There is a very interesting gap between the initial idea behind Bitcoin and its actual development. When Bitcoin started gaining public traction, crypto-enthusiastic investors saw it as a method for anonymous transactions, which was the intention of Bitcoin’s creator Satoshi Nakamoto.
However, Bitcoin had to pay the price for mainstream acceptance by giving up its anonymity. On second thought, anonymous isn’t really the right word. This attribute stands for someone or something without a name label. Blockchain users don’t lack a label even though they’re not represented by their name on the blockchain. Still, blockchain anonymity or semi-anonymity isn’t the main obstacle for users who want to hide their identity in the transaction process.
So, in this article, I’ll try to explain why Bitcoin trading can’t be anonymous and focus on a method that serves as “the last straw” for preserving users’ anonymity. It’s called tumbling.
How Does the Bitcoin Blockchain Work?
Bitcoin and all other types of cryptocurrency operate on their native blockchains. The blockchain is a decentralized public ledger, different from every system for financial interaction you’ve already seen.
If you don’t know how the blockchain looks, imagine it as an open-source database that exists on each user’s computer. Unlike MySQL, for example, where you have certain individuals granted the title to control and confirm modifications, the blockchain is open to anybody. To preserve robust transparency and security, the blockchain uses automated mechanisms and protocols, which can differ from one blockchain to another.
In this guide, I’ll stick to Bitcoin. The Bitcoin blockchain utilizes the Proof-of-Work consensus mechanism whereby all participants, called miners, are involved in establishing a secure environment for executing transactions. As a reward for their contribution, miners get a certainly defined portion of newly-minted bitcoins. That’s where the term Bitcoin mining comes from.
When I say executing transactions, I mean Bitcoin users that send and receive bitcoins to each other regardless of whether they do that directly in a peer-to-peer manner or by using an intermediary, i.e., a digital currency exchange. For each transaction, the sender pays transaction fees, which also go to the reward fund of miners.
Is Cryptocurrency Anonymous?
Both the recipient and the sender are represented on the blockchain by their wallet addresses. They’re public and generated by the Bitcoin wallet of the user. The address doesn’t reveal any personal information. On the Bitcoin blockchain, the address is represented by a long non-meaningful string, something like this 3J98t1WpVM73CNmQviebanyiWrnqGhWNLy. Since the blockchain is open by its nature, everyone can see that this address has received 5 BTC at a given time, but nobody will know that it’s John Doe behind that Bitcoin address. Given this, we can classify the blockchain as a pseudonymous rather than an anonymous network.
Now, let’s get back to the outside world. Bitcoin was launched in 2009 and started getting noticed a few years later. Those who recognized the power of this decentralized model used it as a gateway to darknet markets. Unfortunately, we have many examples of that dark Bitcoin era.
Crypto exchanges were also the largest marketplace back then, but they levitated around the virtual world without any regulations. This led to a series of hacker attacks and a large room for scams and other forms of user manipulation.
Things got alarming when Bitcoin started boosting its value, together with an array of other successful crypto projects like Ethereum (ETH), Litecoin (LTC), Bitcoin Cash (BCH), Cardano (ADA), etc. This billions-of-worth industry could not get unnoticed by law enforcement, so things started changing.
How Is Bitcoin Regulated?
Soon after the 2013 infamous forum post (the FBI does not have a prayer of a chance of finding out who is who), the authorities put much effort into creating law instruments to track down illegal crypto activities. So, in a few years, they showed that it’d be nearly impossible for hackers to skip the consequences of blockchain-related crimes. This means that law enforcement has its way of connecting the dots from your digital wallet address to your credentials, even if you use a VPN or access the market from a Tor browser.
Another thing is regulating crypto providers under the applicable AML (Anti Money Laundering) and CFT (Combating the Financing of Terrorism) practices. This means that all new users must go through a detailed KYC procedure to get started with their trading activities.
