The Innovation Hub for Internal Security of the European Union has recently highlighted the challenges posed by certain blockchain technologies for law enforcement agencies.
According to this network of laboratories supporting the internal security organizations of the 27 member countries, platforms such as mixers, privacy-focused cryptocurrencies, and layer 2 blockchains can greatly complicate fund tracing.
Crypto Mixers and Privacy Networks
Crypto mixers, particularly brought to the forefront by the Tornado Cash case, allow cryptocurrency users to exchange tokens while masking wallet addresses on networks such as Ethereum, BNB Chain, Arbitrum, Avalanche, and Optimism.
These tools, using zero-knowledge proof mechanisms, enable the withdrawal of funds from the mixer without revealing the initial deposit amount, greatly complicating law enforcement’s work in tracing the origin of funds, especially illicit ones.
Challenges posed by layer 2
According to HISI, layer 2 solutions like the Lightning Network can also be exploited for criminal purposes. These technologies enable payments to be made almost invisibly, with payment schedules and amounts remaining hidden, adding an additional layer of complexity to legal investigations.
Similarly, new wallet encryption schemes can hinder lawful access by law enforcement.
According to Tracfin, crypto assets are increasingly used for money laundering from criminal activities (such as ransomware attacks), tax fraud, and terrorism financing.
AMF
French Regulatory Perspective
Meanwhile, the French Financial Markets Authority (AMF) has noted that cryptocurrency remains a high risk for money laundering due to its popularity, cross-border nature, and the anonymity offered by platforms like mixers.
In a report published on the same day as the EU report, the AMF emphasizes the need for increased vigilance and appropriate regulation to manage these risks while recognizing the technological innovations these platforms bring.
