IRS Looking for Privacy Coin Tracking Solutions

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  • The IRS is on the hunt for privacy coin-tracking applications
  • The agency has recognized a gap in its ability to trace money flows through privacy coins, layer 2 solutions, and more
  • Schnorr Signature in particular “presents a new challenge for investigative support services”

The IRS has asked for examples of applications that can trace privacy coin transactions as part of a pilot Criminal Investigation Division (CI) program. In a sign that privacy coins are gaining traction among law enforcement agencies, the department has asked for examples of methods of tracing the flow of money through and between top privacy coins and Layer-2 off-chain protocols. The IRS cites Schnorr Signature as a particular area of interest, saying that it “presents a new challenge for investigative support services” with no investigative solutions currently in existence to track it.

IRS Admits it Can’t Trace Some Privacy Coins

CI is responsible for investigating a range of financial crimes in the US, including crimes related to tax, money laundering, and related financial crimes. Citing itself as a “global leader in cyber-criminal investigations involving cryptocurrency and various digital assets”, the IRS subsidiary boasts a number of victories against “numerous major Dark Net Marketplaces, virtual currency exchanges and other transnational criminal organizations.”

Given the ever-changing nature of cryptocurrencies however, the IRS seems to have realized that it is lacking in coverage of certain privacy coins and those that use specific technologies:

Currently, there are few investigative resources for tracing transactions involving privacy cryptocurrency coins, Layer 2 network protocol transactions, side-chain ledger transactions, or transactions on distributed ledgers that are adopting signature algorithms that provide privacy to illicit actors.

Schnorr Signatures a Key Focus for CI

In order to try and close the gap, the IRS is now actively searching for applications that would allow the CI to trace privacy coins and other anonymity-providing protocols. It makes a particular case for Schnorr Signatures, which Bitcoin Cash tested in 2019, which can reduce storage requirements on the ledger as well as enhancing privacy. This has the knock on effect of inhibiting the effectiveness of certain traditional tracing algorithms, something the CI and IRS are keen to address.

Despite being much better suited to illicit activity, privacy coins still lag way behind Bitcoin in terms of use for such transactions, which itself trails massively in the wake of the US dollar which is still the criminals’ currency of choice.