Bitcoin is completely anonymous, right? Not quite. There are blockchain analysis tools and investigators that can piece together where a Bitcoin or Bitcoin transaction originates. Some Bitcoin users don’t like that idea. Some of those people will use a Bitcoin tumbler to mix their cryptocurrency, hopefully erasing its history in the process.
Bitcoin tumblers promise to give you clean Bitcoin in exchange for a small transaction fee. But is it legal to use a Bitcoin mixing service? Or are Bitcoin tumblers in effect just Bitcoin money-laundering services?
What Is a Bitcoin Tumbler?
A Bitcoin tumbler or cryptocurrency tumbler is a service that mixes cryptocurrency tokens to obscure their origin.
Most cryptocurrencies are not completely anonymous. With the right know-how, you can trace Bitcoin and Ethereum transactions to specific wallets. If the cryptocurrency wallet user relates the wallet address to a specific account containing identifiable information (like a name, bank account, ID card, and so on), the Bitcoin user is no longer anonymous.
Remember, the Bitcoin blockchain is completely open. Anyone can download it for analysis, or use a blockchain explorer to pore through transactions, wallet addresses, and more. It makes sense that Bitcoin is traceable.
A Bitcoin mixing service disconnects the links between Bitcoin wallet addresses.
For example, I send a Bitcoin to Joe. Joe sends the Bitcoin onto Dan, and Dan, feeling generous, sends it on to James. If you check the Bitcoin blockchain, there is a clear link between James and myself as the Bitcoin passes through link wallet addresses.
However, if I was to send my Bitcoin to a Bitcoin tumbler first, the tokens sent from the service no longer have any link to my original wallet address. The link is broken, and I remain anonymous.
The Bitcoin tumbler service breaks the chain by sending incoming coins to different outgoing addresses, and so on. If you send the Bitcoin tumbler 1 Bitcoin, you still receive the same output (minus the transaction and service fee), but it is now “clean.” Most Bitcoin and cryptocurrency token mixing services randomize the output amounts, too, sending different transaction sizes to sever the links between incoming and outgoing wallet addresses further.
Are Bitcoin Tumblers Legal?
Therein lies the issue. Is it legal to mix your Bitcoins to protect your privacy?
Well, yes. Tumbling your Bitcoin to remove its past is not illegal. There are no explicit laws that ban the tumbling of cryptocurrency. You can use a Bitcoin tumbler to increase your privacy.
But there is no denying that Bitcoin tumbling is a useful tool if someone wants to cash out ill-gotten cryptocurrency. Bitcoin tumbling services have strong associations with illegal activities and are carry the tag as money laundering services for cryptocurrencies.
The European Union also take a dim view of cryptocurrency mixing services. In mid-2019, the Dutch Financial Crime Investigative Service seized the website of popular Bitcoin mixing service, Bestmixer.io. Working with Europol, the authorities seized six services based in Luxembourg and the Netherlands. Europol alleges that most of the cryptocurrency passing through Bestmixer has “a criminal origin or destination.” Before its takedown, Bestmixer tumbled around 27,000 Bitcoins.
Tumbling Bitcoins is not explicitly illegal, and nor should it be. The very real risk, however, is that your cryptocurrency is lumped in with other users tumbling their dirty laundry. You’re not even guilty by association. But you could lose your Bitcoin in the case of a police seizure.
Is Bitcoin Tumbling Safe?
Just a few days after Bestmixer was shut down, another Bitcoin tumbler bit the dust. Bitcoin Blender posted a notice on its homepage informing its user that it would close, with almost immediate effect. There was a small period where users could withdraw their existing balances before the servers went offline, indicating that Bitcoin Blender was ending the service on their own terms.
The demise of two popular Bitcoin blending services within a short period points to the backdrop these services work against. Bitcoin Blender was referenced by attorneys and law enforcement agencies as a vehicle to prevent the effective tracking of criminal funds.
Many Bitcoin tumbling services are not safe. Poor operational security, badly encryption implementations, and ailing service infrastructure are all common issues facing Bitcoin tumbler users. Research conducted [PDF] by blockchain analysis firm, Chainalaysis, finds that these issues compound as “devising and implementing a secure mixer is far from an easy task, and as such it is plagued with a multitude of opportunities to get things wrong and compromise the service.”
However, despite the negativity and risk associated with Bitcoin mixing services, it appears the services are used for lawful activities more often than not. Another blockchain analysis firm, Elliptic, found that only 16% of the funds entering the Bitcoin mixers in their study came from an illicit source. The remaining 84% is regular users attempting to improve their privacy using a Bitcoin tumbler.
The vast majority of Bitcoin laundering takes places on unregulated cryptocurrency exchanges, rather than using a cryptocurrency tumbling service. A criminal can send illicit Bitcoin to an unregulated exchange, swap it between several altcoins, make numerous trades, then send it on to anonymous accounts ready for cashing out. The CipherTrace Cryptocurrency Anti-Money Laundering Report [PDF] found that from January 2009 to September 2018, some 97-percent of laundered Bitcoin is processed using unregulated exchanges.
Do You Need to Tumble Your Bitcoins?
The need to tumble your Bitcoins depends on your take on the privacy Bitcoin offers. Bitcoin is pseudo-anonymous. If you want more privacy from your Bitcoin, using a cryptocurrency mixing service is one option available to you.
Another option is using an alternative cryptocurrency. There are several cryptocurrencies with extensive integrated privacy and anonymity features, such as Monero or ZCash.