What is Cryptocurrency Mixer and how does it work?

The advancements in the crypto space are at an unprecedented rate, and services like cryptocurrency mixers have emerged. It is now becoming a critical issue for financial security.

When bitcoin was in its inception, many people saw it as an anonymous and entirely private way to transmit money. However, they realised that these myths were no longer correct as the centralized exchanges required customers to submit identification verification (KYC) to access their services. Most cryptocurrencies, including Bitcoin and Ethereum, are pseudonymous and traceable.

Here comes the concept of cryptocurrency mixing, which many consider money laundering. It is a technique for preserving privacy and anonymity while trading in cryptocurrencies, which means that any transactions conducted using cryptocurrency are not associated with your name and identity. You can hide the fact that you have money by using third-party services or tools like Cryptocurrency Mixer.

Let's discuss this in more detail, including how it works, its benefits, and whether it is legal or not.

What is a Cryptocurrency Mixer?

Cryptocurrency mixers (or tumblers) obscure the ownership and origins of funds used in cryptocurrency transactions. Many individuals use crypto mixers to hide their cryptocurrency transactions by mixing easily traceable cryptocurrency funds with large volumes of other funds. These services don't need Know Your Customer (KYC) checks and are frequently used to anonymize payment transfers.

Benefits of Cryptocurrency Mixer

Crypto Mixers' optimistic outlook focuses on security and privacy. Imagine you are living under a dictatorship and you want to make some legal transactions anonymously. Then, your financial privacy can be maintained via crypto mixers. Payment is separated from your personal information. 

You can also employ mixers to conceal significant transactions to avoid hackers. Your financial information is more secure as it won't be on a public ledger. As a result, your security is maintained as it is more challenging for a hacker to access your personal and sensitive data. Although there is a transaction fee, it is insignificant considering one's privacy. There is a transaction fee, but it is small compared to your privacy.

Types of Crypto Mixers

There are two types of cryptocurrency mixing services: custodial and noncustodial coin mixers.

Centralized mixers: a mixing service is used by users to transfer their assets. The users lose control of their money throughout the mixing procedure, making this strategy ineffective. As a result, in the case of these mixers, the trusted mixing party could also take away money. These services often charge a transaction fee of around 2-5%.

Decentralized mixers: it is a decentralized way of mixing as it removes the interference of intermediaries and third parties. For efficient transactions between users of the same platform, users gather and decide which crypto assets they want to "mix." Consequently, the randomness increases as the platform's user base grows. They are more enhanced blockchain platforms that overcome the shortcomings of centralized ones. 

How Do Crypto Mixers Work?

You may now have an idea that both Centralized and Decentralized mixers work differently. In the case of a centralized mixer, it will take your cryptos and mix them with other cryptos from other deposits, and then send back an equal amount of crypto at the end of the transaction. Even though they may hide the public source and destination of cryptocurrency payments, the provider may still keep a record that can connect transactions together.

In decentralized ones, use protocols like CoinJoin to completely hide transactions via a coordinated or peer-to-peer way. Users form a group to carry out a combined transaction to break the blockchain's connection between senders and receivers. Even though some systems offer complete assurance of anonymity and privacy, they tend to be more expensive than those with less security. Apart from the mixing server, none of the participants can see the link between the incoming and outgoing coin addresses.

Briefly, coin mixers work by taking your cryptocurrency, mixing it with a large quantity of another cryptocurrency, and then sending your smaller units of cryptocurrency to an address of your choice.

It hides the transactions in such a way that they cannot be tracked. For example, a transaction will display that person X deposited cryptocurrency to a mixer and person Y received crypto from the mixer. That’s how the “tainted” crypto is laundered. 

Are cryptocurrency mixers legal?

While cryptocurrency mixers bring several benefits by maintaining anonymity, in reality, they have been used to launder funds from some of the major crypto hacks and heists.  Crypto mixing services Blender.io and Tornado Cash were used to launder the illegal assets in the infamous Axie Infinity attack, wherein North Korean hacker group Lazarusstole $620 million.

Mixers are another tool that criminals might use to launder stolen crypto funds. As a result, they can be dangerous in terms of money laundering and terror funding. Their legality differs from country to country and the purpose of their usage.

In the United States, the Financial Crimes Enforcement Network (FinCEN) has stated that mixers are considered money transmitters under the Bank Secrecy Act (BSA), and so have these critical obligations. Users must register with FinCEN in order to create, implement, and maintain an anti-money laundering and know-your-customer compliance program that satisfies all relevant reporting and record-keeping requirements.

Still, there is criticism regarding cryptocurrency mixers and restrictions, since criminals employed them regularly with no limits on the number of coins that can be mixed. Indeed, mixers are not the only way for criminals to launder money; they are also using privacy coins, which are more reliable in preserving anonymity.

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Given that hackers are constantly seeking new methods to steal customers' wealth, a cryptocurrency mixer is a laudable notion. As Blockchain transactions are being examined by both cybercriminals and certain government authorities. Mixers are a suitable answer to blockchain analysis. 

However, some criminal actions, such as money laundering, should not be facilitated by the entire process. To increase the overall growth of the sector, systems must identify foolproof techniques that can encourage ethical activities in the realm of cryptocurrency. Always be wary of services that appear to be frauds.