A recent EU report suggests that Bitcoin’s Lightning Network and other layer 2 technologies could help criminals hide illegal transactions.

The EU Innovation Hub for Internal Security's First Report on Encryption highlights the Lightning Network, noting that its two-party multisignature payment channels only record the opening and closing of transactions on the blockchain, not the transactions themselves.

The report indicates that this selective broadcasting and other layer 2 technologies might be exploited by criminals, complicating law enforcement investigations.

In addition to layer 2 solutions, the report criticizes privacy-preserving tools in the cryptocurrency space, such as coin mixers like Tornado Cash and privacy coins like Monero, Zcash, Grin, and Dash. These tools use zero-knowledge proofs and other methods that make it significantly harder for law enforcement to trace illicit cryptocurrency origins.

Although the report notes that cryptographic protocols like Mimblewimble are not widely used currently, it emphasizes the increasing regulatory scrutiny on privacy coins. The EU’s upcoming Markets in Crypto Assets (MiCA) framework, set to take effect in late 2024, will restrict interactions between crypto service providers and privacy coins, prompting major exchanges like Binance to delist these assets.