EU Innovation Hub Criticizes Privacy Coins, Crypto Mixers

In its first encryption paper, the EU Innovation Hub for Internal Security studied how privacy coins and mixing techniques affect regulation

Individual privacy and collective security can be reconciled through data encryption. Nevertheless, the adoption of cryptocurrency mixing protocols in European legislative frameworks may be a challenging task.

The EU Innovation Hub, a collaborative initiative that includes members from European Union agencies and member states, has released its inaugural report on encryption. The report underscores the “dual-use” characteristics of cryptographic technologies.

The advantages and disadvantages of cryptocurrency

The report advocated for the inherent dependence of cryptocurrency and nonfungible tokens (NFTs) on public-private cryptography for storage, mining, and transfers.

Nevertheless, certain malicious actors exploit the system to evade law enforcement, particularly protocols and privacy currencies that can “obscure” visibility on the blockchain.

The EU Innovation Hub specifically identified cryptocurrencies layer-2 initiatives, zero-knowledge proofs, crypto mixing services, and non-compliant crypto exchanges are all designed to facilitate the laundering of funds by malicious actors. It stated:

Mimblewimble and zero-knowledge proofs are relatively recent developments that can also obscure the visibility of cryptocurrency addresses, balances, and transactions, even though mixers and privacy coins have been complicating tracing for years.

Encrypting concealed tracks

Additionally, crypto hackers and fraudsters frequently utilize services such as Tornado Cash to divert stolen funds and impede traceability. Nevertheless, law enforcement can monitor these transactions:

The report was authored by six members of the EU Innovation Hub for Internal Security: 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.

Alexey Pertsev, the developer of Tornado Cash, a cryptocurrency mixing protocol, was convicted of money trafficking in May. This conviction has the potential to have severe repercussions for open-source code developers.

Tornado Cash is a noncustodial crypto mixing protocol, which means that the funds processed through the protocol are never retained or controlled by it. Nevertheless, the sentencing took place.

Amid Pertsev’s legal battle with law enforcement, a cross-chain bridge exploiter recently utilized Tornado Cash to siphon $47.7 million in stolen funds.