What Is a Bitcoin Mixer?
|— Bitcoin mixers are software or third-party services that mix up your Bitcoin funds with other users’ funds to reduce the tracing of transactions.|
— There are two types of mixers: centralized mixers and decentralized mixers. Centralized mixers use a third party, while decentralized mixers use open-source protocols to mix transactions.
— Crypto mixers offer users anonymity which can be integral to those living under oppressive regimes, but it can also open the door for criminal activity.
— There are many potential risks of using mixers, such as violating local laws, receiving wallet flags, platform bans and more.
First introduced in 2009, Bitcoin allows users to transact and trust each other across borders without needing banks 24/7. If that seems unfamiliar to you, make sure to read the guide on what Bitcoin is. However, for the purposes of this article, it’s important to understand that these benefits come with a trade-off.
One of the core concepts of what blockchain is offering — transparency — is not exactly privacy-friendly. To explain, the blockchain is freely available to everyone, and you can read every transaction on sites like block explorers. With this information and additional external data, you can link an arbitrary Bitcoin address to its owner. So, what do you do when you’d prefer not to share this information?
Most people will never need to hide their blockchain transactions. However, for those living under oppressive regimes and require the freedom of moving their assets where they like, tools to protect users’ identities become imperative. But unfortunately, the very same tools that help such people survive also encourage bad actors.
Specifically, these tools are named crypto tumblers, or mixers and let you make anonymous transactions on the blockchain.
But what is a Bitcoin mixer exactly; how do they work, and are they even legal?
Let’s dive in.
What Is a Bitcoin Mixer?
Bitcoin mixers, also known as tumblers, are services that receive cryptocurrencies from users, pool them together, and then send the amounts to their corresponding recipient addresses. This is an effort to obfuscate the transaction trail.
To explain, if you’re using a mixer, the mixer’s address becomes the recipient of any outgoing transactions from your wallet instead of a specific Bitcoin address. Similarly, in the case of a recipient’s address, the address is again that of the Bitcoin mixer. If you want to see this in action, here’s how to read blockchain transactions.
Mixing funds hides the original sources, making it difficult for external observers to identify the specific senders or recipients.
Depending on the mixer, service fees are generally quite low, ranging from 0.5% to 7% of the transaction.
What Is a Bitcoin Mixer For?
Bitcoin mixers make crypto transactions harder to trace, thus preserving privacy and hiding the sender’s identity. Essentially, they serve as a way to anonymize crypto transactions.
So why would you want to use a crypto mixer?
Firstly, many people using mixers live in countries with oppressive regimes. Not every country gives its citizens the same rights, meaning outspoken journalists, members of opposition parties, or even normal civilians may be in danger for expressing opposing views or beliefs. If citizens of such countries use a transparent transaction on the blockchain, they could be putting themselves at risk.
Secondly, whistleblowers and investigative journalists can also benefit from this tool. Using a crypto mixer means they can pay and get paid for information across borders, but without revealing their sources.
Of course, ‘anonymity’ also encourages bad actors to exist. Scammers often want to hide their identities, and crypto mixers are their tools of choice.
For instance, Bitcoin tumblers have a long history of money laundering and scams, with the first notable case in December 2013. Just four years after Bitcoin’s launch, the mixer Bitcoin Fog was used to launder 96000 BTC from a marketplace. These incidents continued well into 2021, with Bitcoin Fog allegedly funneling over $1.3 million BTC. US authorities finally arrested the founder of this tumbler, Roman Sterlingov, in 2021.
Since then, US authorities have sanctioned many high-profile mixers, namely Blender.io and Tornado Cash. Similarly, German authorities also took down the infamous Chipmixer, and seized over $46 million in cryptocurrency.
How Do Crypto Mixers Work?
Crypto mixers collect Bitcoin from their users, merge their transactions, and redistribute it.
To better understand this concept, let us take the example of a charity receiving donations anonymously. Instead of directly donating, multiple donors could pool their funds together and designate a third party to complete the actual transaction. As a result, the charity receives the donation without knowing the specific source.
