My question is, if someone mixes bitcoin using Wasabi or similar mixing service, are those coins considered “tainted” for every individual owner of those coins in the future?
For context… I often buy bitcoin peer-to-peer and I’ve considered using a mixing service to increase my privacy. But then I learned that some crypto exchanges do not accept coins that have been mixed. Of course this sounds ridiculous to me, but if mixing will limit my options in the future I’d rather avoid “tainting” my bitcoin since I’m not doing anything illegal anyway. Just curious how it’s possible to tell that coins have been previously mixed, and is it worth the chance that it may be more difficult to transact with those coins in the future?
Technically, yes. But depends how many hops back you or exchanges look. I believe rule of thumb for Coinbase (the co.) was 5 transactions back? Also worth mentioning utxo management, if your p2p bought coin was mixed then assume the entire wallet is unless youve already done good labels on your utxos and could pinpoint it exacrly. But bro i wouldnt worry about it. If youre buying from peers you know where we are headed.
reply
Most definitely. I have no plans to ever use an exchange – just curious as to the technical details. Do you know if Coinbase publishes this policy online? Where did you hear that they look 5 transactions back? Wouldn’t that mean I could simply make 6 transactions to myself after mixing?
Apologies if these are dumb questions.
reply
But depends how many hops back you or exchanges look. I believe rule of thumb for Coinbase (the co.) was 5 transactions back?
Good point about the effectiveness of exchanges looking into the transaction history of coins.
I think if more people use mixing services (which I hope will increase in the future [1]), it will get less and less effective and exchanges would get more incentive to accept mixed coins.
Essentially, the anonymity set needs to get big enough such that associating mixing coins with illegal activity no longer makes sense.
reply
Part of the problem here is that they already view mixing coins itself as illegal activity.
reply
It's very likely that they are rejecting mixed coins because the US government has privately ordered them to do so ("if you accept recently-mixed coins, then we will investigate you for financially supporting terrorism"). So in a way, coin mixing is already illegal, but only for regulated companies to accept, because that's the only way the government can fight the mixing of coins.
If that seems absurd, consider that Facebook gave US agencies direct access to delete posts from Facebook. The US very likely coerced Facebook into giving them access (e.g. "If you don't let us delete posts by people we deem to be terrorists, then we will investigate your company for possibly assissting terrorists").
reply
Not if P2P
reply
Going out of KYC should be a one way ticket, if you keep thinking you can always go back to an exchange, then why do you even go P2P "for privacy" or even mix?
reply
You’re correct, I don’t plan on ever going the exchange route, in fact I’m lucky enough to have never used an exchange…I’m really just curious to know the technical details around how mixing can be detected and affect future transactions.
You never know how far governments will be willing to go – look what happened to Tornado Cash.
reply
Coinjoin transactions leave a fingerprint on the blockchain. Here is an example coinjoin transaction: https://mempool.space/tx/db417ce9e468bfa55a563eb9912a8252fe9205e373771087ca118aaabdfa6457
Some of the typical characteristic of coinjoins are:
  • there are more than three inputs (i.e. "from" addresses)
  • there are more than three outputs (i.e. "to" addresses)
  • at least three of the outputs have the same value
An exchange can detect if a coin was in a coinjoin by scanning the blockchain for the transaction that sent money to your bitcoin address from some other bitcoin address, and then checking the transaction that sent money to that address, and so on. If any of the transactions in your coin's history was a coinjoin, then they know your coins were in a coinjoin once. But they cannot trace them back further than that because the whole point of coinjoins is that you can't figure out which sender sent money to which recipient.
reply
I guess not if you pay taxes with them.
reply
But then I learned that some crypto exchanges do not accept coins that have been mixed.
Don't comply, use P2P. Or just don't send your coins back to exchanges since it would only be for selling, no?
However, I'm guilty of complying myself so far to some degree since I haven't mixed my coins yet and am not using P2P yet.
Will try to create a no-KYC stack using Bisq soon.
reply
I'm sorry, what was that? You mean you're going to lose your seed phrase in a boating accident? Man, that sucks bru
reply
I accidentally flushed my seed phrase down the toilet:
tragic toilet accident, haha
reply
Yep… Bisq is one option. Depending on your location there may be easier web-based p2p options for you too. HodlHodl is another. I believe in you!
reply
not for p2p or second layer payments.
mixed bitcoin -> lightning -> swap onchain problem solved
reply
Analytics are heavy on probabilities and heuristics. Nothing can be nailed down until someone sends coin to an exchange. If you ever look at how the FBI tracks down bitcoin usage and busts people, it is always traced backward from the exchange, since the KYC positively id's all the analytics they have on your stack.
reply