IRS offers grants for software to trace privacy-focused cryptocurrency trades

September 11, 2020 TH Author

The US Internal Revenue Service (IRS) is soliciting proposals from contractors that believe they can develop technologies able to shatter the privacy surrounding cryptocurrency transactions.

The IRS solicitation was made public last week, as reported by Coin Telegraph, and has been made on behalf of the IRS’ Criminal Investigation department (IRS-CI).

IRS-CI is involved in criminal investigations and has played a role in the takedown of Dark Web marketplaces, money laundering programs, and trafficking rings.

Cryptocurrency-related crimes, too, are on the department’s radar. Virtual coins including Bitcoin (BTC), Ethereum (ETH), and Monero (XMR) are often demanded as blackmail payments by ransomware operators; cryptocurrency trading posts are targeted by threat actors and funds stolen; exchange operators perform exit scams and run off with user coins, and crypto may also be used in the Dark Web to purchase illegal items.

While cryptocurrency has rapidly become a legitimate and innovative industry in its own right, the use of blockchain technologies and the emergence of privacy-focused coins that aim to prevent transaction tracing is of concern to the IRS and law enforcement.

The agency says that Monero, in particular, is rapidly becoming popular with cybercriminal groups, noting that ransomware group Sodinokibi has now moved from Bitcoin to Monero due to “privacy concerns.”

“The use of privacy coins is becoming more popular for general use, and is also seeing an increase in use by illicit actors,” the IRS says. “Currently, there are limited investigative resources for tracing transactions involving privacy cryptocurrency coins such as Monero, Layer 2 network protocol transactions such as Lightning Labs, or other off-chain transactions that provide privacy to illicit actors.”

IRS-CI is asking for proposals from one or more contractors to “provide innovative solutions for tracing and attribution of privacy coins and Layer 2 off-chain transactions,” including tools, software, data, and algorithms.

Prototypes and suggested methods to trace cryptocurrency transactions should including tracking capabilities for law enforcement, predictive analytics, and should have as little reliance on vendor-specific technologies as possible.

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“All solutions must support cryptocurrency transactions that occurred in 2020,” the proposal reads. “All solutions must support open standards for interoperability (common file formats, REST APIs, etc. as appropriate) to facilitate easy integration into internally developed IRS-CI cryptocurrency analytic systems and data.”

The IRS is offering a $500,000 grant after a prototype and an “initial working system” has been submitted. Contractors are then given eight months to work on their projects, with a further $125,000 awarded on deployment.

A deadline of September 16, 2020, has been set for applications.

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In August, CipherTrace claims to have developed a Monero-tracking tool for the US Department of Homeland Security (DHS). According to the company, the tracing tools are able to “visualize Monero transaction flows for criminal investigations.”

Earlier this week, cryptocurrency exchange ETERBASE disclosed a security incident in which $5.4 million in funds was allegedly stolen. The organization said the lost cryptocurrency — including Bitcoin, Ether, and Ripple — was held in hot wallets, storage facilities with active internet connections.

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