IRS Offers $625K Bounty to Break Monero or Lightning Network Privacy

The agency stated that the goal of the bounty is to promote innovative responses to challenges facing law enforcement. It notes that the so-called Pilot IRS is very different from the way the government traditionally buys technology.

US Feds Go After Privacy-Enhancing Cryptocurrencies

As detailed by the Request for Proposal, the IRS has set a deadline for submissions to Sept 16. It also outlines a two-phase approach. Phase one will award up to $500,000 for no more than eight months of development. In this proof of concept phase, the contractor must demonstrate reliable tracking results on real-world cryptocurrency transactions for either Lightning Network or Monero. This includes sending and receiving address identification. Phase two will award a further $125,000 and 120 days of development. This phase will see the contractor add additional functionality and improve the performance of the system developed in the previous phase. The chosen contractor must demonstrate that their solution works for transactions occurring in 2020. Additionally, the solution must support open standards of interoperability and must not rely on external vendors.

Growing Use of Privacy Solutions Threatens Fed Power

As part of the Request for Proposals, the IRS mentions that Monero use is growing. The agency noted that in April 2020, the Ransomware as a Service group Sodinokibi began to request future payments be made using the anonymity-focused XMR currency. The group cited privacy concerns with its former payment method, BTC, as influencing the decision. As well as a rise in the number of Monero users, the IRS highlighted the growth of the Lightning Network. The second-layer Bitcoin scaling solution not only allows for micro-transactions but further obscures the sender and receiver of transactions by only recording the opening and closing of a channel on the Bitcoin blockchain. The Federal agency mentions that there is already a Lightning Network monitoring solution of sorts for Bitcoin. However, none exist for Lightning implementations on other networks such as Litecoin or Ethereum (Raiden). Blockchain forensics has come a long way in recent years. BeInCrypto has previously reported on numerous cases involving data provided by the likes of Chainalysis and other companies. One of these particular firms is CipherTrace, which appears to stand in good stead to deliver on the recent IRS Request for Proposals. The company recently announced the development of its own Monero tracking tool:

CipherTrace Announces World’s First Monero Tracing Capabilities for Law Enforcement, Government, and Virtual Asset Service Providers https://t.co/jcP1tfaKzK #monero #privacycoins #blockchainanalytics

— CipherTrace (@ciphertrace) August 31, 2020

However, both Monero enthusiasts and CipherTrace itself highlight limitations with the solution. CipherTrace stated that the project “laid the groundwork” for greater Monero transparency but that more work was needed. Meanwhile, security technician Seth Simmons said that the announcement is unoriginal, adding that nothing in the CipherTrace solution is beyond the capabilities of Monero developers already. In June 2020, Chainalysis announced the addition of privacy coins Dash and Zcash to its compliance toolset but has yet to include Monero tracking in the services it offers.