By design, Bitcoin offers pseudonymity to its users. To ensure complete anonymity, however, you’ll have to use tools like bitcoin mixers.
Bitcoin’s blockchain is entirely public. A blockchain explorer will provide you with a complete record of every bitcoin transaction since the cryptocurrency was launched in 2009.
It is a core feature, not a problem, for some. However, the public nature of the Bitcoin blockchain is a huge privacy concern for those who prefer anonymity.
Bitcoin transactions can be kept entirely private – to conceal who sends what where. Bitcoin mixers, also called tumblers, are among the most popular methods. An amount of bitcoin is jumbled up in private pools before being sent to the intended recipient.
Shuffling bitcoin through a black box makes it difficult to track the amount of bitcoin sent from person A to person B. It simply shows that person A sent bitcoins to a mixer, as did a dozen other people, and that person B received bitcoins from a mixer, as did a dozen others.
Centralised vs. decentralised mixers
There are two main types of bitcoin mixers:
- Centralized mixers: like Blender.io.
- Decentralized mixers: such as Wasabi and JoinMarket.
For a fee, centralized mixers will accept your bitcoin and send back different bitcoins. Although they offer an easy way for tumbling bitcoin, they also present a privacy challenge since while the links between “incoming” and “outgoing” bitcoin will not be public, the mixer will still keep a record of the transactions. The company could release those records in the future, revealing a user’s connection to the coins.
Protocols such as CoinJoin are used by decentralised mixers to obscure transactions via coordinated or peer-to-peer methods. Essentially, the protocol enables a large number of users (e.g. 100 users) to combine 1 bitcoin each and then distribute it, so that everyone receives 1 bitcoin back without knowing who got what.
Problems with using mixers
There are some flaws in mixers. It is unlikely that someone else in the tumbler sent the same amount of bitcoin as you. It isn’t difficult to reconnect the flow of money if a law enforcement agency knows the address used by its first suspect, and the second suspect is the only one whose amount of money was the same. The more people who use the mixer, the harder it is to solve this problem.
Some exchanges do not allow mixed bitcoin to enter or leave their exchange. Because exchanges are able to identify mixers, they label mixed bitcoin as ‘tainted.’ Binance, for example, has blocked withdrawals to Wasabi, a privacy-preserving bitcoin wallet that integrates CoinJoin, a popular mixing service. Another popular bitcoin mixer is Samourai.
Mixing services aren’t all legitimate, and some are less effective at obscuring financial transactions than others. Before using a mixer, make sure you do your research.
Are bitcoin mixers illegal?
Bitcoin mixers have the capability to obfuscate bitcoin transactions, making them an obvious hotbed for money laundering, attracting tax dodgers and criminals interested in concealing proceeds of illegal activity.
The legality of using these services depends on the jurisdiction in which you reside. In February 2021, then-U.S. Deputy Assistant Attorney General Brian Benczkowski said that using mixers to hide crypto transactions “is a crime.”
After two months, U.S. authorities arrested Roman Sterlingov, aka the Russian-Swedish founder of bitcoin tumbling service “Bitcoin Fog,” and charged him with helping people launder $335 million. Larry Harmon, the owner of a bitcoin mixer called Helix, pleaded guilty in August 2021 to helping darknet market criminals launder $300 million.
New anti-money laundering rules, like the Financial Action Task Force’s “travel rule” and the European Union’s AMLD-5 directive, will make laundering money more difficult and could make Bitcoin tumblers less viable for people who want to participate in the wider crypto economy – the sort that relies on popular exchanges accepting coins.
The alternatives to bitcoin mixers
Bitcoin mixers aren’t the only way to hide bitcoin transactions.
Hackers often siphon funds out of exchanges by creating accounts with cheaply bought or stolen identities. It takes law enforcement a long time to shut down accounts, and it is hard for exchanges to catch dodgy accounts once they have already gone through know-your-customer (KYC) procedures. This technique, known as chain-hopping, relies on the fact that it takes law enforcement a long time to shut down accounts.
Advocates of privacy argue that privacy coins can be used to prevent the government from snooping on your financial transactions, asserting that they are not just for criminals. Monero uses “stealth” addresses that are one-time-use and combines genuine transaction signatures with decoys to obscure the flow of funds. Silk Road, one of the first major dark web marketplaces, included a bitcoin tumbler in its infrastructure, but former darknet market White House Market, which had a reputation for security, only took Monero.
Alternatively, Zcash offers optional private transactions, which are based on zero-knowledge proofs, which do not share transaction information. Dash’s options of private transactions function a little like CoinJoin.