Bitcoin
European Law Enforcement Authorities Raise Concerns About Privacy Coins, Layer 2 Networks and Crypto Mixers
The EU Innovation Center for Homeland Security has released its first comprehensive report on encryption, focusing significantly on issues related to encryption.
The report, a collaboration between Europol, Eurojust and other EU agencies, investigates how cryptocurrencies are impacting law enforcement efforts.
It highlights significant gaps in authorities’ ability to track and recover illicit digital assets powered by decentralized methods such as privacy coins, layer 2 networks and crypto mixers.
Cryptography and law enforcement
According to the report, cryptocurrencies, which rely heavily on public-private key cryptography, pose unique challenges and opportunities for law enforcement.
The report describes how cryptocurrencies are increasingly used to launder criminal proceeds, complicating efforts to track illicit funds. The emergence of technologies such as zero knowledge tests (ZKP) and Layer-2 (L2), which improve privacy, can further obscure the origins and movements of these funds.
The report states that currently, law enforcement authorities can only recover funds moved through custodial wallets – where users do not have their own private keys – by cooperating with exchanges and service providers to seize cryptocurrencies suspected of criminal activity.
This cooperation is crucial given the strict user identification (know your customer, or KYC) measures required by anti-money laundering regulations. However, illicit funds moved through decentralized wallets and addresses remain beyond the reach of law enforcement authorities due to the greater privacy offered by these technologies.
Technological advances and data obfuscation
The report highlighted several advances that complicate the tracking of crypto transactions. Privacy Coins as Monero obscure details of transactions, presenting significant tracking challenges despite being less popular than Bitcoin among criminals.
Meanwhile, cryptocurrencies like Feature It is Litecoin offer optional encryption features that improve transaction obfuscation. Mimblewimble, a protocol used by Grin and Beam, hides transaction details and uses aggregated verification techniques.
ZKPs, used by coins like Zcash and mixing services such as Tornado Moneyverify transactions without revealing details, posing substantial risks tracking challenges.
Additionally, L2 solutions like the Lightning Network for Bitcoin create payment channels that do not transmit all transactions to the blockchain, complicating authorities’ tracking efforts.
Future steps
The report noted the paramount need for law enforcement authorities to keep up with technological developments and emphasized that access to suspects’ private keys is critical to overcoming encryption challenges.
The report also urged state agencies to improve technical capabilities and promote closer collaboration with cryptocurrency exchanges and custodial wallet providers, which are essential to effectively combat the misuse of digital assets for criminal purposes.
The report called for continued research into “user-controlled” encryption and its impact on digital forensics and decryption capabilities. He also highlighted the potential of quantum computing to revolutionize cryptographic protocols and stated that EU funding schemes are vital to support research projects to address these challenges.
The report urged lawmakers to prioritize funding to improve authorities’ ability to combat cryptocurrency misuse.