IRS Turns Attention to Privacy Coins and Layer 2 Transactions

TLDR; IRS is gathering info for a pilot program to trace privacy coins and Layer 2 transactions. They’re looking at stuff like side-chains and Schnorr signatures too.

I think law enforcement has probably been on this for a while. They might not drop tools in public, but tracking isn’t rocket science for them. It's just a matter of monitoring everyone to figure out who’s transacting with whom...

Yeah but this tracking violates privacy. It's a double-edged sword for sure. Sure, it can help with crime prevention, but putting that power in the wrong hands is a mess. Sacrificing privacy for a ‘greater good’ isn’t a good trade.

More tracking? Big surprise there.

UPDATE: Coinbase is now selling blockchain analytics tools to the Secret Service. They got the contract earlier this year and it runs until 2024.

Honestly, should we even be shocked? They know how to make money from this stuff.

I’m curious how they plan to tackle privacy coins. Sounds a bit too optimistic. What if Coinbase can’t crack it? Do they get a refund?

Jesse Powell from Kraken had some thoughts on this. He’s got a point, but I think he’s in the minority with those views. Wonder if his investors will push for profit in this too.

Good luck tracing Monero or Grin. Those coins have communities working hard to keep them untraceable. It might not be impossible, but I doubt they’ll pull it off with all of them.

Totally agree. Layer 2 networks will be a tough nut to crack too. Maybe if they control enough nodes they’ll find some patterns, but it’s a tall order.

The government doesn’t care about privacy. Laws are already in place to monitor everyone without a court order. Crypto had a shot at privacy, but now every exchange is demanding KYC. Expect more regulations coming.

Kraken is trying to fill the gap left by Bitfinex in the US. Powell’s marketing to the privacy crowd is smart, but they’re still following the same AML rules as Coinbase.

Tracing anonymous coins is gonna be wild. IRS tracking methods will be interesting to see. Those communities are all about keeping their transactions private.

Check out this paper on Monero. It’s crazy, past flaws could be used to unmask old transactions.

Good news is, tracking Monero is a nightmare. But bad news? Exchanges might start to drop it.

That’s what worries me about privacy coins. They need to find a balance between being useful and not attracting too much attention.

Governments can restrict demand, but the supply issue is real. Monero’s supply model isn’t friendly for long-term investors.

You’re right about the two-tier exchange system. Regulated ones will avoid privacy coins, while unregulated ones will thrive.

It’s not that they don’t care about privacy, it’s just that money shouldn’t be private under AML laws. They can’t let criminals operate freely.

It’ll be interesting to see how this market shifts. No way legit platforms will keep these coins around.