As initially reported by Cointelegraph, two contracts worth $625000 were awarded to Chainalysis and Texas-based forensic data analysis firm Integra FEC. The two companies have been selected to help develop a pilot solution that will assist the IRS in tracing cryptocurrencies.
The Daily Chain previously reported that the IRS had begun a contract application process for a solution that would help the IRS trace privacy focused cryptocurrency Monero as well as trace transactions carried out using the Lightning Network for Bitcoin.
The initial process called for applicants to submit a prototype of the solution that would enable the tracing of these various networks. This contract was the latest in the IRS’ efforts to help its Criminal Investigation unit’s special agents hunt down criminals using technology to trace and monitor illicit cryptocurrency transactions.
Less than a month later the IRS has now confirmed that the two firms will assist in developing the prototype to trace Monero and Lightning network transactions.
According to Cointelegraph, over 22 different firms had submitted proposals for the contract and Chainalysis and Integra FEC were awarded based on ‘comparative analysis’ between the different applicant’s submissions.
Tracing privacy coins likely to be difficult
As government and law enforcement agencies look to clamp down on money laundering and illicit fund transfers carried out using cryptocurrencies, it might not be a straightforward endeavor trying to trace movement of funds done with privacy coins.
Monero itself is considered to be one of the most robust and privacy-ensuring cryptocurrencies which has historically been hailed as untraceable.
That has not stopped cryptocurrency analysis firms from trying. In August 2020 blockchain security firm CipherTrace announced that Monero was now on the list of over 800 cryptocurrencies that it is able to trace by monitoring cryptocurrency wallets, exchanges and smart contracts.
As reported by Cointelegraph, the company has been developing a tool for tracing Monero transactions for over a year and that it is possible to track stolen XMR, specifically Monero that is stolen through ransomware attacks.
The tool itself only tracks the flow of transactions, with the rest of the investigations left up to law enforcement agencies. CipherTrace’s Monero tracing tool was set to be used by the U.S. Department of Homeland Security.
Cryptocurrency industry experts were skeptical about the efficacy of the tool, with DV Chain regulatory compliance analyst Justin Ehrenhofer telling Cointelegraph that its capabilities may be limited.
“We assume that CipherTrace has developed a novel method to trace Monero transactions, but I am not quite sure of what they can do, so it’s hard to interpret the legitimacy of their claims. Saying you have a method to look at Monero transactions doesn’t mean this is now as transparent as Bitcoin transactions.”