Bitcoin is a public blockchain and the fact that all information on the network is recorded and accessed by others is seen as a privacy issue by those who prefer anonymity in transactions.
Bitcoin mixers are specially designed for these people. These mixers are private third-party tools that help users maintain their anonymity while transacting cryptocurrency.
The idea behind bitcoin mixers is to remove all digital signatures associated with a trade. This makes it difficult for entities to determine the source of the transaction and its ultimate destination.
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How do bitcoin mixers work?
With a normal exchange, bitcoins go from Person ‘A’ to Person ‘B’ and this is how the transaction is recorded on the blockchain. However, with a bitcoin mixer, person “A”‘s bitcoins are first collected from a private pool and mixed with other users’ bitcoins before being sent to person “B”.
Therefore, when inspectors look at the transaction, they will see that person “A” sent bitcoins to a mixer. They will also see that person “B” received bitcoins from a mixer. However, they will not find any direct transaction between Person ‘A’ and Person ‘B’.
Who uses bitcoin mixers and are they legal?
Since these mixers provide anonymous transactions, they are often used by criminals to obfuscate their money laundering operations and perform other illicit activities using bitcoins.
However, it’s not just criminals who use them. Research by blockchain analytics firm Chainalysis suggests that mixers are mostly used by regular bitcoin users who simply want privacy. But the legality of mixers will depend on where the user is from and what laws apply there.
For example, the US government has arrested the founders of several mixers for helping to launder money. Similarly, the European Union has also issued anti-money laundering regulations that have made mixers less viable for people who want to join the broader crypto economy.
Although there are no concrete laws regarding mixers in India, exchanges may flag your trades if you use mixers. Some exchanges have also been known to suspend the accounts of users who transact through mixers.
Why do people use bitcoin mixers?
There are many misconceptions about the levels of privacy that cryptocurrencies bring to the table. Cryptocurrencies only provide a pseudonym rather than completely concealing a holder’s identity.
According to the definition of a public ledger (blockchain), anyone can view transaction records if they wish. Although your transactions are tied to an address and not some form of identification, they can still be used to reveal real identities.
For example, if you withdraw bitcoins from a centralized exchange, the KYC information linked to your account will reveal your identity to exchange operators. There are also other identification techniques.
Blockchain analysis, a process of inspecting, identifying, aggregating, modeling, and visually representing data on a cryptographic distributed ledger, can be easily used by different entities to link your crypto address to your true identity.
For many, this is not a flaw but a feature that creates a liability system and prevents bad actors from using this technology for nefarious purposes. But there is also a certain section of bitcoin traders who want to maintain their privacy entirely. They do this through various methods, one of which is bitcoin mixers.
(Edited by : Jomy Jos Pullokaran)