Recently, the US government has been making efforts to trace the cryptocurrency Monero with the aim of preventing tax evasion and crypto-related offences. This isn’t the first such news in recent times – we recently reported on the IRS suspecting tax evasion on the part of virtually every crypto wallet holder.
Monero is an open-source cryptocurrency that has gained much popularity owing to the privacy it offers. Unlike other cryptocurrencies such as Bitcoin which are pseudonymous in nature, Monero is actually anonymous. This means that a user’s wallet address never appears on the public blockchain and all transaction details are obscured, making it largely untraceable.
Can Monero be Traced?
The question ‘is Monero traceable?’ is one many in the crypto community ask. The US Department of Homeland Security (DHS) had reportedly already obtained a tool to trace Monero from CipherTrace. The tool has been claimed to include exploration, transaction search, and visualization tools for Monero transaction flows. It has also been said that there would be a focus on tracking the sources of ransomware demands.
In September 2020, the Internal Revenue Service (IRS) spent $1.25 million to task two firms, Chainalysis and Integra FECT, with building a Monero tracing prototype. However, the details about the nature of the tool are not yet clear.
How does Monero offer privacy?
Monero (XMR) is a privacy coin that uses the processes of ring signatures and stealth addresses to implement its privacy features. The blockchain is configured in a manner that helps obscure identities of the participants. Ring signatures allow senders to conceal their identities from other participants in the blockchain network while stealth addresses are randomly generated addresses for one-time use that add an additional layer of privacy to the transactions.
Moreover, the privacy features are mostly mandatory and applied by default, enhancing the coin’s privacy even more. However, users participating in transactions should not assume that these transactions are completely private
So, is Monero traceable then?
So far, only a few details on these tracing tools are known to the public and some in the crypto community are sceptical of the potential of these tools. However, we do know that there is a large amount of Monero-related data available and these early efforts to create tools serve as starting points for creating more effective tracing systems.