share from cross-chain swaps via Squid router, the 6.7% share from “middleware operations software” UnionChain and the innovative privacy tool Railgun.
The addresses in the dataset were used in 30 recent flash-loan attacks, such as the complex $48 million hack of the decentralized exchange KyberSwap in November, the simultaneous attacks on the Arbitrum projects Gamma Strategies and Radiant Capital, and the successful $1 million governance attack on the NFT project Loot last month.
The US Treasury imposed sanctions on the cryptocurrency mixing service in August 2022, which made it more difficult for hackers to cash out even though Tornado Cash is still the main source of funding for on-chain hacks.
When converting any illicit gains to fiat currency, addresses that have come into contact with any “tainted” funds from the mixer are typically flagged by exchanges following the sanctions, making it a bad option.
According to a recent article from 404 Media, the author passed KYC checks on OKX, the funding source of one of the attacks Forta investigated, using a $15 AI-generated fake ID from the website OnlyFake.
With the help of these AI tools, hackers can create a completely new person along with all of their accompanying documentation without having to buy “fullz” or stolen credentials on the darknet.
The high percentage of exchange-funded attacks demonstrates how simple it has become to get around KYC, a trend that is probably going to continue as more people use tools of a similar nature.
The hackers may feel somewhat safer leaving less of a trail on-chain even though they still run the risk of the CEX blocking their funds.
Although evading legitimate KYC checks could be a challenge for the cryptocurrency sector in terms of on-ramping hackers, the issue is certain to impact numerous other industries as well. Paradoxically, the technology that underpins cryptocurrencies—cryptographic proofs—may be the answer to these kinds of problems down the road.
For the time being, there are valid questions regarding the degree to which exchanges take their responsibility and the effectiveness of their KYC procedures.
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