IRS Demands Robust Tracing Tools for Privacy-centric Crypto Coins and Bitcoin Lightning Network
Investors holding privacy-centric digital currencies could soon be on the radar of the U.S’s top-most tax agency, the Internal Revenue Services (IRS). The IRS is now looking for tools that can trace privacy-centric digital currencies and some other off-chain transaction protocols like the Bitcoin Lightning Network.
In a pilot program initiated by the IRS Criminal Investigations Division, the agency issued a request for information (RFI). In the RFI document, the IRS explains:
"This RFI is associated with a pilot IRS Criminal Investigation Division (CI) program. CI Cyber Crimes is requesting information about systems that will allow developers and testers to conduct investigative research of distributed ledger transactions involving privacy cryptocurrency coins (e.g., Monero (XMR), Zcash (ZEC), Dash (DASH), Grin (GRIN), Komodo (KMD), Verge (XVG), and Horizon (ZEN)); Layer 2 off-chain protocol networks (e.g., Lightning Network (LN), Raiden Network, Celer Network); Side-chains (e.g., Plasma and OmiseGo); and tracing challenges following the integration of the Schnorr Signature algorithm.”
The IRS is looking for an interactive prototype with a graphical interface that lets it club transactions from a single user and help the associate “user distributed addresses with distributed ledger addresses” of any criminal suspects.
Besides, the IRS wants that the prototype should be able to disclose the suspects’ distributed ledger addresses. The prototype should do this by using open-source intelligence data allowing agents to share data between concerned agencies and export data to different file formats.
The RFI explains that 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. It also provides an investigative efficiency that is currently limited.
The IRS said that it already has a few investigative cases deployed to trace transactions. Speaking about the Layer 2 protocols like the Raiden and the Lightning Network, the IRS said "even though Layer 2 protocols have been dismissed by many in the investigative support community, there is clear evidence that this is a growing network.”
As crypto use and popularity continue to grow, the IRS is having a close watch on the new developments. The IRS has asked prospective bidders to submit their responses by the 14th of July.