bitcoin mixer are a staple of the crypto industry. They provide a simple way to remove any taint from your bitcoin balances. But there are some risks that users and investors should be aware of.
While mixers make it easier to send and receive cryptocurrency, they can also be a trap for scammers and law enforcement. As a result, regulators have been taking a closer look at the sector.
How does it work?
Cryptocurrency transactions are recorded on a public, transparent distributed ledger called the blockchain. This makes it possible for anyone to see the balances of individual crypto addresses and link them to real-world identities. So, for privacy reasons, people sometimes use mixers to obscure their blockchain transaction records.
Known as tumblers, these services typically offer to mix your cryptocurrency with that of other users for a fee. The result is that it becomes more difficult for observers to determine the origin of your coins.
But these simple centralized mixers have a major downside: non-criminal users may receive coins that are tainted by criminals who use the same mixing service. In effect, they’re essentially laundering money for cybercriminals.
A more advanced type of mixer is a decentralized mixer. Rather than storing user funds on its own, a decentralized mixer mixes your coins with those of other users in a pool. Then, it sends each user a new address with a balance equal to the amount that they initially transferred to the mixer.
Because of their decentralized structure, decentralized mixers tend to be less vulnerable to scams than their centralized counterparts. But they’re still not without risk: one of the largest decentralized mixers, Bitcoin Fog, was recently shut down by U.S. federal prosecutors on charges of facilitating more than $300 million in bitcoin tied to illegal activities.
Why do people use it?
Cryptocurrency is a popular way to make purchases, donations and p2p payments. However, transactions are publicly recorded on the blockchain and can be traced back to the original owner. This is problematic for those who are trying to maintain their anonymity, such as ransomware victims. Mixers allow them to change their bitcoins for ones that are less traceable.
The use of mixers is on the rise. According to data analysis company Chainalysis, the percentage of cryptocurrencies from illegal sources reached a record high in 2022 and is still growing. This is mostly due to the proliferation of centralized cryptocurrency exchanges, DeFi protocols and addresses associated with cybercriminals.
Mixers work by pooling users’ tokens together and then returning them minus a fee. They also offer different types of mixing algorithms, ranging from a simple combination to more complex randomization. However, they are not foolproof. Even with a strong mix, blockchain tracking tools can connect the dots and identify the source of a specific transaction.
Some users claim they are using mixers for legitimate reasons, such as avoiding being censored by companies that have been forced to comply with government sanctions. Others argue that the services are facilitating fraud and money laundering, and that they don’t provide any real benefit to their users beyond anonymity. Moreover, mixers and splitters are hardly incentivized to protect their users or themselves as they operate in the shadows of antiquated non-western fintech regulations.
What are the risks?
Whether they are used to protect privacy or laundering money, mixers present risks for users. From a compliance perspective, the emergence of these services highlights the need for firms and individuals to conduct robust due diligence on crypto mixers and their users.
In the case of mixers, this includes a detailed assessment of how the service operates and who else uses it. In addition, it’s important to consider the impact of any changes to the software or protocol on the ability of users to mix their coins.
While it’s clear that many users of these services are criminals, there are also legitimate reasons for individuals to use them. For example, Ethereum founder Vitalik Buterin recently used a mixer to privately donate ETH to Ukraine, which would have otherwise been tracked by Russian state-sponsored hackers.
The increase in the volume of funds sent to mixers over the past two years has been driven by increased activity from centralized exchanges and DeFi protocols, as well as illicit addresses associated with ransomware, drug sales, and other crimes. In fact, the infamous darknet market Hydra was the top destination for ransomware payments last year.
However, it’s worth remembering that even the most secure mixer can still be tripped up by law enforcement and other parties that are looking for suspicious activity. The best way to mitigate these risks is to use a decentralized mixer, which provides a greater level of anonymity and can prevent bad actors from accessing the full pool of available funds.