EU Innovation Hub criticizes privacy coins and crypto mixers in new report

Data encryption can help balance individual privacy and collective security. However, cryptocurrency mixing protocols may face an uphill battle for legislative acceptance in Europe.

The EU Innovation Hub, a collaborative initiative involving members from European Union (EU) agencies and member states, has published its first report on encryption. The report emphasizes the “dual-use” nature of cryptographic technologies.

Source: The EU Agency for Criminal Justice Cooperation

The good and bad in crypto

The report supported cryptocurrency and nonfungible tokens (NFT) inherent reliance on public-private cryptography for storage, mining and transfers. However, some bad actors use the system to evade law enforcement, specifically protocols and privacy coins that can “obscure” visibility on the blockchain.

The EU Innovation Hub specifically called out cryptocurrencies such as Monero (XMR), Zcash (ZEC), Grin (GRIN) and Dash (DASH), layer 2 initiatives, zero-knowledge proofs, crypto mixing services and non-compliant crypto exchanges for making it easier for bad actors to launder funds. It said:

“Mixers and privacy coins have been complicating tracing for years, but Mimblewimble and zero-knowledge proofs are relatively new developments that can also obscure the visibility of cryptocurrency addresses, balances and transactions.”

Decrypting hidden trails

Crypto hackers and scammers also tend to siphon stolen funds through services like Tornado Cash to deter traceability. However, law enforcement can track such transactions:

“All of these developments can still be investigated by law enforcement authorities, when access to the private keys of the suspect are gained.”

The report was created by six EU Innovation Hub for Internal Security members: Europol, Eurojust, the European Commission’s Directorate-General for Migration and Home Affairs, the European Commission’s Joint Research Center, the European Council’s Counter-Terrorism Coordinator and the European Union Agency for the Operational Management of Large-Scale IT Systems in the Area of Freedom, Security and Justice.

Related: North Korea used Tornado Cash to siphon HTX’s $147.5M loot: UN

Alexey Pertsev, the developer of the cryptocurrency mixing protocol Tornado Cash, was found guilty of money laundering, raising potentially severe implications for open-source code developers in May.

The sentencing occurred despite Tornado Cash being a noncustodial crypto mixing protocol, which means the funds processed through the protocol are never held or controlled by it.

Amid Pertsev’s fight with law enforcement, a cross-chain bridge exploiter recently used Tornado Cash to siphon $47.7 million of stolen funds.

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