Every transaction on a public blockchain is permanently recorded and visible to anyone. Wallet addresses are pseudonymous — they are strings of alphanumeric characters with no obligatory link to a real identity — but pseudonymity is not anonymity. Governments and blockchain analytics firms have developed increasingly sophisticated methods for tracing transaction chains and linking addresses to individuals. Mixers exist to complicate that process.

A mixer is an application that breaks the chain of custody between a sender’s wallet and a recipient’s. In a basic smart-contract-based mixer, a user deposits funds from one address into a contract pool, then withdraws the same amount to a different address. The connection between deposit and withdrawal is obscured — the output wallet has no traceable relationship to the input wallet. To improve effectiveness, mixers typically require deposits in standardized denominations and depend on a sufficient number of concurrent users to create a large enough pool that individual transactions cannot be easily disentangled.

Decentralized finance has operated for years in a regulatory environment that is, by any honest assessment, unresolved. No overarching legislative or regulatory framework specifically governs defi. Existing laws — the Bank Secrecy Act, securities statutes, commodities regulations — were written before the technology existed and have been applied to it through guidance, enforcement actions, and legal interpretations that have shifted substantially depending on the administration in office.

The Financial Crimes Enforcement Network established in 2019 guidance that money transmitter regulations apply to decentralized applications when those apps perform money transmission, stating that the rules apply “regardless of label.” A small number of defi entities have registered with any federal regulator, and Treasury acknowledged in a 2023 report that there is likely limited compliance with BSA/AML requirements across the sector. The gap between stated regulatory obligation and actual compliance is not ambiguous — it is documented.

Every major blockchain application eventually collides with an identity problem. DeFi lending protocols that want to offer uncollateralized loans need to assess creditworthiness without holding custody of user data. DAO governance systems that want to prevent sybil attacks — one person controlling many wallets to accumulate disproportionate voting power — need to verify personhood without requiring real names. Regulatory compliance frameworks that require KYC create friction that is incompatible with the permissionless design of public blockchains.