A crypto mixer is a service that helps you hide the origin of your cryptocurrency transactions. It works by distributing your bitcoin among different wallets. This makes it impossible for anyone to track your transaction.
However, centralized mixers can reveal your links between incoming and outgoing bitcoins. This can cause trouble for regulated businesses that must comply with KYC regulations.
The bitcoin blockchain reveals a level of transparency that some users find uncomfortable. For example, if you pay someone in bitcoin for a pair of alpaca socks, that purchase and your real-world identity are mapped on the blockchain. This information can be used to track the source of your funds, even if you don’t intend to use them for illicit purposes. Fortunately, there are ways to improve privacy in crypto transactions. One of the most popular is to use a mixer.
A cryptocurrency mixer is a service that obfuscates the link between your wallet and the recipient’s address by combining your coins with those of other users. Then, they return the coins back to you in a new form that is unlikely to be linked to your original wallet. This process is managed by a centralized mixer and usually requires a fee.
While mixers are often associated with illegal activity, they also have legitimate uses. For example, if you’re a crypto whale and want to conceal your wealth, using a mixer can help you do so without risking your privacy or getting flagged by regulators.
However, the UK’s National Crime Agency is now calling for mixers to implement know-your-customer (KYC) checks and keep audit trails of their users. This could make it easier for authorities to identify and target crypto laundering operations.
A bitcoin mixer works by collecting users’ Bitcoins into a central pool, mixing them thoroughly, and then distributing the results to their respective wallets. This obfuscates the link between senders and receivers, making it difficult for outside observers to trace the transaction’s origin. This decentralization offers an extra layer of security for crypto transactions.
However, this decentralization comes with some risks. For example, the company that operates a mixer can potentially deanonymize users or steal their funds. Therefore, it is important to choose a trusted mixer. Fortunately, blockchain analytics can help businesses identify high risk transactions involving mixers and manage the associated risks.
Regulated businesses can use these analytics capabilities to detect crypto mixing transactions and file suspicious activity reports (SARs) appropriately. This will prevent them from being hampered by law enforcement agencies. For example, the CEO of a crypto exchange business said that criminals who used mixers to launder ransomware funds were tracked by his team within 16 days.
Although many people associate coin mixers with illegal activities, they can also be legitimately used to protect privacy and reclaim a degree of anonymity in the Bitcoin ecosystem. After all, knowledge of a user’s cryptocurrency wallet addresses can reveal a lot about their financial activities. This information might be used to track down the person responsible for a hack or to assess whether they have been exposed to sanctions-busting Russian oligarchs.
Cryptocurrency transactions are recorded in public, open sourced ledgers called blockchains. This makes them very traceable. Criminals use mixing services to obfuscate their cryptocurrency transactions, but they are not foolproof. Mixers can be hacked and shut down, or they can leak user data. They also make it easy for law enforcement to follow the flow of funds and uncover shady transactions.
Fortunately, there are ways to improve your privacy when using cryptocurrencies. For example, you can use a mixing service that pools inputs from many users and returns multiple outputs of identical value. This helps obscure ownership of each UTXO and defeats heuristic-based clustering algorithms used by blockchain investigators.
Aside from centralized mixers, there are also decentralized ones that allow you to choose your own bitcoin addresses to deposit and withdraw from. These services are more resistant to attacks and censorship, but they can be harder to use. Then, there are also blockchain analytics tools that can help regulated businesses detect high risk transactions involving mixers.
But even with these tools, criminals cannot completely hide their tracks. A popular mixer service called Tornado Cash was recently shut down by the U.S. Department of Treasury after being used to launder $7 billion in cryptocurrencies linked to illicit activities. The operator was arrested on charges of money laundering, and the company’s records could reveal his connection to the tainted funds.
crypto mixer offer a degree of anonymity for users, but are not a guarantee against law enforcement snooping. This is because, even though mixers obscure the ownership of each bitcoin output, they cannot completely mask the origin of a transaction in the blockchain. Forensics firms can still track these transactions by tracing them back to the original input, and by connecting them to the mixer’s own records.
For this reason, some experts argue that using mixers is not a good idea for people who want to protect their privacy. However, the fact is that there are plenty of legitimate reasons for people to use mixers. For example, if someone wants to send money to a group of hackers in Ukraine, they might not want their donation to be traceable. This is when a mixer can be useful.
Another argument against using mixers is that they can be used by criminals to launder illegal money. But this is unlikely, as the vast majority of cryptocurrency activity is licit. Furthermore, the mixing services themselves have to comply with anti-money laundering and countering the financing of terrorism regulations.
Custodial mixers are usually considered to be money transmitters, and they have to be licensed by FinCEN. However, non-custodial mixers may not be classified as such if they do not conceal the identity of their customers. Nevertheless, they should also meet all FinCEN requirements.