EU Innovation Hub’s Report Highlights Challenges of Cryptocurrency Encryption

The EU Innovation Hub, a collaborative effort involving various European Union agencies and member states, has released its first report on encryption. The report underscores the “dual-use” nature of cryptographic technologies, which can serve both beneficial and malicious purposes.

The report supports the use of public-private cryptography in cryptocurrencies and nonfungible tokens (NFTs) for storage, mining, and transfers. However, it highlights that some bad actors exploit these systems to evade law enforcement. Specific protocols and privacy coins can obscure blockchain visibility, complicating the tracking of illicit activities.

Privacy Coins and Obfuscation Technologies Under Scrutiny

The EU Innovation Hub specifically identified cryptocurrencies like Monero (XMR), Zcash (ZEC), Grin (GRIN), and Dash (DASH) as problematic due to their potential to obscure transactions. The report also pointed out layer-2 initiatives, zero-knowledge proofs, crypto mixing services, and noncompliant crypto exchanges as tools that facilitate money laundering. It 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.”

Crypto hackers and scammers often use services like Tornado Cash to launder stolen funds, making them harder to trace. Despite these challenges, the report emphasizes that law enforcement can still track such transactions when they gain access to the suspect’s private keys.

The report was developed 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.

This comprehensive collaboration highlights the EU’s commitment to addressing the complexities of encryption in the digital age. While encryption plays a vital role in safeguarding privacy and security, it also poses significant challenges for law enforcement. The report indicates a need for balanced legislation that upholds privacy without compromising security.