The United States Internal Revenue Service (IRS) published a $625,000 bounty for breaking Monero, an anonymity-enhanced cryptocurrency, other anonymity-enhanced cryptocurrencies 2nd layer technology applied to cryptocurrencies like Bitcoin Lightning Network. Many people are aware of cryptocurrencies like Bitcoin, Ethereum, and Litecoin. The key selling point with most of these digital currencies is that they are decentralized and use blockchain technology. When you make any transactions with Bitcoin, that transaction is recorded in a public ledger in blocks, and the blocks are connected, forming a chain of blocks, hence the name blockchain.
However, not everyone was happy with the fact all their transactions are public. That led to the creation of specific cryptocurrencies that are designed to keep transactions private. That is what Monero and the Lightning network do. Here is a brief breakdown of each to enhance your understanding.
What is Monero?
Monero is a cryptocurrency just like Bitcoin. The main difference between Monero and Bitcoin is that its blockchains are opaque. This is because when it was launched in 2014, it was privacy-oriented. To keep the transactions in a blockchain private, the sender and receiver’s details are disguised in the ledger. The amounts transacted are also kept anonymous. This has made Monero a favorite crypto-choice for criminals and those making transactions on the dark web.
In April 2020, the Ransomware as a Service (Raas) group Sodinokibi made a request that future payments to them be made using XMR (Monero’s cryptocurrency) due to its anonymity-focused transactions.
What is the Lightning Network?
A Lightning Network is a 2nd layer network that runs on top of a cryptocurrency network. For example, the Bitcoin lightning network was designed to solve Bitcoin’s scalability problems. It has found new use cases due to the fact that transactions made in a channel on the Lightning Network are not recorded. Bitcoin has a scalability issue because only 3.3 to 7 transactions can be recorded on a Bitcoin block per second. If Bitcoin goes mainstream, it will not be able to compete with traditional payment solution platforms like MasterCard and PayPal, which can transact tens of thousands of transactions per second
To solve this problem, the Bitcoin Lightning Network was created. It allows the users to create side chains to certain blocks in the blockchain. These side chains create multiple payment channels or nodes that can be used to make off-the-ledger transactions. The only transactions that will be recorded on Bitcoin’s blockchain will be when channels open and close. Despite the fact that the Lightning Network was created to solve the scalability issue, people have been using it to make transactions they don’t want to be traced back to them. The Lightning Network can be used on top of other cryptocurrency networks using Blockchain technology, not just Bitcoin.
Why the IRS placed a bounty for breaking Monero and other anonymity-enhanced cryptocurrencies
There are two main reasons why the IRS and law enforcement agencies want these anonymity-enhanced cryptocurrencies and networks cracked.
Criminals are using them to fund illegal activity. For example, if a drug syndicate wanted to purchase drugs worth hundreds of thousands of dollars, they would be hard-pressed to move that money without alerting suspicion from banks and law enforcement authorities. However, with anonymous cryptocurrencies, they can exchange money back and forth without fear that their money can be traced as the transactions are anonymous and not policed by an intermediary.
It is easy for people to evade paying taxes for products and services. If a bakery introduces anonymous cryptocurrency payments, they would be able to charge lower prices as they would be no need to account for Value Added Tax. This move may favor the customers but not tax collection bodies since they use taxes for development. Generally, when lower amounts of taxes are collected, projects such as development projects stall.
How contractors will compete for the bounty
The bounty will be paid out in two phases as the project is running in two phases.
Phase 1: Deliver successful proof-of-concept
Between the time the bounty was announced and September 16th, interested participants are expected to present working prototypes. These prototypes should be able to:
Identify the wallets by stripping away the pseudo addresses to reveal the actual sending and receiving addresses,
Reveal the actual transaction dates and times when the sender and receiver exchanged the currency,
Show the amount of money that was transacted.
Those who have succeeded at delivering successful proof of concepts by no later than that date will share the reward of $500,000.
Phase 2: Increase functionality and performance
In this phase, there will be one lucky winner who will walk away with the remaining $125,000. They will make the crack more functional. They will also improve and demonstrate the functionality of the crack to transactions.
The winner will then give the IRS complete control of the product. It should be noted that the final product should be independent, meaning it does not rely on any external vendors and should be modifiable, so they can change and develop it further in the future.
Limitations to the bounty for breaking Monero as a solution
The main limitation to this bounty solution is that the reward for a crack for these anonymous cryptocurrencies may not be incentive enough for participants. This is because, if they succeed, these federal agencies will gain much more than they will have lost. Additionally, will the winners be paid anonymously to keep them safe from retaliation by criminals who use these networks? Will these payments be made using the same anonymous cryptocurrency channels?
Currently, blockchain analytics firm CipherTrace already claims that they have developed a new tool that can break Monero and provide information on its transactions. People are skeptical about the tool’s viability, but CipherTrace claims that it has successfully traced several Monero transactions.
When Bitcoin was launched, and even when many subsequent altcoins were launched, the major selling points were decentralizing and creating an open ledger. On the other hand, some cryptocurrencies like Monero were launched with opaque ledgers as the selling point to hide money trails. Criminals and tax evaders have been using these anonymous cryptocurrencies to perform untraceable transactions. If the IRS’s proposed bounty for breaking Monero and lightning is successful, the federal agencies will be able to do their jobs more effectively and stop them.