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The decentralized structure of cryptocurrencies has boosted their acceptance throughout the world. Banks or governments will nearly never have access to your accounts, and you have total control over your money. Total control over your funds raises the issue and question of the security of the wallets holding your funds after making a transaction and the history of the funds, especially for the history part many do leverage cryptocurrency mixers to gain more privacy.
You might be surprised to discover that every time you use your digital currency to buy something on any website, a trail is left behind that can be followed.
Many individuals are unaware that most blockchain transactional information is open to the public to uphold its transparency feature. A blockchain essentially serves as a digital archive of all the records created on a specific network. All information, from the very first transaction to the most current one, is stored on the blockchain and is accessible to anybody with a functional internet connection.
For instance, the transaction ledger for Bitcoin is open to everyone. You can get a complete history of all bitcoin transactions since the currency’s introduction in early 2009 by visiting a blockchain explorer. That is not an issue but rather a key characteristic for some. However, the public nature of the Bitcoin blockchain is a significant privacy problem for people who require a little more anonymity.
There are techniques for completely obscuring who sends what to whom in bitcoin transactions. Using a cryptocurrency mixer, sometimes referred to as a tumbler, is one of the most well-recommended techniques. These processes mix up a certain quantity of crypto in private pools before dispensing it to the people it is intended for.
What is a Cryptocurrency Mixer?
You can combine your Bitcoin or other cryptocurrencies with those of other users to affirm anonymity via a service called a cryptocurrency mixer or tumbler. Platforms like mixers or mixing services hide the source of cryptocurrency funds during a transaction. The goal is to make transactions secretive and challenging to track. To do this, the mixer will combine coins and transfer them to several wallet addresses.
Cryptocurrencies like bitcoin and ether have a publicly accessible register of all transactions because of the transparency of the blockchain. All fund flows are, therefore, traceable. Since cryptocurrencies like bitcoin offer a public ledger of all transactions, mixers have emerged to enhance the anonymity of these digital currencies. Mixers have been used to wash cryptocurrency off any digital trail.
Consider a money-pool analogy. You and several other people each give $100. Then you cross the pool to the other side and take out $100. However, the $100 is now on a brand-new bill. The difference is that a mixer uses cryptocurrency.
The purpose of cryptocurrency mixers is to combine your digital currency with that of other users to produce multiple combinations and countless transactions, obfuscate the source and destination of cryptocurrencies, and establish a decentralized network. Both public and dubious forums on the internet offer these services. Although anyone can use this technology, which is legal in many places, its providers advertise it as a tool to increase privacy rather than a way to launder bitcoin.
Tornado Cash is a Blockchain Ethereum mixer that has gained popularity recently, especially among hackers. This service, launched in 2019, processes millions of dollars daily. The amount a user deposits in the Ether (ETH) coin used by the protocol or program can be withdrawn in full. Importantly, Tornado Cash conceals the transaction by erasing the transaction’s trail. The mixer breaks the on-chain connection between the deposit and withdrawal to increase transaction privacy. Perfect anonymity is ensured because there is currently no way to link any ETH withdrawals made using the new address to the associated deposits.
Cryptocurrency mixers: How they work
The goal is to make it impossible to determine that person A delivered person B 10 bitcoins by shuffling currency through a black box. A public explorer will only display that user B contributed bitcoin to a mixer with a dozen other users and that user B received bitcoin from the mixer along with a dozen other users.
The majority of the time, a mixer will ask you to send your coins to a particular address. The mixer will send an equivalent number of coins to another address you specify after processing your transaction. Keep in mind that the mixer won’t be aware of the identities of the addresses involved. However, it’s still crucial to use a mixer you can trust because they have been taking customer funds.
The majority of bitcoin transactions are kept on a blockchain, a public ledger where everyone can see and track the transfer of money from one wallet address to another. By combining the source funds with other funds to create an amalgamated deposit that is more difficult to monitor, cryptocurrency mixers try to make it tougher to detect specific transactions.
