Read now to learn how Bitcoin mixers work and why your financial privacy is worth fighting for.
If there’s one thing that can seem to be in short supply in cryptocurrency, it’s privacy. For starters, most cryptocurrencies run on top of public blockchains, which means transactions are permanently displayed for anyone at all to see.
That said, while privacy on a blockchain like Bitcoin’s may seem a bit more difficult, it’s definitely not impossible. For example, last week we talked about how not publicizing your Bitcoin activity and not reusing Bitcoin addresses are easy ways to protect your privacy.
Another privacy tool that is becoming much more common are cryptocurrency mixers, which are services that mix different streams of potentially identifiable cryptocurrency in order to improve anonymity. Bitcoin mixers, for example, work best when many different people all send similar amounts of BTC into the mix at the same time. While inputs and outputs can easily be seen on the blockchain, it’s extremely difficult to tell which mixed input and output are directly linked.
But Can Mixers Be Demixed?
In an interesting turn of events, the Blockchain Analytics Firm Chainalysis claims to have identified the hacker behind the infamous ETH DAO attack by demixing transactions that were sent through the popular CoinJoin service from Wasabi Wallet:
When pressed to provide more information, Chainalysis was rather tight-lipped and provided no evidence to back up their claim or explanation of how the demixing was possible. But if they’re telling the truth, who can really blame them for not sharing their trade secrets? After all, privacy is important for everyone, even for a company whose main service is invading the privacy of others.
You may be wondering at this point whether this means that all Bitcoin mixers can be demixed. If yes, obviously that would be a huge blow to privacy on the Bitcoin blockchain. While no one knows for sure at this point, it seems likely that demixing happens as a result of unwise user behavior, such as address reuse, or because of coding errors with specific mixing services. It’s unlikely that the privacy of all mixers has been broken.
Are Bitcoin Mixers Illegal?
The legality of Bitcoin mixers varies from country to country, but it seems safe to say that most governments and financial institutions don’t like them very much. That shouldn’t come as a surprise honestly. Ultimately, governments use your information to control you and financial institutions use your information to profit off of you. They don’t care too much about your privacy if it limits their ability to accrue money and power.
In fact, governments and financial institutions will actually support limiting financial privacy in the name of eliminating money laundering and financial support for terrorism. Don’t get me wrong: I support the end of crime and terrorism. But do the ends justify the means? The vast majority of financial transactions in the world are completely legitimate, with only a very small amount being tied to criminal or terrorist purposes. Should we take away the privacy of the many in order to limit the actions of the few?
I believe wholeheartedly in everyone’s right to financial privacy. A person’s ability to transact with their own money shouldn’t be limited because of the illegitimate actions of a few bad actors, nor should it be limited because the government doesn’t approve of that person’s free speech. But unfortunately if our financial transactions aren’t private, someone can at some point censure us and limit our financial freedoms if they choose to do so.
So should mixing be illegal? I’m of the opinion that it should not be. After all, using a mixer is just an attempt to protect one’s privacy and privacy is not illegal (at least not yet and, hopefully, not ever). Sure, criminals and terrorists can use mixers to protect the privacy of their illicit deeds But remember, it’s their crimes that are illegal, not privacy. The more our governments blur the line between our right to privacy and their duty to fight crime, the more innocent people will suffer when they’re unduly deprived of their ability to safely spend their money how they see fit.
Whether or not Chainalysis can demix Bitcoin transactions, one thing is clear: your financial privacy is under assault in both the traditional and cryptocurrency industries. It’s up to you to decide what you’ll do about it.
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This is not financial advice. This newsletter and related content are for informational purposes only. Cryptocurrencies and digital assets can be risky. Always do your own research before making any sort of investment.
