EU Report: Lightning Network, L2 Solutions Could Become Tools for Criminals, Increasing Enforcement Challenges

The security report from the European Union Innovation Center indicates that Bitcoin's Lightning Network and other L2 solutions could be exploited by criminals, serving as a technology for "data obfuscation" while aiming to "protect privacy."

Challenges of L2 Solutions

The report, published through collaboration of innovation labs in EU member states, is the first report on encryption technology. It points out that technologies including Mimblewimble, zero-knowledge proofs (zk proofs), encryption mixers, and privacy coins such as Monero and Zcash may be used for illicit activities.

The report specifically mentions the Lightning Network:

L2 solutions like the Lightning Network could also be exploited by criminals. The "bidirectional multi-signature payment channel" of the Lightning Network does not broadcast all transactions to the chain, only the opening and closing of the channel are broadcasted. This could make it difficult for law enforcement agencies during investigations.

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Calling out Tornado Cash

The report also criticizes encryption mixers such as Tornado Cash, as well as privacy coins and L2 solutions, all of which can hide some transaction data, significantly increasing the difficulty for law enforcement agencies to track the sources of illicit cryptocurrency.

Meanwhile, the upgraded privacy protection protocol MimbleWimble (MWEB) has made tracking cryptocurrency transactions more complex, with projects like Grin, Beam, and Litecoin adopting it.

However, the report also mentions that transactions using Mimblewimble are not common.

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Regulatory Pressure on Privacy Coins

Privacy coins have faced continuous regulatory pressure in recent months. The EU's crypto asset market regulation, MiCA, will come into effect by the end of 2024, which strictly regulates the interaction between cryptocurrency service providers and privacy coins. Major exchanges like Binance and OKEx have chosen to delist privacy coins one after another.

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