It is paramount for users to do their research before choosing a mixer to make sure it’s respectable and has a proven track record. Additionally, you want to search for a mixer that provides great security and privacy. While some mixers might need you to register for an account, others might let you use their services anonymously. You will typically need to give a receiving address where the coins can be transmitted.
Although each user can withdraw their whole payment, less a fee for the mixer, it’s more challenging for blockchain experts to track down where the money went because the coins are drawn from a chaotic pool. Another degree of secrecy is added when users can withdraw money from some mixers in different amounts delivered to different wallet addresses.
However, because cryptocurrencies are so frequently used in online crime, mixers have emerged as a crucial tool for criminals looking to cash out covertly. Despite this, some fraudsters have been apprehended thanks to cutting-edge methods for tracking cryptocurrency via the blockchain. Additionally, in a well-known example, the US Department of Justice was able to recover some Bitcoin valued at roughly US$2.3 million out of the US$4.3 million that Colonial Pipeline, a victim of the DarkSide ransomware attack in 2021, paid.
Cybercriminals have started looking for ways to improve the anonymity of their transactions and launder the cryptocurrency proceeds from their illegal endeavors over time. One such technique makes use of services referred to as cryptocurrency mixers or tumblers.
Despite their values, mixers have a severe issue that makes them ineffective and causes them to perform poorly when there are large crypto deposits.
Users receive a mix of funds from other users; as a result, if one user floods the mixer by contributing significantly more than the others, a sizable portion of the funds they ultimately receive will be made up of the money they initially provided, making it simpler to trace the funds back to their source.
Types of mixers
These are types of mixers that will accept your crypto and send back various crypto. While they provide a quick way to tumble bitcoin, they also pose a privacy concern because the mixer itself will still have a record connecting the transactions even though the linkages between incoming and outgoing bitcoin will not be made public.
Centralized mixers have access to your Bitcoin and IP addresses. They ultimately know which address sent and received which coins and are probably keeping a log. It follows that at some point in the future, the business might divulge those records and disclose a user’s relationship to the coins to a third party. In an ideal centralized mixer, all this information regarding the user is deleted.
Usually, this deposit is where the service takes its 1-3% fee. Users enter their e-wallet addresses on these services and send the exact quantity of cryptocurrency they want to mix to the platform. As a result, the user gives the agent complete authority to execute numerous transactions to mix crypto assets. We refer to an agent as a specialized algorithm that executes several transactions at random. An example of a Centralized mixer is Blender.
These mixers use peer-to-peer or coordinated protocols to completely jumble transactions. In essence, the protocol enables a sizable user base to combine a sum of bitcoin, but no one can determine who received what or where it originated from.
In this scenario, mixers make an effort to avoid middlemen and fix the shortcomings of centralized mixing. Individuals band together and pool their coins to make one significant transaction, and the coins get randomly returned to the pool members. The higher the number of users in the pool, the higher the randomization.
The most popular non-custodial mixers include Wasabi Wallet and Samourai Whirlpool.
Steps Involved in Decentralized Cryptocurrency Mixers
The process for noncustodial mixing consists of two steps.
Users first deposit the same amount of Ether (ETH) or other tokens into a mixer contract from address A. Then, after a user-defined time interval, they can withdraw their deposited coins via a withdrawal transaction to a new address B.
Users can confirm the mixer contract that they deposited without exposing the deposit transaction they issued by using one of several accessible cryptographic techniques, such as ring signatures and ZK-SNARKs, in the withdrawal transaction.
How Cryptocurrency Mixing Creates User Anonymity
In the end, bitcoin mixers are a tool that may be utilized to improve user privacy and increase the anonymity of cryptocurrency transactions. Individuals who need to create their exchange history with more mystery or who need an additional degree of security from exterior parties who might have gotten their data might discover this value.