Canada has turned out to be one of the most proactive countries in regulating the status of crypto. Here, all crypto exchanges must be FINTRAC-registered MSBs (Money Service Businesses) and fully compliant with AML/CFT framework. At the same time, all your profits from crypto trading are subject to Income Tax as digital assets are treated as commodities rather than legal tender or foreign currency.
So, do you still believe that you can send Bitcoin without identification?
What Is a Bitcoin Tumbler?
Tumbler is an external service that divides your BTC holdings into smaller chunks and then mixes them with the Bitcoin transactions of other users. That’s why some bitcoiners use the term a Bitcoin mixer or blender. When the mixing process is complete, you get your coins back, but as a different Bitcoin set.
This makes tracking down much more difficult no matter where and how you’ve acquired the coins — a crypto exchange, P2P platform, or as a gift. The new bitcoins aren’t associated with your identity, and at some point, you can achieve full privacy. Using a Bitcoin tumbler comes with a particular fee depending on the provider. They usually range between 1% and 3%.
Types of Bitcoin Tumblers
We can make a clear distinction between centralized and decentralized Bitcoin tumblers. Centralized crypto mixers are regulated companies that take your coins and give you back different bitcoins at a pre-determined price. They work pretty simply but when but can’t guarantee full privacy. Centralized tumblers operate under government-set rules and are obliged to submit the link between the old and the new addresses if law enforcement requires it. The most popular centralized tumbler or blender is Blender.io.
On the other hand, decentralized blenders usually use the CoinJoin protocol to prevent tracking crypto transactions in a P2P or a coordinated style. In a nutshell, this protocol enables a large number of users to join their bitcoins together and get a different coin in return. For instance, 200 users put 2 BTC in a tumbling pool and then randomly distribute these 2 bitcoins to each other, but nobody knows which share comes from where.
JoinMarket is the best-recognized protocol for the implementation of CoinJoin. Also, the open-source desktop wallet Wasabi is common storage and transfer solution for utilizing CoinJoin over the Tor network.
Are Crypto Tumblers Legal?
For many experts, the tumbling process is nothing but laundering. Yet, we can’t deny that these Bitcoin-tumbling services are a shrewd idea. In terms of legitimacy, I’d say that they’re on the borderline. Technically, you’re not doing anything wrong or illegal, but the motive behind mixing is always questionable. It’s either tax dodging or entrance to gambling sites and illicit markets, even though your reasons can be much humbler — that you feel uncomfortable exposing your identity online. However, how your Bitcoin mix will be treated depends on the legislation in which you’re using a tumbler.
But, even without interference from law enforcement, some exchanges don’t accept tumbled bitcoins. They have mechanisms to detect them and label these coins as tainted. For example, forums are full of users who had unsuccessful withdrawal attempts from Binance to Wassabi.
When it comes to government measures, tumblers have been under a lot of scrutiny. In 2021, authorities arrested the mastermind behind the popular tumbler Bitcoin Fog for being involved in laundering $335 million. The same year, Larry Harmon, the founder of another BTC mixer — Helix — pleaded guilty to being part of a dark web crime group that managed to launder nearly $300 million. The general trend in crypto-regulated countries goes to lowering and, eventually, disabling the power of Bitcoin mixers.
A Few Words Before You Go…
As I implied throughout this article, using a Bitcoin tumbler is justified only if there is no mischievous crime purpose behind it. Otherwise, authorities will soon track you down despite the “blurred” footprint you’re leaving in the virtual world.
The hype about privacy is present in the world of digital finance more than ever. Ironically, Bitcoin was envisioned as an ultimately anonymous instrument for financial communication and hence, a stairway to credential-free transfers. However, when it comes to regulatory standards, trading Bitcoin doesn’t differ from traditional stocks, commodities, and fiat currencies. You should be perfectly aware of Bitcoin’s status whenever you type down How to trade Bitcoin anonymously. After all, regulations are here to protect you from malware and scams.