A cryptocurrency tumbler is a system which mixes transactions in order to make it difficult to trace the origin of the funds.
Although in fiat money markets this would be seen as an attempt at money laundering, or an indicator of some other possible illegal activity, mixing or tumbling cryptocurrency does not always have a shady motive behind it.
Bitcoin transactions are 100% transparent and may reveal the funds contained in the source wallet to anyone who receives a payment from that wallet.
This may not please all consumers, who may not want to expose their true BTC balance at every shop they happen to visit.
Take, for example, some unfortunate recent events.
There have been cases where cryptocurrency traders were robbed after revealing their crypto balance in online chats.
When a user trades Bitcoin for cash in a peer to peer system, such as LocalBitcoins, the counterpart can see the balance on the source Bitcoin address.
A shady Bitcoin buyer could set up physical world transactions in order to find regional Bitcoin holders, thus mapping potential theft victims.
Note that this is not a vulnerability in LocalBitcoins, but something inherent to Bitcoin. Unless you mix your Bitcoin addresses before transactions, your counterpart can see your entire transaction history.
Several cryptocurrencies try to include privacy into their own systems so that tumblers would no longer be necessary to protect legit users' privacy.
These cryptos protect the consumer by not revealing their entire transaction history.
Since cryptocurrencies are mostly unregulated around the world, the legal status of tumblers is unknown and may depend on local legislation.
It is safe to predict that this type of service will either be heavily regulated or made illegal in the future.
At the time of this writing it is perfectly legal to mix cryptocurrency transactions as you please.
Cryptocurrency exchanges also make it possible to trade one currency for another, which makes it possible for you to restart your crypto history using a completely different blockchain.
In essence, having over 1500 cryptocurrencies available and tens of different exchanges, it's very easy to perform "tumbling and mixing by hand".
Simply by moving from one cryptocurrency to another in various exchanges will accomplish pretty good history scrambling, because there is no cross-chain trail.
Several exchanges around the world would have to share multiple blockchain data in order to uncover the entire transaction history.
As of February 2020, Helix tumbler creator Larry Harmon has been arrested for running a Bitcoin mixing service.
Authorities accuse him of a $300 million money laundering conspiracy.
His defense claims he's innocent and that he had no involvement in Alphabay. The case raises legal questions for Bitcoin mixer operators as they can now be held liable for 3rd party illegal funds that pass through their service.