In any case, a few tumblers have a history of being utilized falsely to wash dirty cash. Some mixers can differ in their authenticity and capacity to conceal financial activities, and some have minimum and maximum limits per transaction.
It is challenging to determine the source of a digital currency transaction due to the practice of cryptocurrency mixing. When multiple transactions are mixed, it is far more difficult for anyone to determine which individual coins were transmitted from which wallets. This makes it enticing for consumers to conduct transactions on open blockchains like Bitcoin.
While cryptocurrency mixing services employ a variety of techniques to this end, the employment of so-called “mixing pools” is by far the most popular. Users who participate in a mixing pool submit money to a central address, which then randomly distributes the money to other pool members. As a result, it is highly challenging to pinpoint the origin of any particular input because it might have originated from any number of locations.
Factors to Consider While Selecting Crypto Mixing Platforms
When choosing a Crypto tumbling service, there are several factors you should consider, which include:
Speed: The best tumbling services work rapidly and efficiently to obfuscate the cryptos before sending them out. They make use of private pools from which transactions can be sent in as few as two or three network confirmations.
Fees: The majority of the available crypto-mixing services will charge you a percentage of the coin deposited on the platform. It is crucial to go over the fee structures before choosing a platform.
Anonymity: Bitcoin mixers & tumblers delete your transaction logs to avoid blockchain experts following the transaction trail. Different mixers erase the records after different durations, usually after 24 hours. To ensure maximum anonymity, choose platforms that erase your logs.
Limits: Bitcoin blenders use as many as ten payout addresses at once. Because the reimbursements will be distributed in varying amounts rather than just one, people who will follow the mixing process to figure out someone’s identity will be confused.
Are crypto mixers illegal?
Even though they are utilized for unlawful behavior, cryptocurrency mixers are not necessarily illegal. Bitcoin mixers are a go-to tool for cybercriminals trading in cryptocurrency, according to a Chainalysis analysis of July, and illegal addresses are responsible for over a quarter of the payments supplied to mixers since January.
The Financial Crimes Enforcement Network (FinCEN) in the United States views mixers as money transmitters subject to the Bank Secrecy Act’s (BSA) registration and compliance procedures. However, Chainalysis stated in its research that “to our knowledge, no bitcoin or Ethereum mixers are currently adhering to these guidelines.”
The usage of cryptocurrency mixers is not always prohibited and has genuine uses. In general, the issue occurs when these services are used to circumvent regulations or launder the proceeds of unlawful activity, which is one of the reasons they are coming under more regulatory scrutiny.
Regulations requiring crypto exchanges to gather customer-identifying data have begun to take effect in many nations. Users are prohibited from withdrawing funds linked to a cryptocurrency mixer wallet on some exchanges (like Binance). Additionally, future money laundering with crypto mixers is going to be even more challenging due to new international anti-money laundering rules.
Crypto mixing’s legality ultimately depends on how it is employed and whether it violates any regionally established laws while doing so. Cryptocurrency laundering is becoming more and more challenging, and law enforcement has even been able to target the activities of cryptocurrency mixers by tracking the source of illegally obtained digital currency.
Mixers are a clear hub for money laundering because of the capacity to obscure crypto transactions, drawing in the likes of tax evaders and criminals looking to conceal the process of their illicit activities.
Depending on the country you are based in, using these services may or may not be illegal. According to former U.S. Deputy Assistant Attorney General Brian Benczkowski, using mixers to conceal cryptocurrency transactions “is a crime” in February 2021.
Roman Sterlingov, the Russian-Swedish inventor of the bitcoin tumbling service “Bitcoin Fog,” was detained by American police two months later for assisting in the laundering of $335 million. Owner of the bitcoin mixer Helix, Larry Harmon, admitted guilt in August 2021 to assisting darknet market criminals in laundering almost $300 million.
A cryptocurrency tumbler’s purported operator was charged with “money laundering conspiracy,” “running an unauthorized money transmitting business,” and “conducting money transmission without a D.C. license” in a February 2020 indictment.
