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CipherTrace Files Two Monero Cryptocurrency Tracing Patents

anti-money laundering
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November 20, 2020
Dave Jevans

November 20, 2020

CipherTrace has filed their second Monero tracing patent application— Techniques and Probabilistic Methods for Tracing Monero.  This follows on their first patent application Systems and Methods for Investigating Monero. These patents cover:

  • Forensic tools to explore Monero transaction flows to assist in financial investigations.
  • Development of original tracing methodologies based on simulation techniques and Bayesian approaches.
  • Statistical and probabilistic methods for scoring transaction and clustering likely owners.
  • Monero decoy reduction.
  • Probabilistic approaches to risk-based Monero money laundering controls.
  • Transaction visualization tools and ways to track stolen Monero currencies or illicit Monero.
  • Methodologies for gaining intelligence about transactions that rely on third party nodes.
  • Active participation in the Monero network to gain intelligence.

CipherTrace has been developing these tools since early 2019 within the scope of a Department of Homeland Security project. This project has laid the groundwork for future implementation of entity transaction clustering, wallet identification, exchange attribution, and other functionality that will provide law enforcement with even more tools for investigating Monero transactions and addresses related to criminal activity.

With 45% of darknet markets now supporting Monero—the second-favorite cryptocurrency of choice among criminals, just behind bitcoin—law enforcement interest in Monero tracing has soared. Monero employs a particularly unique design to ensure user anonymity, including always-on, enforced privacy. Unlike other anonymity-enhanced cryptocurrencies, Monero uses enforced privacy-by-default for all transactions so that no user can accidentally or deliberately be traceable or insecure. Unlike public-by-default mechanisms, this functionality protects users from accidentally not using Monero’s privacy features. As a result, users cannot be scrutinized or penalized by outside actors for using private transactions.

These built-in obfuscation techniques are what draw in privacy advocates and criminals alike. CipherTrace’s goal is to enable the detection of criminal users, therefore increasing the safety and sustainability of privacy coins like Monero in the future. As it stands, Monero’s privacy capabilities make it too difficult for many Virtual Asset Service Providers to take on their risk. The inability to know the source of any XMR funds makes them inherently high risk to any anti-money laundering program and, as a result, more and more VASPs would rather delist than take on the extra compliance risks of anonymity-enhanced coins like Monero.

CipherTrace’s Monero tracing capabilities will allow VASPs to identify when inbound XMR may have criminal origins, allowing them to adequately risk rate customer transactions per any required regulations.

Privacy Coins Face Delisting

South Korea recently announced that the country will ban privacy coins in the new year while enforcing stricter KYC requirements on crypto users. The new regulations, filed as updates to the country’s Special Payment Act, will outlaw so-called “dark coins” that are considered hard to trace. Exchanges operating in the country will have six months to show compliance with the KYC elements of the law.

Meanwhile, some exchanges, such as OKEx and Upbit, have already delisted privacy coins based on their interpretation of FATF guidelines. This month, Colorado & Switzerland based ShapeShift  delisted privacy coins Zcash, Dash, and Monero.

CipherTrace and Privacy

CipherTrace has always been an advocate of user privacy. We do not identify the individual identities of cryptocurrency users. We do, however, identify the Virtual Asset Service Providers (VASPs) that are commercial companies operating cryptocurrency businesses. We also endeavor to identify criminal addresses and wallets pertaining to the theft of cryptocurrencies, wide-spread fraud against consumers, ransomware, extortion, child exploitation and other crimes against people of the world. This visibility helps prevent people from sending their cryptocurrency funds to criminal enterprises. It also provides the ability for legal due process through court orders, subpoenas and legal trials to potentially recover stolen funds for victims.

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