A new EU report argues that Bitcoin’s Lightning Network and other layer 2 solutions could enable criminals to obscure illicit transactions.The First Report on Encryption by the EU Innovation Hub for Internal Security singles out the Lightning Network, arguing that its “two-party multisignature payment channels will not broadcast all transactions to the blockchain, but only the opening and closing of the channel.”
According to the report, this selective transaction broadcasting, along with other layer 2 solutions, might “be abused by criminals” and could cause “problems for law enforcement investigations.”Alongside layer 2 technologies, the EU report takes aim at privacy-preserving tools in the cryptocurrency space, including coin mixers like Tornado Cash and privacy coins such as Monero, Zcash, Grin and Dash. It contends that the use of zero-knowledge proofs and layer 2 solutions in these coins and protocols “significantly complicates tracing the origins of (illicit) cryptocurrency for law enforcement.”While acknowledging that transactions using cryptographic protocols like Mimblewimble are “not frequently encountered” at present, the report highlights the increasing regulatory pressure on privacy coins. The EU’s upcoming Markets in Crypto Assets (MiCA) framework will crack down on interactions between crypto service providers and privacy coins when it takes effect in late 2024, a development that has already prompted major exchanges like Binance to delist such assets.