Lately, the U.S. Treasury did sanction the Tornado cash crypto mixer (a prior example of that was the OFAC listing of the blender mixer) by adding them to this list, it's illegal for US residents/citizens to interact with any of those both cryptocurrencies mixers.
Notable Legal Events with Crypto Tumblers
Roman Sterlingov, a Russian-Swedish man who founded Bitcoin Fog, was detained by U.S. federal authorities in April 2021 on suspicion of money laundering, running an unauthorized money transmission business, and sending money in the District of Columbia without a license. It was said that over its ten years of existence, Bitcoin Fog cleaned up more than 1.2 million Bitcoin, worth about $335 million.
According to the U.S. Treasury Department, Tornado Cash, an Ethereum mixer, was used to launder more than $96 million in illicit funds from the June 2022 attack on Harmony’s Horizon bridge as well as at least $7.8 million from a hack of cross-chain bridge Nomad.
Additionally, the January theft of the Singapore-based cryptocurrency exchange Crypto.com revealed that 4,600 ETH in stolen money might have been laundered using Tornado Cash, according to on-chain data from PeckShield. Several exchanges, such as Paxos, have recognized the usage of mixers as a measure to make sure users are “not engaged in money laundering or other criminal activity.”
The first bitcoin mixer ever to receive an OFAC punishment was Blender.io. According to reports, Lazarus Group, a group of North Korea state-sponsored hackers, utilized the site in March 2022 to carry out a significant breach on the online game Axie Infinity, which led to roughly $620 million in losses. Blender.io reportedly handled $20.5 million of the illegal funds, according to OFAC.
The first bitcoin mixer to get a fine from FinCEN for breaking anti-money-laundering regulations was Helix, a darknet bitcoin mixer, in October 2020. The company’s creator, Larry Dean Harmon, admitted guilt to one count of conspiring to launder money and was sentenced to pay a $60 million civil penalty. Helix is said to have handled 354,468 BTC between July 2014 and its closure in December 2017.
In 2022 after the tornado cash ban, there also was an arrest in the Netherlands of an alleged tornado cash developer (many do describe this as the start of the war on privacy and code)
So why are mixers allowed?
The desire of consumers to keep their cryptocurrency transactions private is not inherently criminal. It has been emphasized that concealing actual monetary transactions is possible in the real world.
The use of cryptocurrency mixers may not be forbidden everywhere, depending on the country, state and regulations. Although cryptocurrency mixers have the benefit of helping to retain anonymity, the truth is that thieves also use these services to hide their identities.
The cybercrime sector as a whole, and the ransomware environment, in particular, have both experienced a huge increase in activity. The increase in activity is due to the increase in significant black-market sales of malware, illicit goods, and data obtained from attacks on various platforms, services, and businesses.
Additionally, moving or hiding money is not the same as money laundering, according to Bill Callahan, a former Drug Enforcement Agency agent, who spoke to CoinDesk in January.
Is Tornado Cash used for money laundering? They are undoubtedly concealing it. However, I caution against using the word “money laundering,” Callahan added. “Pretend I’m attempting to avoid being caught by the police while rushing away with a bag of cash and hopping over fences. That’s not money laundering. Money laundering is not taking place if Tornado Cash knows who made the deposit and withdrew the funds.
Roman Semenov, a co-founder of Tornado Cash, told Bloomberg earlier this month that the protocol fits the description of “anonymizing software providers, exempting it from knowing your customer (KYC) restrictions that apply to money transmitters in the United States.”
Semenov continued, “All we do is write code and publish it on GitHub. Because it closely resembles the notion of free expression, creating code cannot be prohibited.”
Problems with using mixers
Even mixers have their shortcomings. There’s a slim chance that someone else in the mixer transmitted the same amount of bitcoin as you did, less the tumbler’s charge. It won’t be too difficult to resume the flow of funds if a law enforcement agency knows the address used by its first suspect and the second suspect is the only one to have gotten a bit less of a particular sum. The more people who use the mixer, the more difficult this problem is to address.
