Blockchain analytics firm CipherTrace applied for two separate patents for systems that it says will allow it to track transactions made by the leading privacy coin Monero.
The Nov. 20 announcement covers a number of tools and methods that bring CipherTrace closer to being able to track Monero transactions—although not break the privacy of individual users, the firm stressed. They build on the techniques unveiled in the firm’s somewhat overblown Aug. 31 announcement that it was able to track Monero transactions.
CipherTrace said it has been working on those tools since early 2019, as part of a Department of Homeland Security project. The firm claims that the new developments have laid the groundwork for future tools “like entity transaction clustering, wallet identification, exchange attribution, and other functionality that will provide law enforcement with even more tools for investigating Monero transactions and addresses related to criminal activity.”
CipherTrace explained that growing support for Monero (XMR) by darknet markets—now at 45%—increased law enforcement’s interest in systems that enable its tracing. All Monero transactions are private, which means that “users cannot be scrutinized or penalized by outside actors for using private transactions.”
That gives it a big leg up over competing privacy coins Zcash and Dash, which CipherTrace competitor Chainalysis claimed it can track back in June 2020. That was in line with the findings of a May 2020 study by Carnegie Mellon University, which said that unlike privacy coins that allow users to decide whether or not to use privacy settings, it was able to track “nearly zero” Monero transactions—compared to 99.9% of Zcash transactions.
CipherTrace is not the only one interested in cracking Monero. In October, the U.S. Internal Revenue Service announced that it had paid Chainalysis and data analytics company Integra FEC $500,000 each to develop tools to track Monero back to individuals.
Good for Monero?
CipherTrace claims that its tools can result in increased Monero adoption, thanks to a reduction in the risk cryptocurrency exchanges—also known as virtual asset service providers (VASPs)—face from regulators for anti-money-laundering failures.
“CipherTrace’s goal is to enable the detection of criminal users, therefore increasing the safety and sustainability of privacy coins like Monero in the future,” the announcement said “The inability to know the source of any XMR funds makes them inherently high risk to any anti-money laundering program.”
CipherTrace pointed out that South Korea recently announced that it will ban privacy coins, while the exchanges OKEx and Upbit already delisted Monero and other privacy coins based on their interpretation of intergovernmental Financial Action Task Force’s new guidelines. Furthermore, this month instant exchange Shapeshift also delisted Zcash, Dash, and Monero.
Claiming that it only seeks to track the identities of VASPs providing cryptocurrency services and the wallets and addresses used by criminals raging from crypto thieves and ransomware blackmailers to child pornography peddlers, CipherTrace said it “has always been an advocate of user privacy,” adding “[w]e do not identify the individual identities of cryptocurrency users.”
In tracking Monero, the firm said, it “helps prevent people from sending their cryptocurrency funds to criminal enterprises… [and] provides the ability for legal due process through court orders, subpoenas and legal trials to potentially recover stolen funds for victims.”
The two patents announced today by CipherTrace cover Monero transaction forensic tools, the development of tracing methodologies based on simulation techniques, statistical and probabilistic methods, transaction visualization tools methodologies for transaction intelligence acquisition including active network participation.