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The relevance of crypto mixers is dwindling as regulators target them

Cryptocurrency mixers have been an interesting topic of discussion since the advent of cryptocurrencies and their adoption by retail investors around the world.

Cryptocurrency mixers are services that essentially focus on one feature of a blockchain network: privacy.

Cryptocurrency mixers, also known as tumblers, offer anonymity so no one can trace the sender or recipient of a transaction. This can help protect the identity of people who want to be completely anonymous and untraceable. Cryptocurrency blenders work by breaking down the funds sent using the blender and merging them with other transactions. They break the link that links the holder’s identity to the crypto they own.

A process for making cryptocurrency transactions anonymous is known as CoinJoin and was originally developed by Bitcoin (BTC) developer Gregory Maxwell back in 2013. In the thread on the Bitcointalk forums, Maxwell explained how these transactions are structured and how the privacy of the transitions can be significantly improved without making major changes to the network. Essentially, this concept is a mixed block box from which users receive their transactions and includes hundreds of transactions from different wallets. CoinJoin is one of the most popular cryptocurrency mixers on the market.

There are mainly two types of mixers, central and decentralized mixers. Centralized mixers receive cryptocurrencies from users into the mixer and return various cryptocurrencies for a fee. The transaction addresses of the different users who deposit their cryptocurrency into the mixers are managed by a program. Cryptocurrencies returned to users are not the same as those originally deposited, and they can be returned to the user’s account through more than one transaction.

In contrast, decentralized mixers use other crypto protocols to obfuscate transactions over either a coordinated network or peer-to-peer (P2P) networks. Cointelegraph discussed the pros and cons of centralized and decentralized mixers with Marie Tatibouet, Chief Marketing Officer of crypto exchange Gate.io. She said:

“Centralized services are obviously more accessible and approachable. However, you do have access to your bitcoin and IP addresses. Therefore, they are not the most private service in the world. Remote mixers can be a little less accessible, but they’re a lot more private.”

Related: What is a cryptocurrency mixer and how does it work?

However, cryptocurrency mixers and tumblers get a bad rap as they can be used to launder money or to hide large earnings. While not illegal by law, the service providers have a chance of being implicated in a crypto money laundering investigation. There have been several instances where cryptocurrency mixers and their users have come under scrutiny from various jurisdictions and governments.

Blenders might be in a gray area

Most recently, the UK’s National Crime Agency wants to regulate cryptocurrency mixers under the country’s relevant anti-money laundering (AML) laws.

The agency’s head of financial investigations, Gary Cathcart, said transaction blending tools provide criminals with a layer of anonymity that allows them to keep criminal funds flowing by disguising their origins.

According to Cathcart, subjecting mixers to AML laws would ensure that mixing services conduct thorough AML checks and audit all transactions going through the mixer. While this may seem like a working idea on the surface, there is a high possibility that such reviews will discourage all users from using the blender.

A closer look at the numbers shows that the concerns of the criminal authorities are not unfounded. A recent report by blockchain analytics firm Chainalysis, titled “2022 Crypto Crime Report,” found that the total value of cryptocurrency received from illicit addresses hit an all-time high of $14 billion in 2021, down from 7, almost doubled to $8 billion last year.

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At the same time, it is worth noting that the total market capitalization of the entire market has grown significantly along with the adoption of digital assets by retail investors. The Chainalaysis crime report also highlights the illegal percentage of all cryptocurrencies, which hit a four-year low of 0.15% in 2021.

This suggests that as the digital asset market has evolved, the checks and balances placed on transaction routes by market participants have acted as a deterrent to criminals and money laundering activities alike. In fact, most of the transactions flagged as received from illegal addresses come from hackers stealing funds from various DeFi protocols like Wormhole and Poly Network in 2021.

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Anton Gulin, regional director of crypto exchange AAX, told Cointelegraph that the whole essence of mixers is not illegal by default. “However, some countries are constantly enforcing the Financial Action Task Force’s travel rules, which require exchanges and other players in the virtual asset market to collect, verify, and transmit customer originator and receiver information for every cryptocurrency transaction.”

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The imposition of this rule prevents regulated entities like centralized exchanges from receiving funds from mixers, which in turn puts all activity in a gray area. Adrian Jonklass, head of research at blockchain API provider Covalent, told Cointelegraph:

“They are operating in a gray area because, at a global level, regulations are still being developed on the fundamentals of what virtual assets comprise, whether they fall under the money transfer regulations and/or commodities regulations and/or securities regulations and/or a new category.”

The FATF’s rule on the digital assets industry has the potential to curb activity even further. A survey of crypto businesses conducted by Notabene, a crypto compliance firm, found that 70% of respondents are either already following the Travel Rule or planning to align their compliance in early 2022.

Relevance of Crypto Mixers in 2022

While cryptocurrency mixers were originally designed to promote anonymity and privacy, the development of blockchain technology and innovations like whitelisting and decentralized identifier protocols could make them less relevant.

Guilin said there is no apparent benefit to using a crypto mixer in 2022, stating that “it is now widely associated with something illegal and in most cases it is actually related. Therefore, most mixer addresses have been clustered by know-your-customer vendors and are easily traceable.”

This means users cannot use their funds after shuffling without being traced by market participants as transactions withdrawn from a shuffler are flagged and contradict the logic of using a shuffler in the first place.

Cryptocurrency mixers definitely still have the potential to appeal to original cryptoromantics who place a high priority on the privacy and anonymity of their cryptocurrency transactions.

However, their relevance today may be waning due to the retail acceptance models and other checks and balances that market participants in the ecosystem are now utilizing. The industry and blockchain technology in general have evolved exponentially since Maxwell first spoke of the CoinJoin concept; It could also be important for service providers to recognize this.