Some exchanges forbid the entry or exit of mixed bitcoin. Exchanges classify mixed bitcoin as tainted because they can identify mixers. For instance, Binance has prohibited withdrawals to Wasabi, a bitcoin wallet that protects user anonymity and incorporates the well-liked CoinJoin mixing platform. Samourai and JoinMarket are two additional well-liked bitcoin mixers.
It’s crucial to remember that not all mixing services are legal, and some are much less successful than others at hiding money transactions. Before utilizing a mixer, be sure to complete your research on it.
Also, nowadays, interacting with any mixer (or even just receiving funds from it) can flag/block your address – the latest famous example was the Aave block of Justin Sun’s address after someone anonymously sent him 0.1 ETH from a mixer.
Through the mixing procedure, the service provides crypto to various users. As a result, individuals run the danger of obtaining “dirty bitcoin”, which has, for instance, been used for illicit purposes and may now link them to these actions. Criminals employ mixing services as a means of laundering stolen money, for instance. As a result, mixing is prohibited by anti-structuring laws in several areas. Because of this, mixers could “relate” you to other criminal activity, which you should avoid highly.
How to use Bitcoin Mixers?
Here are the steps to use Bitcoin Mixers:
Note: Bitcoin mixers typically charge a small fee for their services, generally around a minimum fee of 0.001 BTC -0.005 BTC. This process is called Bitcoin tumbling.
Step 1) Send your coins to the service’s address and provide the addresses of the wallets you want to receive your mixed coins.
Step 2) The mixer service will then send back the same number of coins from different addresses, making it difficult to trace where the funds originated.
Some work differently by handing you something like a “secret hash” to access & withdraw your funds in the future.
Legitimate Reasons to Use Crypto Mixer
More people interact with cryptocurrency mixers for legitimate lawful reasons than those who don’t. Normally, while transactions go through a cryptographic hashing process to maintain privacy, if someone matches your real-world identity with a crypto wallet address, then it is easy to follow the movement of all funds to and from that wallet. However, to prevent this and ensure privacy, the Crypto Tumblers come.
Also, large business owners, sharks, and highly influenced individuals in the crypto space will need ways to minimize the publicity of the movement of large funds. In addition, from an enterprise perspective, competitors could view the transactional history of supplier details and the cost of operations. Unfortunately, high-net-worth individuals are more vulnerable to hacks and attacks if their wallet addresses and real-world identity are known. As such, using a cryptocurrency mixer can provide an extra layer of security when moving funds.
Another demographic frequently interacting with crypto mixers is the idealists, holding the philosophy of removing monetary transactions from government tracking. People who value the utmost privacy and anonymity with cryptocurrencies are likely to partake in Crypto mixing activities.
Even Vitalik Buterin (The Ethereum founder) tweeted that there are legitimate reasons to use cryptocurrency mixers and that he used tornado cash in the past to donate to Ukraine, for example.
There you have it, then. There’s bound to be a choice that suits your needs among the list we’ve examined, whether you’re searching for a basic cryptocurrency mixer or one with more sophisticated capabilities.
Make sure to carefully contrast the mixers’ features and costs before making a choice. Always remember that it is better to be safe than sorry when it comes to preserving your privacy. Even though some bitcoin mixers might provide anonymity, not all of them are made equally.
There are many risks associated with mixers, especially when it comes to giving over control of your funds. However, the industry has a lot of reliable and trustworthy tumblers that deliver what they promise. Whether centralized or decentralized, the choice is ultimately yours.
We also do never recommend doing anything shady or against the law (make sure to check your local laws)
Also, as mentioned prior, there are many downsides to possible affiliation with “unwanted” people or blocked wallets, this is another reason why we do NOT recommend using cryptocurrency mixers.