The Bitcoin system is built so that its users can have pseudonymous identities. To be completely anonymous, it is necessary to use sophisticated tools such as Bitcoin mixers.
The Bitcoin record is entirely open to the public. Using a blockchain viewer, you can see a list of all Bitcoin transactions since 2009, when the currency was first created. This list is permanent and cannot be changed.
For some people, this is not a problem but an essential feature of their identity. But for people who want more privacy, the openness of the Bitcoin blockchain is a big hole in confidentiality.
How Do You Keep It Private?
There are ways to make Bitcoin transactions completely private, hiding the names of both the sender and the recipient. One of the most popular ways is to use a Bitcoin mixer, a tumbler. These cryptographic tools use private pools to hide where a certain amount of Bitcoin came from and where it goes before sending it to the right people.
It is difficult to figure out how the money went from sender A to recipient B on the Bitcoin network if concealment techniques, such as a blending service, are used. The public record will only show that person A and several other users sent a certain amount of Bitcoin to the blending service. Likewise, it will show that another user, B, and several others received Bitcoin from the blending service.
Centralized and Decentralized Mixers – What Is the Difference?
The main difference between centralized and decentralized mixers is how much power the mixing process has. Decentralized mixers are designed to operate in a trusted environment where no central authority is in charge of the mixing process. In contrast to centralized mixers, which are controlled by a single source that contains the entire process.
Centralized mixers are third-party businesses that help people hide the origin of their Bitcoin transactions by giving back different Bitcoin units in exchange for a fee. Even though they make it easy to hide Bitcoin transactions, mixers still make it hard to keep your privacy. Even though the public won’t see how Bitcoin coming in and going out are linked, the mixer will keep a record relating the transactions. The company may give up these records, revealing a user’s connection to cryptocurrency.
Decentralized mixers use modern protocols like CoinJoin to hide transactions entirely. This can be done in a coordinated way or peer-to-peer. The protocol allows many users to work together to pool their Bitcoin holdings (for example, 100 people could each contribute one Bitcoin) and then reassign the funds in a way that makes it impossible to figure out who the recipient or originator is.
Some Problems Come with Mixing Services
Even though mixers can give you some privacy, they are not entirely safe. There is a meager chance that another mixer member will send the same amount of Bitcoin as you, minus the tumbler’s fee. Since law enforcement already knows the first suspect’s home, it shouldn’t be too hard to track the money back to the second suspect, who got a slightly smaller amount. The more people who use the mixer, the harder it is to find a solution to this problem.
Some cryptocurrency platforms don’t allow mixed Bitcoin assets to be moved into or out of their platform. Because blockchain transactions can be tracked, media can see when mixers are used and label hybrid bitcoin as “tainted.” Binance, for example, has limited withdrawals from Wasabi, a Bitcoin wallet that includes the popular CoinJoin mixing service. This is because it has functions that make it more private. Other well-known services that mix Bitcoins are Samourai and JoinMarket.
It is essential to realize that not all mixing services are legitimate, and some are less good at hiding financial activities than others. Before using a mixer, doing a lot of study is essential.
Do Bitcoin Mixers Belong to the Group of Illegal Things to Do?
Because Bitcoin transactions are hard to track, mixers are often used to wash money with tax cheats and criminals who want to hide their earnings from illegal activities.
Whether or not one can use these services depends on where a person lives. According to what U.S. Deputy Assistant Attorney General Brian Benczkowski said in February 2021, it is against the law to use mixers to hide Bitcoin transactions.
After two months, the U.S. government caught Roman Sterlingov, the Russian-Swedish genius behind the “Bitcoin Fog” platform for mixing bitcoins. He was arrested on charges that he helped people launder a considerable amount of $335 million. In August of 2021, Larry Harmon, the owner of a Bitcoin mixer called Helix, admitted to helping bad people on the dark web wash about $300 million.
New rules to stop money laundering, like the “travel rule” from the Financial Action Task Force and the AMLD-5 order from the European Union, should make it harder to launder money. Because of this, people who want to participate in the larger cryptocurrency market, which rests on major exchanges accepting their digital assets, may find it harder to use Bitcoin tumblers.
In the cryptocurrency world, you can also hide your transaction records with privacy-focused coins and decentralized exchanges with built-in privacy features.
You Don’t Have to Use a Bitcoin Mixer to Hide the Path of Your Bitcoin Transfers
After a security breach, bad players often use stolen or cheaply bought identities to move illegally obtained funds across multiple cryptocurrency exchanges. Chain-hopping takes advantage of the fact that law enforcement takes a long time to act to force businesses to close accounts. Also, it can be challenging for exchanges to find fake accounts, especially if they have already gone through the “Know Your Customer” (KYC) procedures.
Privacy advocates say cryptocurrencies designed to protect privacy are a powerful way to stop the government from spying on monetary transactions. They also say that cryptocurrencies are helpful for more than just illegal activities. Monero hides the money flow by using “stealth” addresses that only work once and mixing actual transaction signatures with fake ones. A Bitcoin locker was built into the Silk Road, one of the first popular darknet markets. On the other hand, the former dark web market White House Market, known for its vital security steps, only took Monero.
Zcash lets you do private transactions using zero-knowledge proofs to ensure that transaction info doesn’t get out. The qualities of Dash that make it more private are similar to the CoinJoin protocol.