What is the need for Bitcoin mixers when crypto is untraceable anyway, right?
There is a massive misconception that crypto transactions are untraceable. But that is not true. You can use crypto anonymously without revealing your identity, but every transaction is stored in the blockchain record and can be traced back to its origin.
Ninety percent of all crypto users today use centralized exchanges and wallets where KYC is mandatory. Therefore, if one can trace back the transactions to their original source and destination, one can also identify the person behind them. And this doesn’t sit well with some people, especially those concerned about their privacy.
This is where Bitcoin mixers or crypto mixers come in.
While it’s not perfect, crypto mixers and tumblers are interesting tools that require careful analysis. In this guide, we’ll discuss what they are, how it does what it does and if they are legal.
Bitcoin mixers or crypto tumblers allow users to anonymize their crypto transactions by mixing coins from different users, obscuring the source and destination of the original coins. In return, you pay a part of your transaction amount as a fee for its service.
Its intended use is for people concerned with their privacy and people who don’t want third parties sniffing around and tracing their transactions. But unfortunately, crypto mixers have become a weapon of choice for criminals to launder stolen or illegal money. More on this later.
How Bitcoin Mixers Work?
To put it simply, you send a certain amount of Bitcoin (or any other crypto) into a mixer that you want mixed. The funds are then pooled together with the mixer’s own reserves and other users’ funds.
It then performs a mixing algorithm where all coins and tokens are mixed and jumbled, making it impossible to track their origin. After this, the mixer charges a commission (typically 1-3% ) and sends the equivalent amount of funds (in small chunks) you deposited to a different wallet address of your choice.
This is how it generally works, but depending on whether you’re using a centralized or decentralized mixer, some of these things may vary.
Centralized Vs Decentralized Mixers?
First, we must understand that for mixers to achieve their purpose of making transactions untraceable and anonymous, they must have a decent chunk of users on their platform. Otherwise, anyone can see the public blockchain record and identify the source and destination.
For example, if there are only three users in a Bitcoin mixing platform. One can easily tie back the mixed coins to its users by matching the amount deposited from one wallet and sent to another.
Blendar.io is one of the most popular centralized mixers. The main advantage of using a centralized exchange is there are more users, which means more coins and more transactions. Therefore, making it extremely difficult for third parties to identify the source and destination.
This is not the case with decentralized crypto mixers. Decentralized mixers usually have fewer users, fewer funds and fewer transactions, which makes it easier for others to trace back transactions.
On the flip side, the biggest disadvantage of centralized mixers is that they require you to verify your identity before using their services, which defeats the entire purpose of a crypto mixer.
In decentralized mixers, this, of course, is not the case. Everything is automated using smart contracts. No users or the mixer itself will know the identity of other users, which adds an extra layer of privacy.
CoinJoin is an example of one of the most popular decentralized crypto tumblers.
Limitations of Bitcoin Mixers
Since crypto mixers help users make their transactions untraceable and are often associated with money laundering and other criminal activities, some exchanges forbid using mixed crypto on their platforms.
Binance is one of these exchanges that flag mixed coins tainted and ban their use and sometimes its users. Recently, this tweet revealed that Paxos, a crypto brokerage, also banned its use on their platform.
While it’s not apparent at the moment what other exchanges prevent using mixed crypto, it’s safe to assume that most centralized exchanges are on that list.
Centralized exchanges must comply with government regulations. Hence, they are responsible for tracing transactions and users to prevent or track criminals, money launderers and tax dodgers, and crypto mixers present an obstruction in that process.
Other than this, there is the obvious limitation of the lack of effective decentralized crypto mixers. As discussed before, centralized crypto mixers are still not entirely anonymous as they require KYC, and decentralized mixers don’t have the volume of users to mix the coins effectively.
Use of Crypto Mixer in Hacks and Money Laundering
As we said in the beginning, Bitcoin mixers and tumblers have become a weapon of choice for hackers to launder stolen money. Some of these hackers game the system by using fake or stolen identities to complete KYC and use centralized crypto mixers without getting caught.
Most recently, Lazarus, the notorious state-backed North Korean hacker group, stole $625 million worth of ETH and USDC from Axie Infinity and used Blendar.io and ChipMixer to launder the stolen funds. More on this here.
In the past, Bitcoin Fog, a darknet-based crypto mixing service, has been responsible for laundering over $336 million worth of Bitcoin. Roman Sterling, the founder of Bitcoin Fog, was finally arrested in 2021 after its decade-long run as the most popular illegal Bitcoin mixer in the darknet.
Are Crypto Mixers Legal?
Even though crypto mixers aren’t technically illegal in most jurisdictions, the governments don’t shy away from interfering and expressing their dislike of these services.
What this means is Americans are banned from using the platform, but it doesn’t mean Tornado Cash will stop operating since it’s an open-source, Decentralized Autonomous Organization (DAO).
The Office of Foreign Assets Control (OFAC), a government body tasked with regulating and monitoring foreign sanctions concerning US national safety, also blacklisted several bitcoin mixers, including Blendar.io and Tornado Cash.
While it’s true that crypto mixers and blenders can provide a heightened degree of privacy and anonymity for legitimate users, the unfortunate reality is that they are mostly used by hackers to hide their tracks. And the risks may outweigh the positives.