Crypto-currency focus

Cryptocurrency: A new monetary vehicleFinancial crime focus

FRUNZA Marius CristianSchwarzthal Kapital

CNAM - CEFAB, Paris, March 2016

Agenda

1 MotivationBackgroundCrypto-currencies: Why?Fiat Currencies vs Crypto-Currencies

2 BitcoinWhat is the Nature of Bitcoin?Regulatory status

3 Crypto-currencies and financial crimeDigital currencies and crimeCrypto - currency exchangesCrypto - crimes

4 Conclusions

5 Q&A

6 Bibliography

Cryptocurrency: Financial crime focus Schwarzthal Kapital 2

Financial Crime

Introduction to theories and varieties of modern crimes [Frunza(2015a)] Solving modern crime in financial markets [Frunza(2015b)]

http://www.amazon.com/gp/product/B019K7CMUE?qid=1457293412

http://www.amazon.com/Solving-Modern-Crime-Financial-Markets/dp/0128044942

Key Figures

16 countries were visited for case studies, interviews andinvestigations

18 interviews were conducted with professionals, investigators,regulators

3.64 years is the average time spent in prison by the interviewedindividuals

22 institutions provided inputs: Barings, Europol, SAS, IOR, etc...

> 10 disciplines were used in studying the crimes on financial markets:economics, statistics, financial maths, accounting, data mining ,anthropology, criminology, law, sociology, psychology, history ...

> 100 case studies are described in the textbooks

3 R libraries were developed as analytic tools


Crypto-currencies: Why?

Figure : BitCoin farm/hedge fund in...... Central Asia


Crypto-currencies: Why?

It is well enough that the people of this nation do not understand our

banking and monetary system, for if they did, I believe there would be a

revolution before tomorrow morning. Henry Ford

Banking system has currently a quasi-monopoly on the paymentssystem and financial transactions

Physical cash will probably be discarded in a near future

There is an increasing discontent towards banks and financialsystem

Public policies fail to inspire trust and confidence: bailouts,quantitative easing, financial regulation...

Payment, currencies and trades should be democratized


Fiat Currencies vs Crypto-Currencies

Fiat currencies are backed by central banks and governmental policies.

Crypto-currencies by nature are not aimed to be regulated, supervised or

centralized

Example of non-fiat currencies

The Iraqi Swiss Dinar is an example of non-fiat currency. Despite beingbacked in the early 1990s by the Iraqi government, the currency lost itsgovernmental support after the first Gulf war. It continued to be used invarious part of Iraq as it was backed by neither government nor commodityyet held a stable value and never collapsed over a ten-year period.([Grinberg(2012)])

Soviet Ruble continued to be used as a currency in remote places of CentralAsia, long after the fall of the URSS in 1991


Digital Currencies

Crypto-currencies are only a sub-category of digital currencies ([Lee(2015)])

Plunging back in the history it appears that alternative payment methods are not new andmany solutions like PayPal, Apple Pay and Google Wallet, which are still based on whichare based on fiat currency represent viable solutions mainly for the e-commerce.

Attempts for creating a distributes a digital currency date from 1990 with DigiCash Inc.founded by David Chaum ([Chaum et al.(1990)Chaum, Fiat, and Naor]). DigiCashintroduced eCash as probably the first cryptocurrency. Despite some initial popularityeCash did not survive to the 2000 Internet bubble.

Investors had appetite for a currency backed by gold and the opportunity came with theInternet era in the early 2000 when digital gold currencies made surface. Most of thosesecond generation digital currencies like iGolder, gbullion and e-gold, were in factelectronic money backed by ounces of gold which were stored for a fee. Their legacy wasshort as the companies that ran those currencies were either shut down by the FederalGovernment for various offenses or faded away die to heavy regulatory burdens.

A digital currency that had some popularities in the pre-social media era was the LindenDollar, used as money in the web base reality game Second Life. Around 2007 Second Lifewas seen as the promising environment for the virtual economy and the Linden dollar hadsome momentum but also a lot of volatility. The Linden Dollar was a centralized digitalcurrency, being controlled by the company owning Second Life


Bitcoin: the Key Towards a New Economy

Despite a negative and reluctant reception from part of the public opinion,crypto-currencies are without any doubt the main financial innovation, sincethe credit derivatives.

