Have you heard of Tainted Cryptos? Imagine you're on pancake swap or the built-in Swap feature in your crypto wallet app, trading your BTC for Ethereum, and unknowingly, you receive Ethereum from a Crypto Hacker's wallet. This hacker was involved in major crypto thefts around the world. And now because you received this "tainted" or flagged crypto, from the hacker, your wallet is also "tainted" now. Any exchange you interact with will assume that your crypto wallet is high-risk, because you interacted with the hacker, and your crypto was involved in crypto theft. The exchange really doesn't know, if you are the hacker, or the hacker's friend, or a mule - assisting the hacker in order to cash out the stolen crypto. This is why using Centralized Exchanges (Coinbase, Kraken, Uphold, etc.), is much safer. Although, some articles say that even central exchanges sometimes don't catch tainted cryptos and also trade them.
My recommendation is to use multiple wallets. Separate wallet for each exchange. And a separate wallet for any defi services like pancake swap, uniswap, etc. And don't mix crypto between these wallets. We know that there are many complaints of Crypto exchanges blocking/revoking access to people without giving them any explanation. The three main reasons I'm aware of, for your crypto account to be closed, are sending crypto to high risk companies (gambling sites, marijuana dispensaries, firearms dealers, etc.), using crypto mixers like tornado cash, and dealing with high risk/tainted wallets (that have crypto linked to a theft/hack). So, diversification is the best remedy in my opinion. If for some reason your wallet gets flagged, at least you will still have crypto in other wallets that you can use.
BitCoin’s Fatal FLAW That Nobody’s Talking About (Fungibility, Tainted Coins) - MHFIN - Jun 4, 2021
Bitcoin's fundamental flaw - Coding Jesus - Feb 20, 2021
Illegal activities in Crypto | What are tainted Coins? - Dr. Julian Hosp - Krypto, Investieren, Unternehmer - Jun 7, 2018
Fungibility: Bitcoin vs Privacy Coins | Privacy Coin Report - Privacy Coin Report - Jul 13, 2023
Bitcoin Q&A: Blacklists, Taint, and Wallet Fingerprinting - aantonop - Jun 13, 2019
https://patents.google.com/patent/US20200167791A1/en
Crypto taint tracking
Abstract
A method for detecting and tracking tainted cryptographic wallets. The method measures a wallet's propensity to engage in criminal or suspicious activity. Naturally, transacting with a criminal is tantamount either to funding crime or laundering its proceeds, so it is in our collective interest to identify—and then monitor or quarantine—any wallet with criminal association. The method also automatically flags risky withdrawal requests in real-time for further review before committing them to the blockchain. In some embodiments, the exchange can quarantine wallets at a certain Walletscore.
*Here are a few articles on Tainted Cryptos:
Here is a Tainted Crypto Law that might get passed in Cook Islands (part of New Zealand):
'Spy film type thing' - Alarm grows over Cook Islands cryptocurrency bill
By Barbara Dreaver, Pacific Correspondent
Sun, Apr 14
Alarm is growing over proposed Cook Islands legislation, drafted by a US-based company, which could validate hacking into any account or system in the world.
In an investigation, 1News has learned that Drumcliffe, a high-value debt collector specialising in international asset seizure, hired at least two Cook Islands-based lawyers to draft the Tainted Cryptocurrency Recovery Bill 2023.
How does it work?
The Tainted Cryptocurrency Recovery Bill allows for "recovery agents" to use a variety of means including hacking to investigate and find cryptocurrency that may have been used for illegal means or is the proceeds of crime.
Suspected international assets would be seized and eventually turned into cash.
That cash would be put into a bank account in the Cook Islands and while there is little detail on where it would go from here, there would supposedly be some form of revenue stream and benefits to the Cook Islands economy.
The bill is so broadly written that anyone who is suspected of having or even suspected that they might have tainted cryptocurrency in the future can be hacked and spyware installed. Nijsse said he had never seen anything like it.
Given that the Cook Islands is a realm country of New Zealand, he said our Government should be very concerned as "it does have implications for New Zealand governance arrangements".
But a number of experts say seizing the supposedly tainted cryptocurrency is not an easy thing to do. Jeff Nijsse said any seizures, that have been seen, have been as a result of people cooperating with law enforcement to hand over passwords and private keys.
https://quantoz.com/publications/tainted-cryptocurrency-or-suspicious-transaction/
What is a tainted cryptocurrency?
The term tainted cryptocurrency implies that the cryptocurrency was used for illicit activities. 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’.
There are plenty of examples how cryptocurrencies could be tainted without any knowledge or blame to the holder of the crypto.
https://link.springer.com/article/10.1007/s10207-023-00766-z
2.1 Taint analysis
Taint in cryptocurrency refers to the concept that certain coins can be deemed riskier or less acceptable because of their previous owners’ possible links to criminal activity. In this regard, taint analysis can inform us of how much of a coin comes from a given address and thus what percentage of a coin can possibly have illegal or uncertain origins associated with criminal activities.
https://randomoracle.wordpress.com/2022/12/28/the-myth-of-tainted-blockchain-addresses-part-i/
Once we decide one pool of funds are tainted by virtue of being associated with a bad actor or event—a scam, rug-pull or garden-variety theft—that association propagates unchecked and continues to taint funds belonging to innocent bystanders who were not in any way involved with the original crime.
That raises the question: are these unwitting recipients also in violation of OFAC sanctions? Are all funds in those wallets now permanently tainted because of an inbound transaction, a transaction they neither asked for or had any realistic means to prevent given the way blockchains operate?
https://thebitcoinmanual.com/articles/what-is-tainted-bitcoin/
Tainted Bitcoin is a concept of tagging bitcoin associated with the illicit activity as “dirty” and that the tagging will continue indefinitely on that bitcoin despite it being transferred and changing ownership.
If authorities do enforce these tainted blacklists, the concern is that individuals might unknowingly receive tainted bitcoin, through no fault of their own, and might have their funds seized and accounts blocked should they move it to a centralised authority where you give up custody like an exchange. Alternatively, selling the coins is subject to increased scrutiny before they can make a payment, with a merchant accepting bitcoin as payment
https://cryptoforensic.com/blog/tainted-bitcoin-isnt-what-you-think-it-is/
Tainted Bitcoin Isn’t What You Think It Is
If I Can’t be Certain Whether or Not I Have Tainted Bitcoin, is it Something I Need to be Concerned About?
The vast majority of people do not hold any tainted Bitcoin. Just as importantly, though, the vast majority of cryptocurrency users need not have any concern about whether or not they have tainted Bitcoin. This is because most users only buy from major exchanges and services. If you’re the type of person that only buys from these exchanges and major services, you have effectively zero risks you obtained any Bitcoin that was tainted.
Also, check out my post on how government can freeze your crypto in your hardware wallet and make it unusable, if it doesn't like what you say or do: https://www.reddit.com/user/vman305/comments/196e1ic/did_you_know_the_government_can_freeze_your/
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