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The EU Innovation Hub for Internal Security has examined the impact of cryptocurrency mixers and privacy coins on regulatory efforts. This inaugural study on encryption highlighted the challenges posed by these technologies in ensuring regulatory compliance.
The report underscores cryptographic technologies’ “dual-use” nature, which can balance personal privacy against collective security. Despite the potential benefits, adopting bitcoin mixing methods poses significant regulatory hurdles in Europe.
The EU Innovation Hub highlighted specific risks associated with certain cryptocurrencies and technologies. Monero, Zcash, Grin (GRIN), Dash, layer-2 solutions, and zero-knowledge proofs were identified for their roles in obscuring blockchain visibility. These methods complicate law enforcement’s tracing efforts, mainly when used with noncompliant exchanges and crypto-mixing services.
📢 Just published: new report on the use of encrypted communications in criminal investigations.
— Eurojust (@Eurojust) June 10, 2024
The report, from the EU Innovation Hub, stresses balance between security & privacy.
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The study highlights mixers and privacy coins like Tornado Cash, which have been instrumental in obscuring transaction details for years. Despite these challenges, the report notes that law enforcement can still conduct investigations if they access a suspect’s private keys.
Collaboration and Contributions
The study was a collaborative effort involving various EU entities, including Europol, Eurojust, and the European Council’s Counter-Terrorism Coordinator. Their collective input provided a comprehensive view of encryption technologies’ challenges and potential regulatory strategies.
The recent conviction of Tornado Cash creator Alexey Pertsev for money laundering underscores the risks for developers involved in creating such technologies. The non-custodial nature of Tornado Cash, which does not retain control over transferred funds, did not prevent legal action from being taken against its creator.
More Criticism on Crypto
This is not the first time Europe has been showing some stance against crypto. Back in February, officials from the European Central Bank (ECB) have shown disapproval of Bitcoin following the endorsement of the first bitcoin spot ETFs by the US Securities and Exchanges Commission (SEC).
While Bitcoin supporters have praised the SEC’s decision as a validation of its legitimacy, a blog post authored by two ECB representatives describes it as a “misjudgement by the authorities” and likens it to the “emperor’s new clothes.”
The representatives also refer to the ensuing price spike after the SEC decision as a “dead cat bounce” rather than evidence of an “unstoppable success.”
The blog further critiques the EU’s Markets in Crypto Assets (MiCA) regulation for misleading “uninformed outsiders” into believing that with MiCA, Bitcoin would be regulated and secure.
Although the blog does not officially represent the ECB’s stance, the two authors hold senior positions within the bank. Ulrich Bindseil is the director-general of market infrastructure and payments, while Jürgen Schaaf is an advisor in the same division.
The two officials also cautioned about the dangers of Bitcoin in an earlier post in November 2022, highlighting its failure to become a global decentralized digital currency and a reliable financial asset, predicting its value would inevitably decline.