Crypto - equity

Crypto - author rights (a solutions for artist or musicians)

Crypto - IP (software industry)

Crypto - funding

...


What is Bitcoin?

Figure : Bitcoin market value evolution: Left Bitcoin - USD exchange ratereached the 1000 dollars level towards the end of 2013..Right Bitcoin marketcapitalization in million USD dollars is mainly driven by the exchange rate.


What is the Nature of Bitcoin?

Figure : Volatility of the Bitcoin USD exchange rate : Benchmark with otherunderlyings


Bitcoin: Econometric Features

Metric Value

Mean 0.0054Maximum 0.3722395Minimum -0.4456405

Standard deviation 0.0625Skewness -0.262Kurtosis 9.86

Jarque-Bera test 6562.314 (p-value =0.00)

Table : Descriptive statistics for the daily returns Bitcoin-USD exchangerate: The series exhibit strong kurtosis and high variance. The Jarque-Bera testindicates non-Gaussian features.



Figure : Distribution fitting for the Bitcoins - USD daily returns. Right:Histogram of the fit for the Normal Inverse Gaussian compared to the Gaussiandistribution. Left: QQ plot for the observed returns against the NIG fit



Figure : Autocorrelation in the Bitcoin USD rates. Left: ACF for the dailyreturns. Right: ACF for the squared daily returns



Parameter GARCH GARCH-NIG GARCH-STD

Value Std p-value Value Std p-value Value Std p-valueω 0.000 0.000 0.08 0.000 0.001 0.01 0.000 0.000 0.01α 0.061 0.004 0.00 0.356 0.055 0.00 0.345 0.044 0.00β 0.937 0.003 0.00 0.642 0.056 0.00 0.653 0.051 0.00ν 3.495 0.213 0.00ζ 0.145 0.035 0.00ξ 0.403 0.052 0.00

LL 2647.3 2950.6 2935.3BIC -3.27 -3.66 -3.63

Table : GARCH fit parameters: Successful fitting of GARCH model to the dailyreturns of Bitcoin-USD rate underlines the existence of clustering in volatility.GARCH(1,1) model with Normal Inverse Gaussian innovation provides with the bestresults


Bitcoin and Market Efficiency

The concept of mining that currencies creates an asymmetry amongst “investors”due to the fact that not all miners have access to the same mining tools, in termsof computation speed. Thus some more advantages than others given the featureof their gear. Obviously those with stronger mining tools have a comparativeadvantage in the price discovery.

For a solo miner the time for processing a block is given by the following equation:

Time =Difficulty · 232

Hashrate(1)

In theory the average time of a solo miner using a standalone computer to solve ablock is around 2000 years. Thus the only economic feasible solutions are either amassive inflation of the mining capacity or joining mining pools. Mining farms startto became a trend in countries where the cost of electricity cheap and space rentare cheap, energy consumption being the main variable cost in the mining process.


Electricity Price by Country

Country US cents/kWh Country US cents/kWh

Kirgizstan 2 Taiwan 12Ukraine 3 South Africa 12

Uzbekistan 4.95 Israel 15Russia 5 Hong Kong 18

Thailand 6 France 19.39Pakistan 7 United Kingdom 20

Dubai 7.62 Singapore 21.53Vietnam 8 Japan 22

China 8 Sweden 27.1Indonesia 8.75 Italy 28.39Canada 9 Netherlands 28.89

India 10 Australia 30Malaysia 10 Philippines 30.46

United States 11 Germany 31.41Denmark 40.38

Table : Electricity price by country (USD/kWh): Countries from South EastAsia and ex-URSS block have low prices. The only developed countries withsimilar levels are Canada and United States. European Union has generally highprices.Cryptocurrency: Financial crime focus Schwarzthal Kapital 17

Efficiency Tests

Electricity market has a similar issues in countries where there are big producersor quasi-monopolies. For example in Germany the main energy producer RWEhas obviously more information on he market than a small broker, due to itsposition of main supplier of underlying and trader.

