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IRS Offers Grants For Privacy Coin Tracing Apps

The U.S. Internal Revenue Service (IRS) offered grants of up to $625,000 to tech companies who develop ways to aid the tax agency in tracing cryptocurrency transactions as part of its money laundering and cybercrime investigations. The IRS’s criminal investigation department––which oversees money laundering, illegal currency transactions on darknet marketplaces, and other cybercrimes––led the effort.

Cyber criminals might find cryptocurrencies other than Bitcoin attractive, such as Monero, since they are more difficult to trace on the blockchain, according to the IRS. The IRS highlighted Sodinokibi (REvil), a ransomware gang which the IRS claims has adopted Monero as its preferred payment medium from its ransomware targets. The IRS said that privacy coins have gained popularity amongst general users and illicit actors. According to the IRS, REvil stated it would request future ransom payments in monero rather than bitcoin due to privacy concerns. 

In addition to exploring ways to combat illicit activity with privacy coins, the IRS has sought new technologies and methods to trace cryptocurrency transactions that use the Lightning Network, a so-called “layer 2” payment protocol designed to enable faster bitcoin transactions. The IRS faces limits while investigating privacy coins, such as monero and Lightning Network, and other off-chain transactions that provide privacy to illicit actors. In an effort to develop new investigatory tools, the IRS wants to develop technologies with additional tracking capabilities, including predictive analytics, so as to help agents determine the likelihood of various cryptocurrency transactions. 

The tax agency also wanted to implement new algorithms and source code that enable its agents to continually modify and update tracking capabilities. The IRS wanted solutions that supported cryptocurrency transactions in 2020 and which supported open standards for interoperability for easy integration into internally developed IRS criminal investigation cryptocurrency analytic systems and data.

As the IRS grant program offered awards, blockchain analytics firm Chainalysis published a report that illicit actors have developed new methods to convert virtual currency into cash. The U.S. Justice Department announced in June a civil forfeiture complaint in an attempt to recover millions in cryptocurrency allegedly stolen from 280 accounts by North Korean hackers. Blockchain security firm CipherTrade announced in August it had developed a monero tracking tool for the Department of Homeland Security to assist that agency with its investigations.