Crypto mixers allow users to complete cryptocurrency transactions while preserving their privacy.
Transparency is one of blockchain's important features, and transactional details are freely accessible to the public. For example, a person can use a block explorer to get in-depth data on crypto transactions, including the sender’s and receiver’s wallet address, amount, fees, and more.
According to the 2022 Chainanalysis report, almost 10% of the funds used in crypto mixers are used for illicit activities. It’s important to note that the funds used at high-risk exchanges, gambling platforms, P2P exchanges, CEXs, and DeFi remain below 0.3%, representing a limited demand for legitimate activities.
Users prefer crypto mixers to conduct crypto transactions without disclosing the information to the public. While this might sound like a great idea at first, it comes with significant trade-offs, which we’ll cover in this article.
Crypto mixer or tumbler is a service that collects funds from users and transfers them without relieving their identities.
For example, you can use this mixer if you plan to send cryptocurrency to your friend while remaining anonymous.
The service offered by mixers hides the sender’s and receiver’s addresses. Here, to mask the user’s details, the mixer’s address will be available to the public as the sender’s and recipient’s address.
This masking process makes it extremely difficult for the public to obtain details on specific transactions, wallet addresses, wallet portfolios, and other major information that was previously available in a few clicks.
There are three steps to how crypto mixers work:
Here, the user who sends the token via the mixer stays anonymous as the blockchain explorers provide the mixer’s wallet address. The mixers deduct a fee from the sender, typically ranging between 1% and 3% of the total crypto transactional value.
Decentralized or non-custodial mixers provide their service to users using the peer-to-peer (P2P) network. Here, the received crypto tokens are mixed and distributed among the users without the support of a central authority or entity.
These non-custodial mixers offer the best possible privacy aspects compared to centralized ones. However, decentralized mixers are less user-friendly as they involve complex protocols, smart contracts, and algorithms.
Decentralized mixers also charge lower fees for their users, as it is easier for the platforms to send cryptos to peer users. Most importantly, the absence of a central authority also reduces the risk of crypto thefts or asset misuse.
In the case of centralized mixers or custodial mixers, a single entity manages and operates the collected user’s fund. Here, the users have no other option other than to trust the respective entity with their crypto fund.
Compared to decentralized mixers, centralized ones have a higher risk of crypto theft, asset misusage, privacy breaches, etc. Additionally, these custodial mixers usually charge higher fees than non-custodial mixers.
Even though centralized mixers offer a user-friendly interface, they also represent a single point of failure, with a high chance of downtime and hacks that might cause users to lose all their transferred assets.
Crypto mixers mask the sender’s and receiver’s address, providing the best possible privacy. Even if a person has the wallet address or transaction hash, it will only show the details of the mixer’s wallet activities.
This privacy feature allows users to transfer their crypto assets without leaving their identity mark on the blockchain. Additionally, it makes tracing transactions back to the original sender or recipient extremely difficult, thereby enhancing their anonymity.
The anonymous nature of crypto mixer-based transactions allows users to stay away from the prying eyes of hackers. The unavailability of trails of user transactions restricts hackers from planning attacks on your wallet.
By hiding important details related to the origin and destination of crypto funds, mixers significantly reduce the risk of targeted online hacks or attacks, thereby providing an additional security layer for users' digital assets.
While there are advantages associated with crypto mixers, it also comes with certain risks, such as:
The jurisdiction has the final word on deciding the legality of crypto mixers. If the regulatory bodies haven’t officially banned the use of these mixers in your region, you are free to use their services.
Several instances have been reported where legal actions were taken against the founders and developers for offering crypto-mixing services. In those cases, the case was registered for not following the Anti-Money Laundering (AML) policies and the absence of KYC verifications.
For example, Roman Sterlingov was convicted in Washington, D.C., of money laundering worth around $400 million. According to the evidence and documents submitted to the court, Sterlingov was involved in the operation of Bitcoin Fog, a crypto mixer that provided its services from 2011 to 2021.
To offer legal crypto mixing services in the United States, one needs to register with the Financial Crimes Enforcement Network (FinCEN), maintain AML and KYC compliance programs, and maintain proper records and reports.
As an informed crypto user, before trusting your funds with crypto mixers, it's necessary to understand the major historical illegal activities of such mixers to evaluate the potential risk involved in these services.
We’ll have a look at some major money laundering conducted by crypto mixers:
Crypto mixers allow users to send and receive crypto assets without exposing the sender’s or receiver’s wallet address. Moreover, if your jurisdiction doesn’t prohibit crypto mixing services, you are free to use such platforms while considering the risk associated with such platforms.
Despite the attractive privacy features that crypto mixers offer, there are possibilities for exit scams, theft, or external hacks, which can lead to partial or complete loss of your valuable digital assets. Ultimately, it’s up to you to decide if the potential benefits are worth the tradeoff.