The Internal Revenue Service (IRS) is getting creating creative when it comes to trying to get some oversight into crypto, and specifically, privacy coins like Monero (XMR).
In a statement last month, the IRS created a pilot offering up to $625,000 for anyone who can provably trace Monero or other privacy coin transactions. According to the tax collector, privacy coins have become popular among “illicit actors” such as Sodinokibi (a former affiliate with the GrandCrab RaaS group) who stated that all future ransom payments will be in Monero (XMR) rather than Bitcoin (BTC) due to privacy concerns. The agency wanted to create some incentive to better understand the privacy coin sector since they say “there are limited investigative resources for tracing transactions involving privacy cryptocurrency coins such as Monero.”
“IRS-CI (Criminal Investigation) is seeking a solution with one or more Contractors to provide innovative solutions for tracing and attribution of privacy coins and Layer 2 off-chain transactions, such as expert tools, data, source code, algorithms, and software development services to assist their Cyber Crimes agents in carrying out their mission as it relates to cryptocurrency privacy technologies. These should support one of the outlined initiatives on Monero or Layer 2 network protocol transactions, or other cryptocurrency obfuscation technologies.”
The IRS outlined three main goals for the initiative that potential contractors would have to deliver. The first is to be able to provide information and technical capabilities to investigators that would allow them to “trace transaction inputs and outputs to a specific user and differentiate them from mixins/multisig actors for Monero and/or Lightning Layer 2 cryptocurrency transactions” all while minimizing the need for external vendors. The second goal is to provide investigators with the technology that would allow them to “predict statistical likelihoods of other transaction inputs, outputs, metadata, and public identifiers.” Lastly, the IRS would want the source code to the technology which would allow them to develop, modify, and integrate it with their own internal systems “minimal costs, licensing issues, or dependency on external vendors.”
Monero was founded in 2014 by largely anonymous developers. It uses ring signatures, zero-knowledge proofs, and “stealth addresses” to make transactions obfuscated and untraceable, though its ledger is public. Currently, it trades at $274, according to CoinMarketCap.