After the Pentagon and the Securities & Exchange Commission (SEC), it is now the Internal Revenue Service (IRS) that is starting to further improve the monitoring of cryptocurrencies.
In the offer’s explanatory memorandum, the IRS states that the US authorities’ investigative tools are currently too “limited” to be able to trace anonymous transactions.
This applies to both anonymous blockchains such as Monero (XMR) and second layer solutions such as Bitcoin’s Lightning network.
Concerning Monero, it is mainly the increase in ransomware that concerns the American tax department. Indeed, the hackers behind this malware now demand more ransom payments using the cryptocurrency:
“The use of privacy-centric cryptocurrencies is becoming more and more widespread, and there is also an increase in their use by illegal actors. For example, in April 2020, a RaaS (Ransomware as a Service) group called Sodinokibi (or REvil) stated that future ransom payments will be made in Monero (XMR) rather than Bitcoin (BTC) (…). »
All second layer solutions also seem to be of concern to the U.S. tax authorities.
Indeed, although Lightning Labs is developing an application to monitor Bitcoin’s Lightning Network (LN) (called Lndmon), the IRS explains that there are no such monitoring capabilities for “other distributed registries (for example, the Litecoin blockchain), Raiden Network (on the Ethereum platform), etc.”. ».
However, the IRS wants to be able to investigate all potentially illicit activities of these networks parallel to the main blockchains.
This is why the tax authorities want to finance a project in 2 phases, for a total of 625,000 dollars. The first phase will consist in presenting the proof of concept of a tool that would allow to trace more easily all the types of transactions mentioned above. Phase 2 will then consist of pilot tests of this monitoring software.
Interested developers and companies have until September 16 to apply.
If the IRS succeeds in doing so, it will remove much of the interest in anonymous cryptocurrencies such as Monero. Although slightly less serious for second layer solutions (because scalability/transaction speed is the main interest), it will deprive them of an asset that was missing from their main block.
Until now, no one seems to have figured it out.