Test name Statistic Critical value (95%)

Portmanteau 10.61 3.8Chow and Denning 3.53 1.95Wright (R1 statistics) 9.10 1.99Wright (R2 statistics) 7.79 2.01Wright (S1 statistics) 13.70 1.93Lo and Mackinley 3.53 1.95Wald 12.47 3.84

Table : Tests for assessing the efficient market hypothesis (weak-form). Thetests are performed on the time series of daily returns of Bitcoin USD exchangerate from 22/07/2010 to 31/12/2014 assuming holding period of 10 trading days


Efficiency Tests

Figure : Efficiency tests applied to Bitcoin/USD daily returns for a 200 daysrolling window: Portmanteau test, Wright test, Wald test, Lo and MacKinley testand Chow-Denning test


Bitcoin Rush

Figure : Bubble detection tests: The Sup augmented Dickey-Fuller test indicatestwo bubbles during 2013. The Generalized sup augmented Dickey-Fuller testindicates also another mini bubble during 2012.


About Mining

“Proof of work”

The blocks carrying transactions’ info are validated by the “system”, and moreprecisely by any terminal on a randomly distributed and de-centralized basis. Theblockchain cannot be overridden once processed. In the classic banking world, theat least one third party validates the transaction, but in the digital world is theMatrix of terminals that is taking care of the validation.

The validation is done based on a set of keys available to all terminals that shouldbe able to read and approve the transaction. For each validated block the terminalreceives an established amount of Bitcoins. This process of generating moneyupon validation previous transactions is called mining. The process seemsstraightforward and if it would remain at this stage, the transaction validation andBitcoin generation would be very fast.

Thus the system introduces an additional step called “proof of work”, which iscomputational intensive process and requires to solve a mathematical puzzle inorder to confirm the validation and to add an new block to the chain. The systemis designed in order to limit in the long term the total number of generatedBitcoin, thereby addressing the issue of controlling the monetary mass;


About Mining

Figure : Evolution of total number of Bitcoins


About Mining: Hashcash

SHA256 (Secure Hash Algorithm) is a function generating values in thespace of 256 bits sequences and is the cryptographic algorithm usedproof-of-work scheme for the Bitcoin system.

For instance assuming a transaction x , taking the value Bitcoin transactionnumber 1 , its hashed assigned value through the SHA256 function is :

SHA256(“Bitcoin transaction number 1”)=”58a9986770cb0de9fff5082dd4d72be50d4a6650b556883832af677b0f4c3fd2”

SHA256(“Bitcoin transaction number 17470”)=”000f68b27437b33d1a76519b44a0a54fb12a82c80797b6b6b016556eac2942bc”

Hashcash was first used an algorithm for spam mail detection throughadding a textual stamp to the header of an email to prove the sender hasexpended a certain amount of computational memory for calculating thestamp prior to sending the email.


Bitcoin: Time for Hashcash Puzzle Solving

Figure : Time for Hashcash puzzle solving : The time needed for solving thepuzzle increases exponentially with the number of zero


What is Bitcoin?

([Selgin(2013)]) in considering Bitcoin and generally virtual currencies as a“synthetic” commodity because it shares features with both commoditymoney and fiat money.

Bitcoin could be more like a digital commodity that has a circumstantialintrinsic value, related to investor propensity towards it. The only differencewith commodities is that it does not carry physical/real value (beside thevalue of the hardware used for mining)

Bitcoin is similar to a right to transfer freely value (CO2 allowances)

Bitcoin could be perceived as virtual good or services used for transactionsas simple as the electricity or gas is used for making functioning houses andindustries.


Legal Status

China banned banks from processing Bitcoin transactions, shutting down theyuan/Bitcoin exchanges operating in the mainland. Russia’s main securityagencies made some announcement about making Bitcoin illegal but with noissue.

Iceland and Vietnam decided to ban Bitcoin . Iceland shut the flow ofincoming Bitcoins, because its central bank restricts restricted the outflow offunds from the country, which was massively hit by the default in itsfinancial sector.

In the US, the Financial Crimes Enforcement Network (FinCEN) defined thecircumstances under which virtual currency users could be categorized asmoney services businesses. These users must enforce Anti-MoneyLaundering and Know Your Client policies, in order to be able to identify thecostumers that they’re doing business with.

