EU Report Criticizes Privacy Coins and Mixers

Twitter icon  •  Published 5 days ago  •  Nikolas Sargeant

In its inaugural report on encryption, the EU Innovation Hub for Internal Security examined how privacy coins and mixing protocols are complicating regulatory efforts.

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.

The Good and Bad in Crypto

The report supports the use of public-private cryptography for cryptocurrencies and nonfungible tokens (NFTs) in storage, mining, and transfers. However, it notes that some bad actors exploit these systems to evade law enforcement, specifically targeting protocols and privacy coins that “obscure” blockchain visibility.

The EU Innovation Hub specifically highlighted cryptocurrencies such as Monero (XMR), Zcash (ZEC), Grin (GRIN), and Dash (DASH), along with layer 2 initiatives, zero-knowledge proofs, crypto mixing services, and non-compliant crypto exchanges for facilitating money laundering. The report stated:

“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 often use services like Tornado Cash to obfuscate stolen funds, making traceability difficult. However, law enforcement can still track these transactions when they gain access to suspects' private keys:

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

Alexey Pertsev, developer of the cryptocurrency mixing protocol Tornado Cash, was found guilty of money laundering in May, raising potential implications for open-source code developers. This sentencing occurred despite Tornado Cash being a noncustodial protocol, meaning it never holds or controls the funds processed through it. Amid Pertsev’s legal battles, a cross-chain bridge exploiter recently used Tornado Cash to launder $47.7 million of stolen funds.

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Nikolas Sargeant

Nik is a content and public relations specialist with an ever-growing interest in Crypto. He has been published on several leading Crypto and blockchain based news sites. He is currently based in Spain, but hails from the Pacific Northwest in the US.