While crypto mixing services can enhance transactional privacy, they are not without risks for users.
Posted September 11, 2023 at 6:20 am EST.
Crypto mixers are one of the go-to tools for cryptocurrency users who are concerned about transactional privacy. Read on to learn what crypto mixers are, how they work, and whether you can legally use them or not.
What Is a Crypto Mixer?
Crypto mixers, also known as crypto tumblers, are services that offer enhanced transactional privacy by mixing coins from different sources after a transaction. It, therefore, becomes challenging to trace the exact addresses involved in a specific transaction.
An important aspect to note to understand the necessity of crypto tumblers is the pseudonymous nature of most cryptocurrencies. Because every open blockchain is a public ledger and anyone can view every transaction and wallet address used, anonymity is slightly compromised.
As it stands, the only truly private cryptocurrency is Monero. For the rest, as much as you can use a pseudonym to protect your identity, your transactions can still be viewed and tracked and, with the right blockchain analysis tools, can be linked to your real-world identity.
How Do Bitcoin Mixers Work?
Every Bitcoin transaction comprises a sender and receiver. Blockchain explorers ensure everyone can see these details. A Bitcoin mixer receives the coins from different sources, tumbles them, and sends them to the parties involved. This way, no one can say who received how much and from whom.
On the blockchain explorer, the recipient will have the sender address as the Bitcoin tumbler. The receiving address for any sender would also be the coin mixer. This factor of mixing coins from different users gives it its name as a mixer.
Crypto mixers vary in the complexity of their services, depending on the infrastructure of the mixers. The more complex the structure, the higher the cryptographic dependency. However, the infrastructure also contributes to the scalability of the service.
Types of Coin Tumblers
Although there are several options for coin mixers, they all fall under two main categories that differentiate their services: custodial and non-custodial.
Custodial crypto mixers are centralized, with one entity handling the mixing process. That means, like any centralized crypto service, the mixer will handle everything for you. You send the coins to the coin tumbler, pay a fee, and receive de facto anonymized coins.
Custodial coin mixers make the process easier for most people. After mixing, you only need to specify the receiving address to get your crypto coins.
However, having a centralized server is a high risk for several events, including hacks and downtime. This single point of failure would mean users losing their coins if anything were to happen to the server. There is also the risk of losing anonymity if there is a system attack or if the mixer decides to disclose its users’ information.
Also known as decentralized crypto mixers, these platforms depend on many people to contribute to a pool. Non-custodial mixers are more permissionless than their custodial counterparts. Despite having many parties involved in the process, you can expect to get all your coins back after a small fee deduction.
The most significant upside of decentralized crypto mixers is that the costs are lesser than in custodial mixers. Additionally, you can expect more anonymity through these mixers since they are permissionless. However, the downside is needing many contributors to the system, or you will lose anonymity through the process of elimination.
Are Crypto Mixers Illegal?
Generally speaking, coin mixing services are not illegal per se. However, crypto mixers may or may not be unlawful, depending on the laws in your jurisdiction.
A significant downside of having mixed coins is that some exchanges will not allow them. Additionally, illegal activities, including money laundering, depend on these services for anonymity. As such, mixers are often associated with unlawful transactions.
Financial watchdogs in major jurisdictions, including the US and EU, frown upon services aiding bad crypto industry actors. Therefore, regulations by the US Financial Crimes Enforcement Network (FinCEN) and some like the EU’s AMLD-5 make it more challenging for crypto enthusiasts to take full advantage of coin tumblers.
Notably, several crypto-mixing services have faced serious charges due to their involvement in laundering millions of dollars for illegal businesses. Some examples are Helix and Bitcoin Fog, whose owners laundered over $600 million in crypto by providing a coin-mixing service.
If you decide to mix your coins to enhance your transactional privacy, consider your priorities and the risks. If it will hinder the services you require from crypto services or put you on the wrong side of the law, you should probably reconsider using a mixer. Alternatively, you could use a privacy coin, such as Monero, which offers anonymity by default, or Zcash, which allows you to use stealth addresses to enhance the privacy of your transactions.