Crypto Mixers and Privacy Tokens Complicate Web3 Industry Regulation

Government experts in the EU examined the balance between security and privacy in the Web3 industry and concluded that the increased privacy of certain crypto technologies complicates industry regulation and requires increased law enforcement capabilities.

The EU Innovation Hub for Internal Security published a report examining cryptographic technologies in the context of balancing privacy and security in their use. The authors emphasize the importance of protecting personal data and fundamental user rights while also enabling the fight against organized crime and terrorism within the legal framework

Researchers note that crypto mixers, privacy tokens, and other privacy-enhancing blockchain technologies complicate issues of regulation of digital assets in general. The problem is that malicious actors actively use such technologies to conceal their on-chain activities.

The researchers highlighted several privacy-enhanced cryptocurrencies in this context: Monero (XMR), Zcash (ZEC), Grin (GRIN), and Dash (DASH). They also noted the complexities of regulating Layer 2 protocols, which are powered by Zero-Knowledge Proof (ZKP) and MimbleWimble technologies. In addition, the document states the negative impact of crypto mixers and exchanges, whose activities don’t meet the requirements of European legislation.

The researchers’ main recommendations are:

• introducing legal provisions to gain legal access to cryptographically encrypted data and the ability to use it in litigation;
• collaborating with academia and commercial entities to create new tools that can be used in investigative work without compromising the overall security of communications;
• developing post-quantum cryptography protocols;
• using artificial intelligence in the fight against organized crime;
• researching and monitoring technologies that utilize cryptography in their work, particularly developments in telecommunications, biometrics, DNS, blockchain, and quantum computing.

European law enforcement agencies began actively opposing the work of crypto mixers in late 2022 when one of the creators of the Tornado Cash protocol was arrested in the Netherlands during a joint operation with the U.S. Department of Justice. Later, in March 2023, Europol officers seized the servers of ChipMixer, halting its operations.

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