IRS Criminal Investigation Division Wants to Track Privacy Coins, Layer-2, and Sidechains

It has been no secret that the top federal law enforcement agency under the U.S Department of Treasury, the Criminal Investigation Division (CI), is keenly following digital assets to trace for any signals of illicit activity. While tracing public blockchains such as bitcoin and Ethereum is easy, such success is yet to be replicated on privacy coins, coin mixers, and sometimes layer-2 solutions.

In a bid to improve their surveillance over the later problems, CI Cyber Crimes department filed a “Request-For-Information” made public on June 30 to gain info for their IRS cryptocurrency investigation pilot program.

According to the statement, the information collected “will allow developers and testers to conduct investigative research” on privacy-enabled digital assets such as Monero (XMR), Zcash (ZEC), Dash (DASH), Grin (GRIN), Komodo (KMD), Verge (XVG), and Horizon (ZEN); layer-2 solutions on public blockchains such as the Lightning Network (LN) and side chains such as Plasma and OmiseGo. The statement reads,

“Acquiring applications to allow an investigation to more easily trace privacy coins and other protocols that provide anonymity to illicit actors would allow investigations to be more effective, as well as facilitate a higher level of deterrence by making it harder to conceal criminal activity.”

The deadline for applying to help in the collection of information and development of the pilot program is 08:00 AM EST on July 14, 2020.

A growing need for privacy

As the blockchain industry focuses on more privacy solutions for users’ security purposes, there is an increased risk of masking illegal activities, the statement implies. Monero (XMR), a privacy token that uses the RandomX hash function, has received an uptake in overall adoption with BEG reporting in April that North Korea is now mining XMR.

Bitcoin developers are now focusing on the integration of Schnorr Signatures, to enhance user’s privacy following a successful initial stage integration on its fork, Bitcoin Cash. On Layer 2 solutions, LN and Raiden Network mentioned explicitly; the IRS investigative program will focus on the previously neglected market. Lightning Labs recently launched an L2 monitoring app, the “Eye of Satoshi.”

A private outlook

Blockchain analysis is heating up with existing companies in the field such as CipherTrace, Chainalysis, and Elliptic, which recently added Stellar transactions on its radar, all providing competitive features to surveil blockchains.

While the IRS believes the current field is limited in resources to adequately track privacy coins, Chainalysis recently announced the addition of Dash (DASH) and Zcash (ZEC) to its blockchain monitor.

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