What are cryptocurrency mixers?
The rapid expansion of cryptocurrencies and the development of crypto infrastructure, as well as vulnerabilities such as cryptocurrency mixers, have been a source of concern for government agencies responsible for financial security. Many people use cryptocurrency mixers to keep cryptocurrency transactions private by mixing potentially identifiable cryptocurrency funds with a large number of other funds. These services are often used to anonymize fund transfers between different services and do not require Know Your Customer (KYC) checks. Therefore, the risk of using cryptocurrency mixers to launder money or hide proceeds is considerable. Mixers and online gambling sites are often involved in the worst money laundering problems because they tend to handle the vast majority of dirty money. For example, mixers handle about a quarter of all illegal Bitcoin (BTC) inflows each year, while the proportion of money laundered through exchanges and gambling remains relatively stable (66% to 72%). There are two types of Bitcoin mixers: centralized mixers and decentralized mixers. Companies that receive Bitcoin and return different Bitcoins are called centralized mixers, providing a simple solution to mixing Bitcoin. Decentralized mixers use protocols like CoinJoin that use a fully coordinated or peer-to-peer (P2P) approach to obfuscate transactions. Essentially, the protocol allows a large group of users to pool a certain amount of Bitcoin and then redistribute it so that everyone receives a certain amount of Bitcoin. However, no one knows who received what, or where it came from. Other types of mixers include obfuscation-based and zero-knowledge-based mixers. Obfuscation-based mixers, often called decoy-based mixers, employ various methods to hide the user's transaction graph. On the other hand, an adversary with sufficient resources can use various methods to recreate the transaction graph. In contrast, zero-knowledge-based mixers rely heavily on advanced cryptographic techniques like zero-knowledge proofs to completely remove the transaction graph. The most significant drawback of this strategy is that it requires a lot of cryptography, which may limit scalability. ## What are the types of cryptocurrency mixing services? Cryptocurrency mixing services are divided into two types, custodial and non-custodial. Custodial mixing occurs when a user submits "dirty" coins to a trusted third party and returns "clean" coins after a timeout. However, this technique is flawed because users lose control of their money during the mixing process. Therefore, in the case of a custodial mixer, it is possible for the trusted mixer to steal funds. Using publicly verifiable and transparent smart contracts or secure multi-party computation to replace the trusted mixer is a common element in non-custodial mixers. The process of non-custodial mixing consists of two steps. Users first deposit the same amount of ETH or other tokens from address A into the mixer contract, and then, after a user-defined time interval, they can withdraw their deposited coins to address B through a withdrawal transaction.
How do cryptocurrency mixers work?
The idea behind cryptocurrency mixers is to run the digital signatures of transactions through a "black box" that hides the digital signatures. A cryptocurrency mixer is a program that mixes a specific amount of cryptocurrency in a private pool before transferring it to a designated recipient. For example, a Bitcoin explorer that tracks all Bitcoin transactions will show that A transferred Bitcoin to the mixer and B received Bitcoin from the mixer. This way, no one knows who sent BTC and to whom. Therefore, "dirty bitcoins" are laundered in the process of cryptocurrency mixing. The function of a cryptocurrency mixer is to mix your cryptocurrency with a bunch of other cryptocurrencies and then return the smaller units of cryptocurrency to the address of your choice, 1-3% less than the total amount you deposited. Mixing companies usually make 1-3% profit, which is how they make a living. Coin mixing is similar to the criminal act of money laundering. However, just because someone participates in coin mixing, it does not mean that they are committing a crime. Instead, it just means that they want to increase the privacy of their cryptocurrency transactions.
Is it illegal to use a cryptocurrency mixer?
Whether it is illegal to use a coin mixing service is determined by the jurisdiction in which you live. In addition, are Bitcoin mixers necessary? Or, is cryptocurrency mixing legal? It depends on the purpose of your use of these services. Former Assistant Attorney General of the United States Brian Benczkowski said that using a coin mixer to disguise cryptocurrency transactions is a crime. For example, the key function of Bitcoin is privacy rather than anonymity, which means that your identity is not always revealed, but your transactions can be audited to investigate any wrongdoing. So, is Bitcoin mixing illegal? Bitcoin mixers are classified as money transmitters by the U.S. Financial Crimes Enforcement Network (FinCEN). As such, they must register with FinCEN and apply for state-to-state licenses to operate. In 2021, an Ohio citizen was arrested for money laundering for operating a Bitcoin mixing service on the dark web. FinCEN has mandatory licensing regulations, and the citizen did not register a money exchange service and conducted currency transactions without a license.
Can you trace a cryptocurrency mixer or Bitcoin mixer?
Due to cryptocurrency mixing services, it is difficult to track a specific cryptocurrency because all the coins are pooled together and then distributed at random intervals. By building a custom blockchain using various digital currencies, cryptocurrency mixers allow retailers to rewrite their crypto history. They trade through a complex, semi-random network of other virtual exchanges, which makes it difficult for users to link the currency to a specific exchange. Therefore, if transferred through a mixing service, the cryptocurrency cannot be traced. Bitcoin mixers (tumblers and mixers) are alternative technologies that can obfuscate the traces of Bitcoin transfers. Although they both achieve the same purpose, Bitcoin tumblers serve those who want to trust a third party, while Bitcoin mixers serve those who don't trust anyone. BitMix is a Bitcoin tumbler and mixer application that provides anonymous transactions through its own system, taking advantage of BTC's inherent anonymity to make Bitcoin difficult to track. On the other hand, many tools track the use of the cryptocurrency by combining public blockchain data with known addresses of threat actors and evaluate this information to identify money laundering transactions and the use of currency swaps and mixers.
Source: Rare Earth Digging
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