IRS seeks info on tracing privacy coins, LN transactions for pilot program

[hugeblack]

TLDR;

 - The IRS is collecting information for a pilot program to track transactions of privacy coins and 2nd layers.
 - Specifically, The investigation pilot program can use to track transactions tied to privacy cryptocurrency coins, Layer 2 off-chain protocol networks, Side-chains, and tracing challenges following the integration of the Schnorr signature algorithm.

The US Internal Revenue Service (IRS) has launched an invitation to obtain information about potential tools that can be used to track different types of cryptos.
The beta version focuses on tracking some anonymization methods. Prospective bidders have until July 14 to submit their responses.

As the IRS explains:

"This RFI is associated with a pilot IRS Criminal Investigation Division (CI) program. CI Cyber Crimes is requesting information about systems that will allow developers and testers to conduct investigative research of distributed ledger transactions involving privacy cryptocurrency coins (e.g., Monero (XMR), Zcash (ZEC), Dash (DASH), Grin (GRIN), Komodo (KMD), Verge (XVG), and Horizon (ZEN)); Layer 2 off-chain protocol networks (e.g., Lightning Network (LN), Raiden Network, Celer Network); Side-chains (e.g., Plasma and OmiseGo); and tracing challenges following the integration of the Schnorr Signature algorithm."

Source ---> https://beta.sam.gov/opp/6c8e3cfe6059462c8cdd82cea4252966/view?keywords=cryptocurrency&sort=-modifiedDate&index=&is_active=true&page=1

There are few investigative resources to track transactions, but it appears that the increasing use of these methods will motivate them to enhance their investigative capabilities.

Read more and source ---> https://www.theblockcrypto.com/post/70320/irs-crypto-pilot-privacy-coins-lightning

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[jackg]

Actually I think the it's looking into tracking this means law enforcement/communications detectives have probably already looked into it? They probably won't release tools anywhere other than interpol (if that) but it's probably safe to assume it isn't too hard for law enforcement to track something like this, as a difference, they'll have to keep tracking EVERYONE in order to store the required information of whos transacting with whom...

[Lorence.xD]

Actually I think the it's looking into tracking this means law enforcement/communications detectives have probably already looked into it? They probably won't release tools anywhere other than interpol (if that) but it's probably safe to assume it isn't too hard for law enforcement to track something like this, as a difference, they'll have to keep tracking EVERYONE in order to store the required information of whos transacting with whom...

The problem with this tracking feature is that it violates privacy. This kind of thing is a double edged sword because they can be use for exploitation purposes, I really believe that when this kind of power comes in the wrong hands it makes things complicated, on the other hand we can use this to prevent money laundering and funding of terrorist activities which is the greater good, in my opinion, having to sacrifice something for something better is not good at all.

[hv_]

More tracking to come

https://www.coindesk.com/fatf-plans-to-strengthen-global-supervisory-framework-for-crypto-exchanges

[hugeblack]

UPDATE:

Coinbase is selling blockchain analytics software to the US Secret Service

TLDR;

 - Coinbase is providing its blockchain analytics software to the U.S. Secret Service
 - The law enforcement agency awarded the contract to Coinbase in May and it ends in 2024

Coinbase Analytics: A software system created by Coinbase after its acquisition of the Neutrino Intelligence Agency in 2019.

According to the information provided, Coinbase Analytics provides completely separate information from Coinbase's internal data, as that data is completely obtained from data available online and publicly available, and does not include any personally identifiable information for anyone, regardless of whether or not they use Coinbase.

Coinbase wanted to sell its analytics software to two U.S. government agencies — and the Internal Revenue Service (IRS) and the DEA — but the agencies have not contracted any awards to Coinbase yet. The IRS and DEA contract opportunities are now “inactive.”

Read more and source ---> https://www.theblockcrypto.com/post/71261/coinbase-is-selling-blockchain-analytics-software-to-the-us-secret-service

[gentlemand]

Should that be any sort of surprise by now? It's one of their areas of expertise. They're going to capitalise on it.

I'd love to know how they're going to crack the dedicated privacy coins. Sounds a tad optimistic to me but you never know what they have hidden away. I wonder if the secret service gets their money back if Coinbase admits to being stumped.

[gentlemand]

Jesse Powell of Kraken comments on this type of thing here.



https://twitter.com/jespow/status/1282179956466790401

Full marks from me but I suspect he is in a tiny minority when it comes to this. Dunno who his backers are but perhaps they'll be put under pressure to make some money from this too.

