The US Internal Revenue Service (IRS) is riding into town and offering up a bounty to any contractor who can track the privacy-centric crypto asset monero (XMR), alongside other Layer 2 distributed ledger privacy schemes, such as those offered by Lightning Labs.
The tax agency notes that in the wild west of digital currency privacy the Federales have “limited investigative resources” for tracing these transactions.
As more settlers ride their digital caravans and stake their claims, the IRS is clearly serious about finding a solution that will help their investigations into transactions, offering up a US$625,000 to the bounty hunter who succeeds.
In its official proposal, the IRS announced it is:
...seeking a solution with one or more contractors to provide innovative solutions for tracing and attribution of privacy coins, such as expert tools, data, source code, algorithms, and software development services.
The IRS will be accepting applications to develop working prototypes made by September 16 - if a submission is made within 8 months of an applicant accepting the challenge and is proven to work, the applicant will receive an initial payment of $500,000. If the working concept is approved, then the applicant will be awarded with a further $125,000.
Why the bounty?
After Bitcoin, Monero is the second most popular coin for dark web transactions. But, unlike Bitcoin (which can be traced far more easily by companies such as Chainalysis due to the pseudonymous nature of those transactions), Monero’s transactions are completely anonymous. With no-one able to link users to Monero transactions, this renders the privacy coin an increasingly popular currency for those who seek privacy for both legitimate and illegitimate reasons.
This growth in cyber crime is one of the stated motivations behind the proposal as the IRS explained how Monero’s privacy design has been favoured by those who favour privacy for the wrong reasons:
In April 2020, a ransomware group called Sodinokibi which stated that future ransom request payments will be paid out in Monero (XMR) rather than Bitcoin (BTC) due to transaction privacy concerns.
Last month CipherTrace, a Blockchain analytics firm, claimed that it had built a Monero tracking tool-set which will allow investigators to search, explore, and visualise Monero transactions.
As a clear blow to the coin with a famed level of privacy, this level of tracking has been disputed by members of the Monero community. But, with the IRS now offering up a bounty, CipherTrace and others have a clear financial incentive to press on and prove their solution works.
Given one of the primary goals of the challenge is to provide algorithms and source code to allow the IRS to "further develop...and integrate [tracing of transactions] with internal code and systems" it's clear that the tension between privacy and the State is one likely to continue from the Old West, to the Wild West and into a more regulated digital currency world.