The US Commodity Futures Trading Commission, which looks after financialderivatives and commodities, has not announced any clear regulation, but asmany experts point that crypto-currencies are similar in m any ways tocommodities their involvement can become more active.


Liberty Reserve

Facts

Liberty Reserve was one of the biggest company providing digital currencyand on-line money transfer

Founded in Costa Rica by Arthur Budovsky aka Eric Paltz, the principalfounder of the company, Vladimir Kats, aka ”Ragnar”,co-founder

Liberty Reserve was born out from the ashes of a previous faded digitalcurrency : E-Gold

Budovsky and Kats were convicted in New York State for operating “GoldAge, Inc.” as an unlicensed money transmitting business

In 2011, Budovsky formally renounced his U.S. citizenship and kept only hisCosta Rican passport

Almost 200 000 accounts were opened with Liberty Reserve from US usersonly.


Liberty Reserve

Figure : Liberty Reserve transfers: Step 1: Client A from US send an amount X of dollars to Exchanger 1 based inMalaysia with a bank account in Hong-Kong. Step 2: Exchanger 1 credits A’s account with Liberty with an equivalent amountY of digital currency. Step 3: Client A can transfer directly or through a broker the amount Y of digital currency to B’s account.Step 4: Client B transfers the amount Y to Exchanger’s 2 account based in Russia. Step 5: Exchanger’s 2 transfers the amountof dollars X or euros Z from its bank in Lichtenstein to a B’s account in Germany


Liberty Reserve

Figure : Hawala system: Step 1: A from US transfers money to Broker 1 and gives him an information representing thesecurity key Step 2: Broker 1 gives information to Broker 2 in Bangladesh concerning the amount he should pay and the securitykey. In parallel A gives to B the security key. Step 3: B based in Bangladesh presents to Broker 2 the security key and thenreceives the amount delivered by A. The brokers can settle the balance afterwards through a platform that is based in Dubai.


Liberty Reserve

Aftermath

In 2009, when the Costa Rican financial regulator started to look atLiberty Reserve’s activity

In 2011, the U.S. Department of the Treasury’s Financial CrimesEnforcement Network (FinCEN) issued a notice regarding the allegedcriminal conduct of Liberty Reserve.

Liberty began emptying the bank accounts in Costa Rica of millionsof dollars and transferring the money to a bank accounts in Cyprusand Russia. Upon a request of US authorities Costa Ricangovernment was able to seize approximately 19.5 million US dollars ina Costa Rican bank accounts.

In 2013 Liberty Reserve directors were sentenced to five years in prisonfor conspiring to operate an unlicensed money transmitting business

In total Liberty Reserve laundered almost 6 billion dollars between2006 and 2013


Risk assessment

Figure : Bitcoin users typologies and transactions. Transaction type 1: Bitcoin/ classic currency trade through anorganized exchange. Transaction type 2: Bitcoin account is credited by the system on successful blockchain puzzle solving.Transaction type 3: Bitcoins can be transfered from an user to another or constitute a payment to a provider (Amazon,e-Bay....) . Transaction type 4: Over the counter transactions paid with Bitcoins. Transaction type 5: Transactions informationare send to miner for validation


Theft

In March 2014 Flexcoin1 shut down following the theft of 896 Bitcoins from itsservers, accounting for 620,000 US dollars . During its short lived activity overthree years Flexcoin, provided cloud service for sending, receiving, and storingBitcoins, advertising itself as “the world’s first Bitcoin bank”.

1Another Bitcoin Startup Tanks After $600 000 Thefthttp://www.forbes.com/sites/andygreenberg/2014/03/04/

another-bitcoin-startup-tanks-after-600000-theft/Cryptocurrency: Financial crime focus Schwarzthal Kapital 32

http://www.forbes.com/sites/andygreenberg/2014/03/04/another-bitcoin-startup-tanks-after-600000-theft/

http://www.forbes.com/sites/andygreenberg/2014/03/04/another-bitcoin-startup-tanks-after-600000-theft/

Rogue Exchanges

A recent example of Bitcoin exchange that closed suddenly is GBL, a ChineseBitcoin trading platform that claimed to be based in Hong Kong, event thatallegedly vaporized in the Matrix 4.1 million dollars from users’ accounts.

