IRS Wants to Be Able to Trace ‘Untraceable’ Digital Currencies

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The Treasury Department’s largest federal law enforcement arm wants to expand its visibility into cryptocurrency transactions that enable anonymity and more privacy than most standard blockchain-based exchanges.Cryptocurrency refers to virtual currency transmitted via a digital, decentralized network. With popular versions like Bitcoin, investigators could scrutinize transaction data to identify those involved but new developments could make it harder for law enforcement to trace transactions. For example, Layer 2 protocols and other off-chain solutions allow for more scalability and speedier transactions without recording every element of the transaction. Privacy coins can underpin completely anonymous transactions, or obfuscate varying levels of information involved or about them.These options continue to grow in use and sophistication, permitting perhaps even more incognito cryptocurrency use.In a request for proposals for “cyber crimes privacy cryptocurrency tools and support” released Friday, the Internal Revenue Service, Criminal Investigation, or IRS-CI said such payment means and networks are being increasingly used for illicit activities—which the group ultimately aims to investigate. The unit intends to team up with “one or more contractors to provide innovative solutions for tracing and attribution of privacy coins and Layer 2 off-chain transactions, such as expert tools, data, source code, algorithms, and software …

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