Crypto mixers or coin tumblers increase the level of anonymity of crypto transactions by obscuring the source of funds. They are mostly used by cybercriminals to obfuscate their connection between wallets they use for illegal activities and their crypto-to-fiat exchanges.
As a result, they have been accused of money laundering and funding criminal activities. Nevertheless, some people still use them for legitimate purposes.
Decentralized Mixers
Crypto mixers are a valuable tool for those who wish to protect their privacy and security. They also allow individuals to make quick international payments using cryptocurrency, which is often faster than traditional methods of payment that can take days to settle.
However, some mixers have been linked to illegal activities, including money laundering, and they can also be susceptible to hacking. Therefore, users should always choose a reputable mixer that complies with applicable laws and has a no-log policy.
Decentralized mixers such as Whirlpool and Samourai Wallet utilize blockchain-based protocols that obscure transactions through a process called tumbling. The process involves combining multiple inputs of Bitcoin into one output, which mixes the coins with each other and makes it difficult to identify their origin. In addition, some mixers use obfuscation techniques such as using different denominations, to further improve the anonymity of the transaction. Moreover, most mixers charge a service fee to mix funds and have transaction limits, which should be considered when choosing a mixer.
Custodial Mixers
A custodial mixer is a service that holds users’ bitcoin for them and sends them back with different ones, typically for a fee. These types of mixers are easy to use but come with a few risks. First, they can be hacked and lose user funds. Second, they can keep records that link incoming and outgoing coins, which could allow law enforcement to track users.
Finally, these mixers are centralized and therefore are not permissionless. This means that if someone wants to find out who used the service, they can simply ask the mixer for their records and tie them together.
Decentralized mixers, such as CoinJoin and those built into privacy wallets like Wasabi Wallet, can be more effective at protecting your anonymity because they are not based on a single server. However, they depend on the participation of many users to work. This can make it easier for regulators and law enforcement to detect the service and stop users from using it for illicit activities.
Legality of Crypto Mixers
Crypto mixers are not explicitly illegal in any jurisdiction, but they can be used by criminals to launder funds or avoid triggering anti-money laundering (AML) alerts at crypto exchanges. As a result, regulated businesses that use them must ensure they are following AML regulations and reporting suspicious activity where required.
The increasing popularity of Bitcoin tumblers in recent years has been a catalyst for increased scrutiny from regulators. In addition, a growing number of fraud cases and cyberattacks have highlighted the role these services play in anonymity erosion.
Mixers can help protect users from these threats by obfuscating the origins of their funds and making it more difficult for bad actors to trace them. However, increased regulation can inadvertently undermine the very reason people use them: financial privacy. For this reason, it is important to choose a custodial mixer that follows your local regulations to prevent accidentally flouting the law. In the US, for example, that means using a mixer with a US-registered company.
