While you may assume that a decentralised currency like Bitcoin or Ethereum is anonymous, that isn’t entirely the case.
Thanks to the blockchain, which is essentially the conveyor belt upon which all cryptocurrency is built. And thanks to analysis tools and specialist investigators, it’s possible to trace back a transaction, or a coin itself, right back to its inception.
Unfortunately, this isn’t great if you are partaking in illegal activity, or trying to cover your tracks for a non-criminal reason.
But that’s where tumblers come in. No, not Tumblr. We’re talking about Bitcoin (and other crypto) tumblers.
For obvious legal reasons, nothing in this article is suggesting that you should partake in criminal activity relating to cryptocurrency. Sorry rims – we’re not Crimemodo. Also, this article is not to be taken as legal and/or financial advice. Gizmodo Australia is not suggesting you should use a cryptocurrency tumbler.
So You Can Trace Crypto?
The Bitcoin blockchain is a completely open platform, which means anybody can download the entire chain and read every transaction, coin and wallet address that has ever been linked to the cryptocurrency.
Most cryptocurrencies operate on a similar system, which means that you’re never truly anonymous.
While most of us aren’t scouring through the blockchain archives reading each transaction, this information is out there and can be used to track down exactly which wallet sent or received a specific coin.
And if your wallet is linked to you IRL identity documents like your bank account or driver’s license, this could eventually be traced back to you.
What Is A Cryptocurrency Tumbler
A cryptocurrency tumbler – also known as a crypto mixer or crypto mixing service – is a paid service in which you can mix potentially traceable coins (for example, stolen coins) with other, clean coins in an effort to make it harder to trace them.
To put it simply, let’s first take a look at how normal, un-tumbled transactions look on the blockchain.
If I were to send one Bitcoin to Steven, who then sends the same Bitcoin to John, who then sends it to Alex, you would still be able to link Alex’s 1x Bitcoin to me through our wallet address transactions.
While this is fine when you’re doing regular, non-shady business, there are plenty of times in which people would prefer this information not to be so easily traced back to them. And that’s where tumblers come in.
This is exactly what we saw happen with some $3 billion worth of cryptocurrency that is currently M.I.A as a result of the developing Africrypt situation.
How Does A Tumbler Actually Work?
Basically, a tumbler service is like a blender. You input the coin in which you wish to hide, it gets chopped up into pieces and mixed with a bunch of other, clean coins, and then spat back out to random addresses.
To make it even more hard to trace, most tumblers also randomise the amount that they pay you back.
You’ll still get your full value back (minus the transaction fee) but instead of being one Bitcoin, it might be four or five fractions of a Bitcoin in separate transactions.
Is This Legal?
Sure, so long as you’re not doing it to hide otherwise illegal activity.
If you’re going to this effort purely to protect your own privacy (at the cost of the transaction fees, of course), go your hardest. There are no specific laws that prohibit cryptocurrency tumbling.
However, using a cryptocurrency tumbler to conceal other illegal activity could still land you in hot water.
Additionally, you really don’t want to be trying to hide your capital gains using a crypto tumbler because crypto is treated as legal property in Australia and is therefore subject to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF 2006). Secondl, blockchain forensic tools can usually still catch you, so you’d be spending money for no reason, really.
If you’re genuinely just doing it to protect your privacy on the blockchain, you should be fine, but it’s well worth looking into your legal obligations in regards to money laundering before you decide to do this.
Is It Risky?
While cryptocurrency tumblers aren’t necessarily illegal, it’s still considered quite risky, even if you’re not personally doing the wrong thing.
Because these mixers work by distributing coins at random, there’s no telling where your coin actually came from. While you wouldn’t be guilty by association if your coin was obtained illegally, your coins could still be seized (depending on where in the world you are) if they’re found to be stolen.
Does It Work?
While cryptocurrency tumblers can obscure your information and make it harder to trace your transactions, it simply cannot be stressed enough that they don’t make your coins completely untraceable.