U.S. tax agency wants to know more about privacycoins

The U.S. Internal Revenue Service (IRS) wants to know more about privacycoins like Monero and Dash, offchain layers like Lightning and Liquid, and Schnorr signatures. The solicitation shows that the IRS is keenly aware of new developments – but also how far behind analytics tools are in obfuscation technologies.

cryptocurrenciesThe Internal Revenue Service (IRS) is the top tax authority in the United States. Bitcoin and other cryptocurrencies have long been on the IRS’s radar. Now it is turning its attention to privacycoins and other technologies that can improve privacy with a request for proposals as part of a pilot project.

The “Criminal Investigation Division (CI)” pilot project is looking for information on systems that enable developers and testers to conduct an investigative examination of transactions on distributed ledgers of accounts, including” – an extensive list follows: “Privacy Coins (such as Monero, Zcash, Dash, Grin, Komodo, Verge, and Horizon); Layer 2 off-chain protocol networks (such as the Lightning network, the Raiden network, the Celer network); sidechains (such as Plasma and OmiseGo); and the challenges of integrating the Schnorr Signature algorithm.

That’s a lot of wood to chop. The IRS has both popular and niche privacy coins under the microscope, and is also in the know about new technologies such as sidechains, offchain networks, and Schnorr signatures that help users improve their privacy. For the CI, getting involved with cryptocurrencies is nothing new in the process: The largest federal law enforcement agency at the Treasury Department is primarily dedicated to tax evasion and money laundering. It is, according to the RFP, “a global leader in cryptocurrency and digital asset investigations” and has played a leading role in tracking down darknetmarkets and convicting other criminal organizations that have used cryptocurrencies.

There are a lot of new services and never before tax situations. It is now even possible to earn an interest with Cryptocurrencies. This is a very difficult topic when it comes to taxes.

However, privacycoins and other technologies are increasingly becoming the sand in the gears of investigations. Currently, he said, there are “few investigative resources to track transactions that go through privacycoins, layer 2 networks, sidechains” or using new signature algorithms. These, however, are “becoming increasingly popular in general and among criminals in particular.” This manifests itself, for example, in the fact that the ransomware gang behind Sodinokobi announced in April 2020 that it would only accept payments in Monero in the future, as Bitcoins are not private enough. With the latest tender, the CI wants to respond to this trend.

  1. The current major blockchain analytics service providers – such as Elliptic – are lagging behind the trend toward privacycoins and other technologies.
  2. Existing service providers have only recently announced plans to extend their service to Dash and Zcash as well.
  3. While this demonstrates the industry’s flexibility, he said. However, Schnorr signatures – such as those used by Bitcoin Cash and sought by Bitcoin – posed a new challenge that no service provider has yet responded to.
  4. Transactions on Lightning and other offchain networks, such as Lightning for Litecoin or Raiden for Ethereum, could in principle be tracked, but currently Lndmon from Lightning Labs is the only monitoring tool available, he said. And that is not yet good enough, he said.

So the IRS is looking for professionals to build and expand the tools that can monitor these new technologies. The solicitation shows how closely authorities are watching new trends in cryptocurrencies. At the same time, it also shows how heavy-handed overseers and their service providers are in responding to these trends.

The cat-and-mouse game between privacy developers and investigators follows asymmetric rules: Every new technology and privacycoin is initially unmonitored, and it takes a lot of work before monitoring succeeds. In cases like Monero or the Lightning network in conjunction with CoinJoin, it is not clear to this day whether they will ever be monitored at all. Privacy, you could say, has already won out over surveillance.

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