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EU Innovation Hub criticizes anonymous coins, cryptocurrency mixers, Lightning Network and Layer 2

Data encryption can help balance individual privacy and collective security. However, crypto mixing protocols may face an uphill battle for adoption by European legislatures.

The EU Innovation Hub, a collaborative initiative involving members from European Union and member state agencies, has published its first report on encryption. Report emphasize the “dual use” nature of cryptographic technology.

The good and the bad in cryptocurrency

The report advocates for the inherent dependence of cryptocurrencies and NFTs on public-private cryptography for storage, mining and transfer. However, some bad actors use this system to evade law enforcement, specifically anonymous protocols and coins that can be “hidden” on the blockchain.

The EU Innovation Hub is particularly critical of cryptocurrencies such as Monero, Zcash, Grin (GRIN) and Dash, layer 2 initiatives, zero-knowledge proof* (ZKP), cryptocurrency mixing services and exchanges. The epidemic of non-compliance is making it easier for bad actors to launder money.

“Anonymizers and coin mixing tools have complicated tracing for years, but Mimblewimble and ZKF are relatively new developments that can also hide cryptocurrency addresses, balances and transactions …. Layer 2 solutions such as the Lightning network can also be abused by criminals to “scramble data”. Lightning Network’s two-party multi-signature payment channels will not broadcast all transactions to the blockchain but only open and close the channel,” adding that it and other layer 2 solutions could “complicate the regulatory process.” investigation by law enforcement agencies”.

The Mimblewimble cryptographic protocol used by cryptocurrencies such as Grin, Beam and Litecoin, is considered a “complicating factor” in law enforcement efforts to trace transactions, although the The report’s author admits that “transactions using Mimblewimble are not frequently encountered.”

Decode hidden traces

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

“All of these developments can still be investigated by law enforcement agencies that gain access to the suspect’s private keys.”

The report was produced by six EU Innovation Hubs 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 Counter-Terrorism Coordinator Statement of the Council of Europe and the European Union Agency on the Operational Management of Large-Scale IT Systems in the Field of Freedom, Security and Justice.

Alexey Pertsev, the developer of cryptocurrency mixing protocol Tornado Cash, was convicted of money laundering in May, with potentially serious implications for open source developers.

Tornado Cash was convicted regardless of being a non-custodial cryptocurrency mixing protocol, meaning the funds processed through the protocol are never held or controlled.

In Pertsev’s battle with law enforcement, a cross-chain bridge exploit recently used Tornado Cash to siphon off $47.7 million in stolen funds.

*Zero knowledge proofs (ZKP) is a method in cryptography and number theory that allows a party to prove that they know a certain fact without having to reveal specific information about that fact. In a ZKP, the prover has the ability to prove to the verifier that a statement is true without providing any additional information beyond the credibility of the statement. In blockchain, ZKP can be used to verify the correctness of a transaction without having to reveal sensitive details such as the amount of money in the transaction. This helps protect user privacy while ensuring system integrity.

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According to Bitcoin Magazine

Mark Tyson
Mark Tyson
Freelance News Writer. Always interested in the way in which technology can change people's lives, and that is why I also advise individuals and companies when it comes to adopting all the advances in Apple devices and services.
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