A cryptocurrency tumbler or cryptocurrency mixing service is a service offered to mix potentially identifiable or 'tainted' cryptocurrency funds with others, with the intention of confusing the trail back to the fund's original source. Tumblers have arisen to improve the anonymity of popular cryptocurrencies, usually bitcoin, since they provide a public ledger of all transactions.
In traditional financial systems, the equivalent would be moving funds through banks located in countries with strict bank-secrecy laws, such as the Cayman Islands, the Bahamas and Panama offshore banks.
Tumblers take a small percentage transaction fee of the total coins mixed to turn a profit, typically 1-3%.
Mixing helps protect privacy and can also be used for money laundering by mixing illegally obtained funds. Mixing large amounts of money may be illegal, being in violation of anti-structuring laws. Financial crimes author Jeffrey Robinson has suggested tumblers should be criminalized due to their potential use in illegal activities, specifically funding terrorism; however, a report from the CTC suggests such use in terrorism related activities is 'relatively limited'.
There has been at least one incident where an exchange has blacklisted "tainted" deposits descending from stolen bitcoins. Manual or lightly automated mixing methods can make detection of taint more difficult unless the exchange follows the trail but this approach does not protect privacy like a true mixing service would.
The existence of tumblers has made the anonymous use of darknet markets easier and the job of law enforcement harder.
Alternatives
Newer and proposed coin implementations such as Dash (formally Darkcoin), Zerocoin, Cloakcoin and shadowcash have built in mixing services as a part of their blockchain network.
The Dark Wallet client software for bitcoin was built to natively mix transactions between users to achieve the same effect without relying on a centralised service.
The Monero cryptocurrency provides complete anonymity without tumbling services due to its privacy centric design, utilizing ring signatures to keep the entire blockchain secure and untraceable.