The US Department of Homeland Security, the branch of the American government which manages areas such as border control, terrorism, cyber-crime, and disaster management, intends to design a system to monitor anonymous cryptocurrencies like Monero and Zcash.

The plan is described in a document called the ‘Small Business Innovation Research (SBIR) FY19 Pre-Solicitation’. The document proposes a number of areas in which the department could spend its massive budget in 2019. The proposals are open to consultation until the 18th of December.

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Phase I, II and III

Specifically mentioning these two cryptocurrencies, the document says that there exists a “compelling interest in tracing and understanding transactions and actions on the blockchain of an illegal nature.”

It intends to “design a blockchain analysis ecosystem or modify an existing one” in ‘Phase I’; ‘Phase II’ involves demonstration of a prototype, in which a number of representative transactions would be analysed; ‘Phase III’ is the application of the system.

Anonymity and the blockchain

There is a widely held misunderstanding that cryptocurrency transactions are anonymous – in fact, they are pseudonymous. Transactions are openly recorded and cannot be deleted, and the contents of all wallets are open to public view. However, the identity of the owner of a wallet need not be disclosed.

It was in January 2018 when a product for tracking Bitcoin first emerged. Crystal, released by San Francisco-based blockchain software company BitFury, allows law enforcement to detect suspicious behaviour on the blockchain and determine wallet ownership, providing evidence that can be used in court.

Monero and Zcash came about because of market demand for anonymity. XMR, Monero’s cryptocurrency, offers users the option of hiding transaction amounts, creating stealth addresses, and obfuscating the path of a transaction. Note that illegality is not the only reason that someone might have for wanting to hide their transactions; avoiding the taxman could be a reason, as could belief in the principle that a person should be able to exchange their money without being watched (as people can currently do with cash).

However, as blockchain businesses aim are increasingly accepted into the mainstream, and big-money investors get involved, anonymous coins begin to stand out as being in defiance of existing financial law. In Japan, for example, these coins have been banned by the cryptocurrency industry’s own self-regulatory organisation.

The DHS is the youngest branch of the American government, created after the attack on New York on September 11, 2001. It is also one of the largest, with a budget of $44.2 billion in 2018. It has requested a 7.8 percent increase in 2019.