[HeRetiK]

"This RFI is associated with a pilot IRS Criminal Investigation Division (CI) program. CI Cyber Crimes is requesting information about systems that will allow developers and testers to conduct investigative research of distributed ledger transactions involving privacy cryptocurrency coins (e.g., Monero (XMR), Zcash (ZEC), Dash (DASH), Grin (GRIN), Komodo (KMD), Verge (XVG), and Horizon (ZEN)); Layer 2 off-chain protocol networks (e.g., Lightning Network (LN), Raiden Network, Celer Network); Side-chains (e.g., Plasma and OmiseGo); and tracing challenges following the integration of the Schnorr Signature algorithm."

I doubt they'll have much luck with the privacy focused coins, they are just too technically diverse. Maybe they'll find weaknesses if they focus on one or two of them, but I'll doubt they'll be able to create meaningful analysis tool for all of them in the foreseeable future.

Attempting to eavesdrop on layer 2 networks won't be easy either. Maybe controlling a significant portion of network nodes will enable them to find some correlations, but overall it's going to be an interesting challenge.

Jesse Powell of Kraken comments on this type of thing here.

Nice to see some integrity every now and then.

[7788bitcoin]

The problem with this tracking feature is that it violates privacy. This kind of thing is a double edged sword because they can be use for exploitation purposes, I really believe that when this kind of power comes in the wrong hands it makes things complicated, on the other hand we can use this to prevent money laundering and funding of terrorist activities which is the greater good, in my opinion, having to sacrifice something for something better is not good at all.

The government does not care about anyone's privacy and they have made laws to monitor everyone even without any court order in the name of national security, the idea about having your privacy is a long distant dream and the cryptocurrency market had our privacy and now all the exchanges mandate compulsory verification and there will be a time when the coins you pass through mixers will be confiscated by the exchanges in the name of upholding the law.

In short nothing is surprising and expect more things to come in the future as governments around the world will try their best to break your privacy.

[figmentofmyass]

https://twitter.com/jespow/status/1282179956466790401

Full marks from me but I suspect he is in a tiny minority when it comes to this. Dunno who his backers are but perhaps they'll be put under pressure to make some money from this too.

kraken has long tried to fill the vacuum left by bitfinex in the USA market. that's their niche among USA exchanges. this is IMO in part a marketing effort---powell appeals to privacy-minded and anti-government folks with his occasional tirades against government intrusion/barriers to entry and privacy stuff.

in reality though, they are a USA exchange. they are running similar AML profiles on their customers as coinbase, they are closing accounts for the same reasons (though they are generally smart enough not to tell customers why their accounts are being closed), and they don't hesitate to respond to law enforcement requests.

the important takeaway for me, as a customer, is all the exchanges are running these internal analytics software on their customers, kraken included. coinbase analytics is such a far-removed concern for me. i'm worried that peoples' focus on stuff like that (which powell is obviously exploiting for marketing purposes) gives them a very false sense of safety about the exchanges they use.

[alani123]

Good luck trying to trace monero, grin etc. anonymous cryptocurrencies...

It would be interesting to see the IRS trying to find ways tracing these. It's probably not impossible, but these coins have an entire community of users seeking to advance the untracability of the cryptocurrency their using. And they're also doing it based on open technology.

It's not fair game compared how IRS will buy proprietary technology to trade them. But for some established coins, I think it could only go so far as to what it will trace.
For the technology to come from crypto companies it's even weirder. But these corporations were already embracing regulation and applying tracing for their own purposes.
So it shouldn't be much of a concern for regular users. It's just going to show that IRS has little insight in what's going on.

[squatter]

Good luck trying to trace monero, grin etc. anonymous cryptocurrencies...

Read this paper about Monero. You might be surprised. Prior to a fork in 2017, its privacy flaws were especially critical.

Therein lies the problem -- blockchains are forever. Exploits found in the future could be used to deanonymize past transactions.

[mindrust]

Good news is, they cannot track monero transactions.

Bad news is, stuff like these will force exchanges and other business to de-adopt monero.

In the end, you'll still be able to hide away your money but the problem is, nobody will be using that chain. You'll be a bag holder for life probably.

[HeRetiK]

Bad news is, stuff like these will force exchanges and other business to de-adopt monero.

That's my main worry about privacy focused coins. They have a fine line to tread between seeing enough usage to be useful, but not so much usage as to trigger a governmental response.

