The Department of Homeland Security (DHS) is out to crack the code of privacy tokens.
In a pre-solicitation, DHS expressed their interest in finding a way to expose the data that privacy coins are designed to hide. They are asking for a structured “blockchain analysis ecosystem” that enables forensic inspection of cryptocurrencies other than bitcoin, especially those focusing on privacy and user anonymity.
While Z-cash and Monero are mentioned specifically, DHS recognizes the potential for new coins to come on the scene in the quickly-evolving cryptocurrency ecosystem. In an effort to keep up, they request a framework for analysis of any blockchain that criminals might use to hide their identity while transferring value. Homeland Security wants a standard procedure to inspect all privacy-based blockchains, regardless of the tech that provides privacy.
The document specifically excludes bitcoin because analysis solutions already exist. With the present version of bitcoin, the challenge lies in tying an identity to a wallet address. Forensic analysis mostly involves finding patterns or clusters of digital wallets of interest, which allows wallets to be associated with specific crimes. The wallets are then monitored for exit points where proceeds of the crime are turned into cash, which usually requires a verified identity.
The pre-solicitation lays out 3 phases of initial development.
In phase 1, contenders will present a solution with an architecture that allows parts of the analysis tool to be interchangeable, to best see thru different privacy technologies. Viability of the solution must be demonstrated, risks assessed and risk mitigation procedures outlined.
Phase 2 requires demonstration of the system in 3 different scenarios, to be determined by DHS.
Phase 3 is to expand the solution into different areas of government where blockchain might be of benefit.
Human behavior is the demise of most criminals who get caught, no matter what methods they use to escape the law. Z-cash, Monero and other privacy coins are specifically designed to not reveal user identity. Even though this brand new technology promises to be virtually unbreakable, law enforcement and crypto-security companies will most likely focus on the same major vulnerability that has always given them the advantage, Human error.