Europol’s first report on cryptography defines self-custody, the Lightning Network and mixers as “problematic”: greater difficulties in combating financial crimes.
A new report released by the EU Innovation Hub for Internal Security examines the potential abuse by criminals of the Lightning Network and other layer 2 solutions. The report “First Report on Encryption” suggests that such technologies could facilitate transactions linked to illegal activities making them more difficult to trace.
According to the report, layer 2 solutions and encryption introduce greater complexity for law enforcement in tracking illicit activities.
Lightning Network and payment channels
The report specifically focuses on multi-signature payment channels between two parties on the Lightning Network. To use LN, only the transactions to open and close the channel are broadcast on the blockchain. The intermediate transactions between the two parties are not visible since they occur off-chain. According to the report, this feature could be exploited by criminals to conceal financial movements associated with illicit activities.
Mixers and privacy coins
The document also examines the main privacy tools used in the sector. By leveraging technologies such as “zero-knowledge proofs”, onion routing and other techniques, mixers like Tornado Cash and privacy coins like Monero, Zcash, Grin and Dash further complicate transaction tracing.
However, the report underlines that despite the privacy features offered by Monero, Bitcoin remains the cryptocurrency most used by criminals given its higher liquidity.
The document also refers to the upcoming regulatory framework Markets in Crypto Assets (MiCA). In anticipation of MiCA, some exchanges, including Binance, have decided to remove privacy coins from their platform.
