A recent report from the European Union Agency for Law Enforcement Cooperation (Europol) has raised serious concerns about the potential misuse of crypto mining and layer-2 blockchain technologies by criminal groups. Europol cautions that these technologies could present significant obstacles for law enforcement, complicating efforts to trace illegal funds and recover stolen assets.

Europol’s report notes the increasing trend of criminals using crypto mining to disguise the origins of their illegal proceeds. By blending illicit gains into mining operations, criminals can launder money and even earn additional profits. The agency has identified suspicious activities in mining pools, particularly those exploited by ransomware operators.

The report also discusses how pool mining schemes have been used in Ponzi scams, such as the BitClub Network, which promised earnings through non-existent mining pools, leading to investors losing hundreds of millions of euros.

Layer-2 blockchain solutions, designed to enhance scalability and reduce transaction costs, are seen by Europol as potentially problematic for law enforcement. Technologies like zero-knowledge proofs could make it more difficult to trace funds on the blockchain.

Europol also points to the challenges posed by the SLIP39 standard, known as Shamir Backup, used by many hardware crypto wallets. This standard allows for multiple recovery shares instead of a single mnemonic phrase, complicating the process for law enforcement to recover a criminal's assets.

Despite these concerns, Europol acknowledges that crypto mining and layer-2 solutions are not inherently criminal. These technologies have legitimate applications and the potential to transform the financial industry. However, their misuse by bad actors remains a risk.

To address these issues, Europol calls for increased cooperation among law enforcement, regulators, and the crypto industry. By developing strong anti-money laundering (AML) and counter-terrorist financing (CTF) measures while encouraging innovation, a balance between security and progress can be achieved.

The report was produced by members of the EU Innovation Hub for Internal Security, including Europol, Eurojust, the European Commission’s Directorate-General for Migration and Home Affairs (DG HOME), the European Commission’s Joint Research Center (JRC), the European Council’s Counter-Terrorism Coordinator, and the European Union Agency for the Operational Management of Large-Scale IT Systems in the Area of Freedom, Security and Justice (EU-LISA).