Cryptocurrency mixers have been an interesting topic of discussion ever since the advent of cryptocurrencies and their adoption by retail investors ar
Cryptocurrency mixers have been an interesting topic of discussion ever since the advent of cryptocurrencies and their adoption by retail investors around the world.
Cryptocurrency mixers are services that essentially focus on one feature of a blockchain network: privacy.
Cryptocurrency mixers, also known as tumblers, provide anonymity so no one can trace the sender or receiver of a transaction. This can help protect the identity of individuals who want to be completely anonymous and non-traceable. How cryptocurrency mixers work is that they break down the funds sent using the mixer and scramble them with other transactions. They break the link which associates the holder’s identity to the crypto they own.
A process used to anonymize cryptocurrency transactions is known as CoinJoin, created initially back in 2013 by Bitcoin (BTC) developer Gregory Maxwell. In the thread on the Bitcointalk forum, Maxwell elaborated on how these transactions are structured and how the privacy of the transitions can be significantly enhanced without making huge changes to the network. Essentially, this concept involves a mixing block box from where users get their transactions and comprises hundreds of transactions from various wallets. CoinJoin is one of the most popular cryptocurrency mixers on the market.
There are primarily two kinds of mixers, centralized and decentralized mixers. Centralized mixers receive cryptocurrency from users into the mixer and send back different cryptocurrencies by charging a fee. The transaction addresses of the several users who deposit their cryptocurrency into the mixers are managed by a program. Cryptocurrencies returned to users are not the same as those initially deposited, and they may be returned to the user’s account through more than one transaction.
In contrast, decentralized mixers utilize other crypto protocols to obscure transactions using either a coordinated network or peer-to-peer (P2P) networks. Cointelegraph discussed the pros and cons of centralized and decentralized mixers with Marie Tatibouet, chief marketing officer of crypto exchange Gate.io. She said:
“Centralized services are obviously more accessible and more approachable. However, they will have access to your Bitcoin and IP addresses. Hence, they are not the most private service in the world. Decentralized mixers can be a little less approachable, but they are a lot more private.”
Related: What is a cryptocurrency mixer, and how does it work?
However, cryptocurrency mixers and tumblers have a bad reputation since they may be used for money laundering or masking huge amounts of earnings. Although not illegal by law, the service providers stand a chance to get embroiled in a crypto money-laundering investigation. There have been several instances where cryptocurrency mixers and their users have come under the scanner by various jurisdictions and governments.
Mixers could be in a gray area
Most recently, the United Kingdom’s National Crime Agency wants to regulate cryptocurrency mixers under the country’s relevant Anti-Money Laundering (AML) laws.
The agency’s head of the financial investigation, Gary Cathcart, said that transaction mixing tools offer a layer of anonymity to criminals, allowing them to maintain the flow of criminal cash by obscuring its origin.
According to Cathcart, subjecting mixers to AML laws would ensure that mixing services conduct thorough AML checks and audit all the transactions that are passing through the mixer. While on the surface, this might seem like an idea that works, there is a high possibility that such checks would discourage any users attempting to use the mixer.
A closer look at the numbers reveals that the concerns of the crime agencies are not without reason. A recent report from blockchain analytics firm Chainalysis called “2022 Crypto Crime Report” found that the total cryptocurrency value received from illicit addresses hit an all-time high of $14 billion in 2021, nearly doubling from $7.8 billion in the previous year.
At the same time, it is also worth noting that the total market capitalization of the entire market has grown significantly along with the adoption of digital assets by retail investors. Chainalaysis’s crime report also highlights the Illicit percentage share of all cryptocurrency currency, which was at a four-year low of 0.15% in 2021.
This indicates that as the digital asset market develops further, the checks and balances being placed on transaction routes by market participants have been acting as a deterrent for criminals and money laundering activities alike. In fact, most of the transactions flagged as received from illicit addresses are from hackers that stole funds from various DeFi protocols like Wormhole and Poly Network in 2021.
Anton Gulin, regional director at crypto exchange AAX, told Cointelegraph that the whole essence of mixers is not illegal by default. “However, some countries are steadily imposing the Financial…
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