What is a Bitcoin mixer

Bitcoin mixer is a tool that makes Bitcoin more anonymous.

With Bitcoin entering the financial world in 2009, many believed that the true digital privacy has come to the financial world. However, that was not true and despite countless articles written on this topic, people still believe that Bitcoin is anonymous. Those of you, who have read at least few of our articles, must know that this simply is not true.

Even though Bitcoin is not anonymous, with the usage of the right tools, the users of Bitcoin can get much closer to complete anonymity. One of these tools is also a Bitcoin mixer. What is a Bitcoin mixer, how does it work, what problems can they have and last but definitely not least, are they legal? All of these questions will be answered in the next few paragraphs.

What is a Bitcoin mixer?

Bitcoin mixer, also known as tumbler, is one of the best known and used services by those who want to keep their bitcoins private and want to increase their anonymity. They work pretty straightforwardly. The senders of the payments or transactions put their money into a pool or a combined pot of bitcoins, which then “shuffles” around all the bitcoins and divides them into the recipients addresses based on the amount sent.

The amount sent is usually a bit lower, from 1 % to about 3 %, which is the fee that the Bitcoin mixer charges for its services. Hence, the bigger the number of different senders and recipients, the better the privacy, since the amounts sent and received are pretty similar, which is something that we will discuss in the problems. Nevertheless, just the use of these services makes the bitcoins received more anonymous.

Since all of this can be still pretty complicated or hard to follow for some, let’s see how Bitcoin mixers work in a simplified real-life example. Imagine a pool full of 100-dollar bills. You also put a 100-dollar bill right into the pool, walk to the other side of the pool, and just randomly take one 100-dollar bill back from it. While you still have a 100-dollar bill, it is entirely different than before.

Why do people use Bitcoin mixers?

Why would anyone want to use these services that charge them for either spending or simply transferring their wealth to different wallets?

Financial privacy. Simple answer that can encompass several different takes, but that is probably it. Most people will want to use such services mostly in cases when they somehow got to a bitcoin that was KYC-ed, and they want to make it anonymous again.

Whether they got it for the investment purposes, savings, as a payment for some products or services does not matter. It is their financial status that they might want to keep private and it is their right to do it, which is why they might be inclined to use Bitcoin mixers.

Thanks to these tools, the Bitcoin enthusiasts are able to disassociate their identity from their Bitcoin stash, essentially regaining their privacy while sending Bitcoin. As with other services and products, there are several options how one can do this. The very basic division comes down to two main possibilities, centralised and decentralised mixers.

Centralised vs decentralised mixers

In its very core, there are two different types of mixers. The centralised mixers are pretty simple to understand. In their case, the users just send the bitcoins to the mixer and receive back different bitcoins, paying just a small fee for this service.

Yet, there needs to be a disclaimer connected to the centralised mixers and that is that sometimes, they do not operate completely open-source, which means that they might keep track of the incoming and outgoing bitcoins and addresses connected to them. Thus, one might be a bit skeptical about these, since in the future, they might be able to connect the addresses together, if need be.

That is however not possible with the decentralised mixers. Most of the time these services use either peer-to-peer approach or completely coordinated approach to obfuscate the transactions. These tend to work just like the pool example. A group of users pool their money together, which is then redistributed so that everyone receives approximately the same amount of bitcoins that they sent in (minus the fee). Yet, no one can know who received whose bitcoins or where it originated.

Problems with Bitcoin mixers

While these services or technologies are getting ever more popular even with regulators trying to restrict them, they still have some problems. First of them was portrayed by centralised mixers, which, technically, can be able to collect data on those using the mixers and keeping them for later purposes.

However, a much bigger problem for the mixers is that, if the pool of users is too small, it is very unlikely that there will be someone with the same number of bitcoins or satoshis. This means that it is very likely that the crypto analysis agencies can know which addresses to pair.

If they know the address of the first suspect and they can clearly show the receiver address with a bit less received, they can connect them together pretty easily. Yet, as was specified before, the higher the number of participants, the better privacy for each of them.

Another problem can be regulators or exchanges. Some exchanges do not allow mixed bitcoins to be sent to their addresses. As of now, they have different tools to track or find out whether bitcoins were used in the mixer, to some degree. Then, they label them as tainted and do not allow their inflow to the exchange.

Moreover, some exchanges such as Binance for instance, have blocked withdrawals to Wasabi wallet, which is one of the most famous anonymous bitcoin wallets out there. This also shows that they do not allow bitcoins to be sent to addresses that can potentially be connected to mixers or CoinJoins.

Are Bitcoin mixers illegal?

While some exchanges might be inclined to do these practices just for their own safety or due to internal policies, most of them were probably pushed to do it due to regulators. The approach of regulators varies in every jurisdiction. Some jurisdictions simply do not address this problem, others are a bit stricter about it. And there are even jurisdictions that put these services outside of the law. But are Bitcoin mixers really illegal?

Regulators, who believe that use of such services should be illegal often argue that they are mostly used by criminals or money launderers. And while this might be true to some degree, it definitely is not true for everyone. In fact, blockchain analytics firm Chainalysis hinted that most of the mixers are used by regular bitcoiners, who just value their Bitcoin privacy.

Thus the question should tackle whether it is illegal to want financial privacy. Chris DePow, senior advisor of financial institution regulation and compliance for Elliptic, has stated the following:

“There is nothing necessarily illegal about users wanting their crypto transaction to remain private. In the real world, physical cash transactions can be done without anyone knowing.”

The same was stated by Kim Grauer, director of research at Chainalysis. Yet, the problem still remains. Moreover, in some instances, the regulators can go as far as arresting the creators of these services. Roman Sterlingov, the founder of bitcoin tumbling service “Bitcoin Fog,” was arrested by US authorities for creating the service that allegedly helped people launder about 350 million dollars. Larry Harmon, owner of the Bitcoin mixer Helix, has seen the same faith.

Yet, Roman Semenov, co-founder of Tornado Cash, an Ethereum mixer, believes that there is nothing wrong with their work. Semenov says that what these companies usually do is that they purely write a code and then publish it on GitHub, which is essentially only a free speech equivalent.

On August 8, 2022, the U.S. Treasury sanctioned Ethereum mixing tool Tornado Cash and made usage of this tool completely illegal for any U.S. citizen. 

Conclusion

The legal question of Bitcoin mixers might not be the easiest to solve. Yet, these services will at least in the foreseeable future remain in place, since an outright ban is almost impossible. But, if in the meantime you want to mix, use, send or spend Bitcoin privately, Whir is here to serve your needs.

Disclaimer: This article does not serve as a piece of financial advice or encouragement and inducement for the usage of Bitcoin and other cryptocurrencies. Its primary role is informative, explanatory, and educational. The readers have to decide themselves whether to use or not to use these types of services.