US calls for new tech to unveil privacy coins

In a rather curious move, the Department of Homeland Security has put feelers out for someone willing to develop tools to identify the parties involved in private transactions using anonymous cryptocurrencies. Interestingly, the search for people with applicable skills has not started at the CIA or DARPA, but inside via the Small Business Innovation Research (SBIR) Program.

According to the pre-solicitation document, posted on the SBIR website the first step is to determine if there are businesses capable of performing the work, before filing an official solicitation request further down the line. "A key feature underlying these newer blockchain platforms that is frequently emphasized is the capability for anonymity and privacy protection," states the document. "While these features are desirable, there is similarly a compelling interest in tracing and understanding transactions and actions on the blockchain of an illegal nature." […] "This proposal calls for solutions that enable law enforcement investigations to perform forensic analysis on blockchain transactions."

Three phases of development

The open blockchains of Bitcoin and Ethereum have led law enforcement agencies to success, enabling several high-profile prosecutions involving money laundering, unlicensed exchanges, and other crimes involving cryptocurrency. Inquiries by Special Counsel Robert Mueller have also revealed widespread use of Bitcoin by Russian spies in the election tampering investigation.

Firms like Chainalysis, Ciphertrace and Elliptic, help to fight crime in this new financial wild west by providing specialized forensic software to law enforcement agencies. According to research from Diar, these blockchain analysis companies have received around $5.7 million from US government agencies for purchase orders and contracts.

As of yet, much of this analytical work has focused on Bitcoin. But Zcash and Monero — as coins that promise a far higher degree of anonymity — provide a more challenging scenario. To help move beyond the "limited scope" of bitcoin analytics, the proposal suggests a new "ecosystem" that would forensically analyse the transaction records of these new blockchains, and also assist both law enforcement agencies and private financial institutions in enforcing "know your customer" and anti-money laundering compliance procedures. To create this technology, a process with three phases is proposed:

**Phase one **is the design of a "blockchain analysis ecosystem" that will allow for the forensic analysis of Zcash and Monero, and other "emerging blockchain networks."

Phase two, the prototype, requires a demonstration of this technology, showcasing the ability to analyse suspicious transactions both with and without external data.

Phase three, the final phase, is the finished product; showing the application of the proposed technology in both the government and commercial sectors.

The fight for privacy

At a congressional hearing in June this year, representative Robert Pittenger of North Carolina called the illicit use of privacy coins and cryptocurrencies "one of the greatest emerging threats to U.S. national security." Similar concerns were raised in a written testimony by Robert Novy, deputy assistant director in the U.S. Secret Service’s Office of Investigations, who urged Congress to "consider additional legislative or regulatory actions to address potential challenges related to anonymity-enhanced cryptocurrencies".

In the six months following the hearing, all has been quiet on the privacy coin front. Except in Japan where regulators have reportedly begun to pressure exchanges into dropping the anonymous cryptocurrencies Monero, Zcash, and Dash.

The technology however, has continued to develop, and several news outlets have reported the growing popularity of privacy coins, with some even claiming that Monero has dethroned bitcoin as the crypto of choice for darknet commerce.

As the US government look to develop new technology to aid in law enforcement, any loopholes in the privacy technology are likely to be put to the test. And if recent reports are to be believed, these loopholes are not insignificant. One study carried out in 2017, titled "An Empirical Analysis of Traceability in the Monero Blockchain", found several vulnerabilities in the code — meaning researchers were able to untangle the cryptocurrency’s proprietary ring signature technology and distinguish 45 percent of real transactions from the spoofs used to disguise them.

If privacy coins are to continue acting as such, then they will need to outdo the tracing efforts of government agencies, creating what could be an ongoing competition between privacy coin developers and the rest of the world. Or, as Monero’s Riccardo Spagni puts it, "a constant cat-and-mouse battle" to gain privacy.

Only "small businesses" can submit proposals for creation of the snooping tool and they have until December the 18th to ask any technical questions they have about the project deliverables. The formal request for proposal is expected to be released on December the 19th.