Europe puts the magnifying glass on Bitcoin privacy tools

As part of the investigations being carried out in the European Union (EU) on issues related to cryptocurrencies, privacy and cybercrime, a study points to Bitcoin’s Lightning Network and other layer 2 solutions as “data obfuscation” technologies of which criminals could “abuse”.

The arguments are presented in the first report on the subject prepared by the EU Innovation Center, a “collaborative network of innovation laboratories” in which all member states of the eurozone participate.

The focus of the study revolves around the need to implement anti-money laundering regulations in the region. Hence, concerns are made explicit about the complications that arise for the authorities. for fund tracking, whether the tools they use make it easier for users to hide their identity in the interest of preserving privacy.

That is why researchers question some advances implemented within blockchains, even pointing out Bitcoin’s Lightning as a tool that “can interfere with police investigations.”

They refer to the decentralized network for instant micropayments with BTC. As CriptoNoticias has explained, Lightning works through payment channels through which people transfer funds to each other in one address, outside the blockchain. Although EU researchers are concerned that some channels “do not transmit all transaction data to the blockchain, but only the opening and closing of the channel.”

In addition to this network, the report cites other solutions used to preserve privacy, such as Mimblewimble, zero-knowledge (zk) proofs, cryptocurrency mixers such as Tornado Cash and so-called privacy cryptoassets such as Monero, Zcash, Grin and Dash.

The observations also They target self-custody wallets. Therefore they support and recommend the use of guarded wallets in which the user does not have his own private key. This, because they consider that this creates opportunities for “cooperation with the authorities, facilitating exchanges and service providers the seizure of crypto assets that are classified as criminal in nature.

However, the custody of cryptocurrencies by third parties is a practice that most members of the ecosystem oppose considering it contrary to the philosophy of bitcoin and contrary to the goal of achieving financial sovereignty.

For EU researchers, this desire to preserve transaction data is a cause for concern and therefore they advise regulators to implement laws that in some way limit privacy among cryptocurrency users. This, in order to facilitate the work of the authorities. They mainly criticize cryptocurrency mixers, already questioned in countries like the United States and the Netherlands where there are already developers in prison.

The restrictions are also contemplated in the Regulation for the Cryptoasset Market (MiCA) that will come into force next December and in which rules are established that limit the inclusion of privacy cryptocurrencies in exchanges. They are measures that the EU supports under the argument of an assumption increase in cryptocurrency crimes.

The presence of encrypted data in criminal investigations continues to increase and is expected to grow even more in the coming years. Many Member States have reacted to this trend with new or updated general legal provisions to help law enforcement agencies bypass encryption used by criminals to conceal their activities help law enforcement agencies bypass encryption used by criminals to hide their activities.

EU Innovation Center.

It should be noted that the report’s statements also made mention of Bitcoin mining, an activity that they say has infiltrated money laundering. “For example, mining platforms or farms have been used to launder funds, purchasing mining equipment with proceeds from criminal activities to pretend that the funds have been obtained legally and hide their criminal origin,” according to the publication.