The IRS is looking to expand its investigative capabilities around privacy coins, layer-two solutions, and sidechains.
The United States’ Internal Revenue Service (IRS) is seeking information and tools to help it trace transactions using privacy coins, layer two protocols such as Lightning Network and side chains like Plasma and OmiseGo (OMG).
A June 30 request for information published by the US Department Of The Treasury reveals the IRS’ Criminal Investigation Division is seeking submissions for “an interactive prototype” with a graphic user interface for analyzing distributed ledger-based transactions involving privacy coins and other privacy-enhancing blockchain technologies.
IRS peeks into privacy
The document explicitly names Monero (XMR), Zcash (ZEC), Dash (DASH), Grin (GRIN), Komodo (KMD), Verge (XVG), and Horizon (ZEN) among the privacy coins that the IRS hopes to target, in addition to the layer-two solutions Raiden Network, Celer Network, and Lightning.
The IRS requests that prototypes detail systems for “clustering transactions” from a single user who is using “privacy coins and obfuscation technologies”; compile a library of wallet addresses associated with “suspected or known to be involved in nefarious activities”; and identify other addresses associated with said nefarious wallets.
The agency also requests that the system include “a mechanism for sharing investigative research between investigators”, secure data export and import functionality, and estimates on proposed systems’ cost and return on investment.
Hard to track privacy coins
Despite the bold ambitions of the IRS’ cryptocurrency tracing initiative, the agency acknowledges that few resources currently exist for tracking the movements and addresses of privacy coins:
“Currently, there are few investigative resources for tracing transactions involving privacy cryptocurrency coins, layer-two network protocol transactions, side-chain ledger tr
