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Secret Money: How Monero Will Impact Blockchain Investigations

With demand for blockchain analysis tools at an all-time high, Lockheed Martin recently announced they are developing a bitcoin analytical tool for the Department of Homeland Security. This news, along with recent news that the FBI used blockchain analysis to deanonymize (bitcoin mixing service) and (cash buying option) in order to identify a prolific darknet scammer, has increased the chatter that Bitcoin is not as anonymous as people think.

Hope for a truly private coin became mainstream in August 2016. The popular drug market AlphaBay announced they would be accepting the currency Monero (XMR) in addition to Bitcoin. Monero has been around since 2014 sitting in relative obscurity until the announcement took place. Quickly the market capitalization of the coin rose from $3.7 million in 2015 to $170 million after the announcement by AlphaBay and other darknet markets. After speculative trading subsided, the currency currently sits at $76 million in market capitalization and is slowly growing (compared to Bitcoins $11 billion).

So what is Monero and why did it suddenly become popular? Monero has some stark differences from Bitcoin. The major difference is Monero runs on a CryptoNote protocol in which transactions cannot be followed through the blockchain as one can with Bitcoin’s blockchain. The approximate amount of a transaction can be known, but the origin, destination, or actual amount is unknown to those trying to analyze the data.

This feature in addition to others has led to the popular darknet markets adopting Monero.

The increased use of Monero has the potential to create issues for those involved in digital currency investigations. The inability to conduct blockchain analysis will prevent law enforcement from easily identifying individuals using darknet sites for illicit activities. In addition, Monero will be allowed on the popular Jaxx wallet, which allows users to maintain numerous currencies in a wallet on their mobile device. The Jaxx wallet enables crypto-to-crypto buying and selling and Jaxx neither holds nor has access to customer funds. This creates a very pseudo anonymous option for darknet users.

While Monero is still gaining traction, there are possible ways to still track those using the currency. There are currently only two options to buy XMR locally with fiat money. Currently purchasing digital currencies with cash is the sole way to attempt to hide one’s identity in the U.S. Without the numerous cash buying option individuals must purchase other digital currencies and then exchange them for XMR currency. This does cause concerns for many Monero users.

Around the internet one can easily find stories of U.S. based Bitcoin exchangers and wallets closing account related to drug activity. Within Coinbase’s user agreement, the purchase of illegal drugs using a Coinbase wallet could result in the account being frozen or suspended. As these companies operate under government regulation, analyzing their customer’s bitcoin habits has become commonplace. While not illegal, it is possible that these companies may track future purchases of the Monero currency and can pass this information on to law enforcement.

Since blockchain analysis is still relegated to federal agencies and local agencies with the knowledge and budget capability, this recent news may be overlooked in the overall picture of digital currency analysis in law enforcement. However, Monero is one of the digital currencies developed to make this digital currency more anonymous. Riding in the wake of Monero’s popularity, ZCash is another currency promising privacy and has become very popular very recently. These sudden developments are also driving Bitcoin to consider new anonymity features in order to keep the popular coin relevant.

It is imperative law enforcement keep up to date on the new changes that could impact current and future investigations. Contact Juliet Bravo Solutions today to schedule a digital currency class for your agency!

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