To answer, we will use a post by Mark Gould, COO of Federal Reserve Bank of San Francisco, on Quora:
There are a variety of ways to think about the relative safety of different means of payment. When you use a credit or debit card, for example, there are laws and regulations that specify the rights and responsibilities of each party to the transaction. So, if someone gets your credit card information and uses it fraudulently, your liability is limited by the legal framework of the transaction. Your bank accounts are protected by deposit insurance. And you have options for recourse if you don't receive the goods or services in return for many types of payment.
Bitcoin was designed to operate independently of any regulatory structure to facilitate anonymous transactions both locally and across international borders. These features make it attractive to some people for certain types of payment, particularly international exchanges. At the same time, because it operates outside the mainstream payments' legal and regulatory structure, transactions made using bitcoin do not have the same consumer protections that are built into many other types of payments.
When considering the safety of any payment, I think it's important for consumers to understand the rules that govern that payment to avoid disappointment if something goes wrong. I think there is sometimes a tendency to focus on the convenience of certain payment types, without fully considering the issues, risks, and alternatives to any particular type of payment.
So, are Bitcoin mixers safe?
To answer this question, we'll try to address different problems that affect Bitcoin mixers. These include quality issues, technical issues, legal issues, and custodial issues. Let's take a look at these in detail:
Unfortunately, not all Bitcoin mixers are safe. Low security, poor encryption implementation, and weak infrastructure are the most common technical issues that Bitcoin mixers face.
Even though Bitcoin mixers look technically simple, developing and implementing a secure operation is not an easy task. With the growing complexity and amount of features Bitcoin mixers offer, there are quite a few things that can go wrong, and even compromise the service.
Unfortunately, there is no way to check whether a Bitcoin mixer is secure enough—unless you get someone else's feedback, or try it yourself. Therefore, we always recommend mixing a small amount before doing higher volumes.
To keep track of the billions of dollars that flow into cryptocurrencies, chief players around the globe roll out dozens of regulations. KYC, AMLD5, and the "Travel" rule by FATF are only a few of the rules that aim to prevent the use of the financial system for money laundering or terrorist financing.
The governments want to know your entire financial history, and any tools or services that help you to conceal your cryptocurrency transactions are not desirable. This includes both Bitcoin mixers and anonymizers.
The hunt for mixers has already begun. In 2019, Europol seized Bestmixer, a popular Bitcoin mixing service, along with six other services from around the EU. In February 2020, the United States Department of Justice has arrested Larry Harmon, the CEO of the Helix mixer.
With the growing pressures, any Bitcoin mixer can become a victim of a seizure by the authorities. The chances are low that you would be using the mixer at the time the raid would happen, and you would eventually lose your coins. However, the succeeding analysis of (undeleted) mixer's logs (by authorities) can reveal your transactions and identity.
To avoid such situations, Bitcoin mixers remove the transaction logs as soon as possible and, ideally, immediately after a successful transaction.
The temporary "legal" protection for Bitcoin mixers is incorporating in a jurisdiction not obliged to implement the recent regulations, such as Seychelles.
A general problem with Bitcoin is that the previous owner's transactions can contaminate them.
Let's say someone uses Bitcoin to commit a crime. To eliminate trace, one shuffles these coins using a Bitcoin mixer. Subsequently, someone else uses this Bitcoin mixer to anonymize the payment for an adult website. Since the criminal's Bitcoins could have contaminated the mixer's pool, the person paying for an adult website could be "marked," or even blacklisted from that site.
Even though there have been very few such cases publicly disclosed, the growing blockchain analytics industry may soon make things much worse.
To avoid this, Bitcoin mixers should formulate their terms to prohibit the use of their service to legalize illegal income, financing of terrorism, participation in schemes of phishing, forgery, or other such falsification or manipulation. In case they identify suspicious activity, they should return the unmixed deposit immediately.
We, at Tumbler, do not process any suspicious deposits and forward them to the destination address without mixing, immediately.
Non-custodial Bitcoin wallets do not keep your private keys, and therefore are more secure. However, they do require a little technical knowledge from the user.
On the other hand, custodial Bitcoin wallets are much easier to use and do not require any knowledge from the user. However, since they store your private keys, they control your funds and thus are less secure.
If you plan to store large amounts of coins, it is recommended to use a non-custodial Bitcoin wallet.
Custodial Bitcoin mixing services take custody of users' funds. In simple terms, they receive coins from users, shuffle them, and send back to the users. Since the Bitcoin mixing service takes possession of your coins, there is always a little risk of your funds disappearing, or being stolen.
On the other hand, Bitcoin mixing software, such as Wasabi wallet, is merely a protocol that allows participants in a mix to move money to and from each other without any service provider in the middle.
If you plan to mix your Bitcoins safely, then we recommend you using a non-custodial mixer. If you'd still prefer to use a custodial mixer, which is more convenient and user-friendly, then we recommend you to use a trusted service.