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11/06/24
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EU Innovation Hub Raises Concerns Regarding Crypto in Report on Encryption
The EU Innovation Hub for Internal Security has released its first report on encryption, noting that encryption challenges and opportunities exist in relation to various technologies, including cryptocurrencies.
The challenges highlighted in the report include the wide usage of crypto to launder criminal proceeds and concerns about complicated tracing of funds if there is wide deployment of zero-knowledge proofs and layer 2 applications in the blockchain.
Conversely, custodial wallets, which do not allow users to hold their own private keys, facilitate cooperation between law enforcement authorities, exchanges and service providers, so they can freeze cryptocurrency assets suspected to be from crimes.
“Different forms of mining have attracted various types of criminal actors. For example, mining rigs or farms have been used to launder funds (buying crypto-mining equipment with criminal proceeds) or to pretend that funds are legally earned and hide the criminal origin. Even when such purchases were not profitable, criminals can still run such mining operations as it can be a cover for illicit earnings,” reads the report.
They mentioned that bad actors use botnet mining or cryptojacking to mine crypto through a victim’s bandwidth and processing power, and scammers run Ponzi schemes using pool mining schemes.
While expressing concerns regarding data obfuscation of crypto mining transactions, the report explained that some cryptocurrencies obscure such visibility, specifically privacy coins like Monero, Zcash and Grin. Litecoin’s implementation of Mimblewimble, which allows private transactions, was mentioned.
“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.”
Bad actors can abuse layer 2 solutions like the lightning network, especially in making payments to each other without making times and amounts of these payments visible. Hence, law enforcement agencies are encouraged to remain updated on new trends within the crypto ecosystem to enhance investigations.
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