Replace this third party with a smart contract, and that’s essentially the foundation of a Bitcoin mixer. Usually, mixers also incorporate a slight delay in sending the Bitcoin to the destination address to avoid further detection.
Bitcoin mixers are of two types: centralized mixers and decentralized mixers.
Centralized Mixers vs. Decentralized Mixers
Centralized mixers are operated by private third-party services that users trust to mix their Bitcoin, while decentralized mixers are peer-to-peer protocols with an automatic mixing process.
Using centralized mixers, users send their funds to wallet addresses owned by these mixers, pay a service fee and mention where they want to send it. Once the mixer receives these funds, they combine them with other users’ funds in a pool and redistribute them. Good examples of centralized mixers include Yo!Mix and Mixtura.
Centralized mixers, particularly, carry the additional risk of trusting a third party. You could potentially lose your funds if the network or the company shuts down. Since these mixers handle a large amount of money, they become attractive targets for hackers and pose risks of potential malicious intent from the company itself. Some centralized mixers might also save your info privately and tie you back to these transactions—and that defeats their whole purpose.
On the other hand, decentralized mixers use an open-source protocol, such as CoinJoin, to create an automatic permissionless mixing process. Essentially, they bank on multiple users using the protocol. Then, they consolidate their funds to a single large transaction, and route different Bitcoins to the destination addresses. The more people that use a decentralized mixer, the more efficient they become. That’s because an increased number of users reduces the odds of detection. A good example of a decentralized crypto mixer that uses CoinJoin includes JoinMarket.
The Wider Risks of Crypto Mixers
While crypto mixers offer a degree of anonymity, it’s important to note that it’s not impossible to find out who sends and receives funds in this manner. Unfortunately, some crypto mixers aren’t as anonymous as they claim, and some are subject to local laws and regulations.
For example, Law enforcement agencies (such as the FBI) have sophisticated tools to trace the origin of funds sent through crypto mixers. This is easier to discover on mixers with limited users, or when tracking large sums of value.
In the case of fewer people participating in the service, tracing funds is simple. Since it’s less likely another user sent a similar amount of Bitcoin as yours, working out the source is entirely plausible. This can be particularly useful when trying to catch bad actors, but it also leaves people living under oppressive regimes vulnerable.
Further, some exchanges actively block these “mixed” tokens and coins due to security and compliance concerns. Thus, if using a crypto mixer, you might face similar issues across major exchanges, limiting how you can use crypto assets. So, while there are countless legitimate reasons to obfuscate your transactions, it’s often simply not that easy.
Bitcoin Mixers: Are They Illegal?
While Bitcoin mixers are not illegal everywhere, many countries do limit their use, or even ban them entirely. Plus, since these mixing services can lend themselves to money laundering, they often attract increased scrutiny from regulators. Regulatory authorities often view mixers with suspicion, as they can hinder law enforcement efforts to track and trace suspicious transactions.
To combat this, countries like the US have placed restrictions on crypto mixers since they deal with money transfers. The US financial law enforcement agency, FinCEN, requires all mixers to register under the Bank Secrecy Act.
Further, in 2022, the US placed sanctions on major crypto mixers like Tornado Cash and Blender.io. The US Treasury held that Tornado Cash had been used for laundering over 7 billion dollars since its creation. Similarly, Blender.io helped a North Korean hacker group launder money.
These sanctions prohibit U.S. persons from doing business with both these services and freeze any assets they may have in the United States.
Since many countries handle crypto mixers differently, consult your local crypto laws before using them.
Can I Use a Crypto Mixer?
So, crypto mixers offer a novel way to benefit from the security and accessibility of the blockchain, without the burden of revealing your identity. For those under oppressive regimes or with political difficulties, this may be the only option. However, if you decide to use a crypto or Bitcoin mixer, it’s important to understand the risk involved. Before using any service that may obfuscate the origin of a specific set of funds, make sure you check your local laws and abide by them. You don’t want to use a crypto mixer and pay the price for it later.
If you want to keep your anonymity in crypto though, using a crypto mixer can be an interesting option. Only you know if using a crypto mixer is right for you. Now you know about how they work, you can navigate the market and decide whether that’s the right choice—because that’s the whole point of self-custody.