IRS Chainalysis Monero contract
Alt coins,  Bitcoin,  Regulation,  United States

IRS bets $1M Monero transactions are traceable

The IRS decision to spend big bucks with Chainalysis and Integra FEC indicates that its criminal investigations division is eager to follow up its successes in tracking Bitcoin

The Internal Revenue Service is splashing out $1 million as it attempts to find a way to trace transactions made using the privacy coin Monero.

IRS Chainalysis Monero contract
Monero is one of the hardest privacy coins to trace (Photo: Monero)

Crypto intelligence firm Chainalysis and the data analytics company Integra FEC will each receive an upfront payment of $500,000 so they can begin developing their proposed tool.

If their technology subsequently passes rigorous testing and is approved for wider use, the triumphant business will trouser another $125,000.

Cracking the code

The IRS received 22 proposals after putting a contract out to tender on Sep. 4.

At the time, America’s taxman said it was seeking “innovative solutions” for tracing XMR, as well as off-chain transactions conducted using Layer 2 scaling networks.

“We expect contractors will offer solutions in the form of software development and source code, data feeds, standalone tools, or some combination of these, but these are not the only types of solutions that will be considered,” that contract said.

According to that document, Chainalysis and Integra FEC will have eight months to deliver results.

Why spend $1 million?

It’s fairly clear why the IRS is willing to put up big bucks—its criminal investigation division has been at the forefront of many of law enforcement’s successes in tracking Bitcoin transactions in fields like terrorism and child pornography.

The IRS decision to award these two contracts comes on the heels of competing blockchain intelligence firm CipherTrace’s somewhat overblown announcement that it was able to trace Monero transactions back in late August.  

Those tools, created in partnership with the U.S. Department of Homeland Security, had some features—transaction search, exploration, and visualization tools—but only “laid the groundwork” for key tools like wallet identification and exchange attribution, according to CEO Dave Jevans. “There is still much work to be done,” he added at the time.

One thing we do know is that XMR is a very effective privacy coin. A May 2020 study by Carnegie Mellon University said it was “much harder” to track Monero transactions than those made using Zcash.

“The anonymity of Monero has evolved to a large extent in the recent few years,” the authors said at the time. “Compared to the version three years ago, current Monero transactions can be conducted with superior anonymity with the introduction of new techniques like RingCT.”

The IRS has warned that XMR is increasingly being used by bad actors—with the ransomware group Sodinokibi recently announcing that it planned to demand ransom payments are made using Monero than Bitcoin in the future.

A fool’s errand?

Nonetheless, Chainalysis itself has said that privacy coins aren’t a criminal’s first choice… Bitcoin is.

In April, the company’s spokeswoman told Modern Consensus: “While privacy coins are more difficult to trace, they are also more difficult to buy and sell as exchanges increasingly delist them due to regulatory reasons. As such, criminals behind darknet markets, extortion schemes, and more need to weigh operational efficiency vs privacy, and often choose operational efficiency.”

All of this suggests that there might not be as much value in cracking Monero’s cryptographic standards as meets the eye—at least for the time being.

It seems many criminals prefer to use Bitcoin as it’s easier anyway, and the fact that they do so indicates many aren’t worried about being caught. But that may change as word about law enforcement’s successes gets out.

That said, as a report released by SWIFT and BAE Systems in September found, it is possible to obfuscate BTC transactions. Authorities recently tracked down an international group that was using a Bitcoin farm to clean funds stolen from heists, and the Lazarus Group, a hacking gang with links to North Korea’s government, has its own sophisticated methods when laundering funds stolen from crypto exchanges.

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Connor Sephton is a journalist with an interest in cryptocurrencies, personal finance, and financial inclusion—as well as the challenges the crypto industry faces in achieving mainstream adoption. He owns cryptocurrencies.