On the other hand there will likely always be a market for privacy coins, if only on some shady off-shore exchanges and via peer-to-peer trades. May not be as convenient and the coins will trade for very little, but Bitcoin didn't start off much different and it still was useable as a currency, so there's that.

[hugeblack]

In the end, you'll still be able to hide away your money but the problem is, nobody will be using that chain. You'll be a bag holder for life probably.

Governments may be able to tighten demand, but the quantity supplied remains a problem as it will be difficult to price those currencies.
Take, for example, Monero coin, there will initially be 18.5 million coins, and then the offer will increase by about 0.87% in the first year. These models are bad for those who want(Investors) to keep them for a long time as the ability to add more currencies will greatly affect my supply and thus price.
Also, producing infinite numbers may not contribute to keeping the price stable.

This problem may be solved using models like Grin, but I am not sure how much they can maintain a stable and untraceable currency.

Good news: I think governments will accept crypto models like Bitcoin, but it will be difficult for you to remain anonymous.

[figmentofmyass]

Bad news is, stuff like these will force exchanges and other business to de-adopt monero.

That's my main worry about privacy focused coins. They have a fine line to tread between seeing enough usage to be useful, but not so much usage as to trigger a governmental response.

developers and investors can't control demand for privacy coins. what we're gonna see is a two tier system of exchanges---whitelisted, regulated exchanges that don't list popular privacy coins, and grey market exchanges that offer privacy coins from unregulated or lax jurisdictions. the japanese government systematically pressured exchanges to de-list XMR, DASH, ZCASH, etc but japanese customers can then turn to seychelles-based altcoin exchanges where they can exchange BTC for privacy coins without KYC.

in other jurisdictions, exchanges/governments will support ZCASH non-shielded transactions, because they know many customers don't know understand the privacy implications.

[Harlot]

The government does not care about anyone's privacy and they have made laws to monitor everyone even without any court order in the name of national security, the idea about having your privacy is a long distant dream and the cryptocurrency market had our privacy and now all the exchanges mandate compulsory verification and there will be a time when the coins you pass through mixers will be confiscated by the exchanges in the name of upholding the law.

In short nothing is surprising and expect more things to come in the future as governments around the world will try their best to break your privacy.

It's not that they do not care about the privacy of their citizens but transactiona lile these that holds monetary value shouldn't supposed to be private due to AML and Tax evasion laws. If the government left these privacy coins and 2nd layer crypto transactions uncheck then they won't be doing their jobs on checking if there is anything illegal going on, it will be a criminal's paradise to see that these networks are not monitored by the authorities.

[gentlemand]

That's my main worry about privacy focused coins. They have a fine line to tread between seeing enough usage to be useful, but not so much usage as to trigger a governmental response.

On the other hand there will likely always be a market for privacy coins, if only on some shady off-shore exchanges and via peer-to-peer trades. May not be as convenient and the coins will trade for very little, but Bitcoin didn't start off much different and it still was useable as a currency, so there's that.

It's going to be interesting to see how their market develops. No way will any of them last on any fully legitimised platform. They'll all be driven out as a condition of being regulated.

There of course always will be a market for such a thing but I expect an awful lot of people would be turned off from entering it. They'll be hives of scum and villainy with people trying to offload toxic non private coins on sellers.

[figmentofmyass]

It's going to be interesting to see how their market develops. No way will any of them last on any fully legitimised platform. They'll all be driven out as a condition of being regulated.

i see an exception for ZCASH and other coins with "optional" privacy. that's why government bootlickers like coinbase and gemini still list it. you can't withdraw to shielded addresses through those platforms. this allows for the same sort of blockchain analysis as bitcoin.

[Harlot]

It's going to be interesting to see how their market develops. No way will any of them last on any fully legitimised platform. They'll all be driven out as a condition of being regulated.

i see an exception for ZCASH and other coins with "optional" privacy. that's why government bootlickers like coinbase and gemini still list it. you can't withdraw to shielded addresses through those platforms. this allows for the same sort of blockchain analysis as bitcoin.

Is this because of what Chainalysis said about them being able to track 99% of Zcash transactions or because simply their users are not using the optional privacy from Zcash? Either way I don't think Zcash should have some kind of exception as going with the same argument as LN transactions or for Privacy Coins what the IRS is trying to avoid is for this cryptocurrencies not to have untraceable transactions on their part. Yes Zcash users might not be utilizing the shielded pools but any new users can used it if they see Zcash becomes exempted from the list of privacy coins.