Uncle Sam is snooping on crypto investors, many of whom believe they're transacting anonymously on the web.
U.S. government spending on blockchain analytics has nearly tripled — $5.7 million to date in 2018 compared to $1.9 million last year, according to Sept. 25 Diar report. Some of those funds are used to unmask digital identities. Agencies are awarding contracts to blockchain analysis firms with much of the taxpayer-funded dollars having been awarded to New York-based Chainalysis. "Blockchain analysis is … frequently used by law enforcement agencies to identify illegal activity and attempt to link identities to pseudo anonymous bitcoin addresses."
So which agencies are tracking crypto investors?
The Internal Revenue Service (IRS) spent the most, accounting for 38% of total federal spend at $2.1 million while Immigration and Customs Enforcement (ICE) came in second at $1.5 million. The FBI has spent $1.1 million so far this year. All three federal agencies combined for 85% of total spending, according to Diar's analysis of public records.
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Why are they doing it?
Federal agencies are seeking assistance to hone "down on potential tax evasion, money laundering, terrorist financing, drug dark markets, among the other illicit activities," wrote the authors. The blockchain analysis firms are turning pseudo anonymity into real identities by following paper trails (at crypto exchanges for example) in order to link digital wallets to identifiable information. Thus, blockchain analysis firms are decrypting crypto data to link payments and balances to individuals. "That information can be used as actionable intelligence with the possibility of leading to criminal prosecution," per Diar report.
It appears that compliance with anti-money laundering (AML) and know-your-customer (KYC) regulations will eventually lead to investigations, tax liens and criminal prosecution. A Bitcoin (BTC) investor who holds a $10 million BTC balance that's undeclared now faces a real possibility of being charged by the IRS. That is, if his/her information is compromised.
Blockchain analysis firms, some of which are providing unmasking services to agencies, are raising capital to expand operations. Chainalysis has raised $17 million; Elliptic raised $7 million so far; CipherTrace is at $3 million.
The technology at times has shown vulnerabilities that can lead to more risk for investors. For example, privacy coin Monero (XMR) recently had a software bug patched by developers. The vulnerability would have allowed an attacker to disrupt cryptocurrency exchanges and XMR-accepting merchants by "burning" tokens sent to a same stealth address.
Last week, developers of Bitcoin Core announced a version upgrade
for its miner nodes that fixed a vulnerability to denial-of-service (DoS) attacks. However, the same bug would have allowed a hacker to artificially inflate BTC supply by minting new bitcoins. The developers said they kept the flaw a secret to decrease the possibility of an inflation attack.
"CVE-2018-17144, a fix for which was released on September 18th in Bitcoin Core versions 0.16.3 and 0.17.0rc4, includes both a Denial of Service component and a critical inflation vulnerability,” per developers’ statement on Sept. 20. “It was originally reported to several developers working on Bitcoin Core, as well as projects supporting other cryptocurrencies, including ABC and Unlimited on September 17th as a Denial of Service bug only, however we quickly determined that the issue was also an inflation vulnerability with the same root cause and fix."
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