CipherTrace adds Monero tracking
Alt coins,  Regulation

CipherTrace adds Monero tracking capability

Thanks to a partnership with the U.S. Department of Homeland Security, the blockchain intelligence firm says it now has the capability to trace transactions using the leading privacy coin

Three months after a Carnegie Mellon University study found that the number of traceable transactions via privacy coin Monero were “nearly zero,” blockchain intelligence firm CipherTrace said it has come up with a solution.

CipherTrace adds Monero tracking
Dave Jevans says CipherTrace has broken Monero’s privacy (Photo: CipherTrace)

In an Aug. 31 announcement, CipherTrace CEO Dave Jevans said he was able to “announce the world’s first Monero tracing capability.”

The Monero tracing tools were designed for the U.S. Department of Homeland Security, with the assistance of the agency’s Science & Technology Directorate, Jevans said. 

“Monero (XMR) is one of the most privacy-oriented cryptocurrencies,” said Jevans. “Our research and development team worked for a year on developing techniques for providing financial investigators with analysis tools.”

The development comes at a time when Monero is being used for a growing range of criminal enterprises, Jevans told Modern Consensus via email.

“Pornography and child exploitation were the early adopters of Monero on the dark market,” said Jevans. “Lately, we have seen a big uptick in Monero used to purchase banking products, such as access to bank accounts, prepaid cards, and credit card dumps.”

Growing on the darknet

Bitcoin remains “the preferred currency of choice among darknet users because of the ubiquity of bitcoin-fiat on and off-ramps,” Jevans added. “Monero comes in second with 45% of darknet markets now using Monero.” He then said:

“I believe that cryptocurrency users are beginning to understand the reality that Bitcoin is and has always been pseudonymous, which makes it easier to trace than cash.”

That growth puts Monero far ahead of the No. 2 privacy coin on the list, Zcash, which is accepted by just 8% of darkness exchanges.

The Carnegie Mellon study said Zcash’s privacy technology—zk-SNARKs—is very solid, but that the privacy features can be turned on and off. The problem with that is virtually none of the privacy coin’s users actually use that feature. 

In June, CipherTrace competitor Chainalysis announced tracking tools for Zcash and Dash.

Zcash relies on moving coin transaction through a shielded “privacy pool.” But with so few of its users turning on the privacy features, these mixing pools become largely useless, with just 0.09% of transactions untraceable in the 30-day period studied.

CipherTrace adds Monero tracking
The ability to trace Monero transactions fell off a cliff in early 2017, when ring signatures were added. (Photo: Carnegie Mellon University)

Monero, by contrast, uses an always-on privacy function, generating a single use address each time a transaction is made. In January 2017, ring signatures were added.

As a result, the “percentage of partially or fully deducible transactions has been nearly zero for over two years,” the study found. The Carnegie Mellon researchers pointed to the increasing number of decoy addresses in the ring signatures as another reason for this success. 

“The use of Ring signatures to enable transaction mixing and make it appear as if many users participated in each transaction makes Monero much more difficult to trace back to its source,” Jevans agreed.

Just the beginning

The new Monero-tracking capability, integrated into CipherTrace’s Inspector financial investigations tool includes “transaction search, exploration, and visualization tools for Monero transaction flows,” according to the company.

The research has “also laid the groundwork for future implementation of entity transactions clustering, wallet identification, exchange attribution, and other functionality that will provide law enforcement with even more tools for investigating Monero transactions and addresses,” it added. 

That said, Jevans added in the CipherTrace release, “[t]here is still much work to be done.”

Apart from the DHS, CipherTrace’s new tools will also be available to cryptocurrency exchanges, OTC trading desks, investment funds, and custody providers, CipherTrace said. This will help them avoid accepting Monero from illicit sources.

While the new tools could help exchanges stay in compliance, a growing number of exchanges are taking the simpler route of delisting Monero and other privacy coins.

Updated at 5:38 p.m. on Aug. 31, 2020 to add comments from Dave Jevans.

Updated at 1:25 p.m. on Sept. 2, 2020 to clarify Zcash privacy features.

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Leo Jakobson, Modern Consensus editor-in-chief, is a New York-based journalist who has traveled the world writing about incentive travel. He has also covered consumer and employee engagement, small business, the East Coast side of the Internet boom and bust, and New York City crime, nightlife, and politics. Disclosure: Jakobson has put some 401k money into Grayscale Bitcoin Trust.