The company2 was launched in May 2013,with its domain btc-glb.com based in

Beijing despite the company’s claim to being based in Hong Kong. GBL’users had

not provided straightforward contact information on their site and that the

platform used a stream of information from other websites.

2Problems for bitcoin in China as HK trader goes down http://www.

wantchinatimes.com/news-subclass-cnt.aspx?id=20131105000045&cid=1102Cryptocurrency: Financial crime focus Schwarzthal Kapital 33

http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20131105000045&cid=1102

http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20131105000045&cid=1102

Rogue Exchanges

Facts

The crash of Mtgox a the biggest intermediary in the Bitcoin universe marked aheadstone in the public awareness of the Bitcoin (Bit con) phenomena.

The exchange shut down after it allegedly discovered that an estimated 744 000Bitcoins, about 350 million dollars had been stolen due to a hole in its security.The amount represented six per cent of the 12.4 million Bitcoins in circulationworldwide at the time.

Few days later Mgtox issued a statement claiming that it had a problem with“transaction malleability”,which implied that an users could withdraw cash andthen alter the ID of the transaction to make it appear that it had never occurred,then request it again. The company indicated that it was a bug in the Bitcoinsoftware but Bitcoin’s developer community pointed out that the issue had beenknown about for some time already, and that it was less a bug and moresomething which needed to be taken into account by developers when creating anexchange service.

aMtGox bitcoin exchange files for bankruptcyhttp://www.bbc.co.uk/news/technology-25233230


http://www.bbc.co.uk/news/technology-25233230

Mtgox Focus

Figure : Benchmark of Bitcoin - USD rate on Mtgox vs the average. Up: EvolutionBitcoin - USD rate on Mtgox vs the average. Down: Ratio of the average Bitcoin -USD rate to Mgtox rate


Mtgox Focus

Figure : Benchmark of traded volumes on Mtgox vs the total Bitcoin - USDtrades. Up Evolution traded volumes on Mtgox vs the total Bitcoin - USD exchanges.Down Ratio of traded volumes on Mtgox to the total Bitcoin - USD exchanges


Mtgox focus

Figure : Who creathed Bitcoin


Bitcoin Investment Scam: Ponzi Scams

In 2014 an US federal investigation 3 came with charges against Trendon Shavers,from base in Texas who ran a scam investment scheme called Bitcoin Savings andTrust. The accusations included one count of securities fraud and one of wirefraud, with each having a maximum penalty of 20 years and potential finestotaling upwards of 5 million US dollars.

By using the on-line social media Shavers allegedly sold Bitcoin investment

opportunities on various on-line forums promising a 7% return per week to

potential investors in an envrionemnt with yearly nominal interest rates of 0.25%.

He was able to raise from 100 investors over 700 000 Bitcoins accounting for 64

million dollars over a period of time stretching from September 2011 to

September 2012.

3Bitcoin Ponzi scheme treated fined as securities fraudhttp://www.bloomberg.com/news/2014-09-20/

bitcoin-ponzi-scheme-treated-fined-as-securities-fraud.htmlCryptocurrency: Financial crime focus Schwarzthal Kapital 38

http://www.bloomberg.com/news/2014-09-20/bitcoin-ponzi-scheme-treated-fined-as-securities-fraud.html

http://www.bloomberg.com/news/2014-09-20/bitcoin-ponzi-scheme-treated-fined-as-securities-fraud.html

Hardware Scams

One example of the Bitcoin rush has Butterfly Labs, a Missouri-based company

that marketed specialized hardware designed to produce Bitcoins allegedly ran a

big scale scam with Bitcoin mining tools 4 Upon investigation from Federal Trade

Commission it occurred that Butterfly Labs charged consumers thousands of

dollars for its hardware, but then failed to provide the gear until they were

practically useless, or in many cases, did not provide the computers at all. Since

June 2012, Butterfly Labs sold mining computers, named BitForce, advertised as

cutting-edge, powerful and efficient for generating Bitcoin. Consumers who

bought the computers were required to pay in full, up front. The computers

ranged in price from 149 dollars to 29 899 dollars based on the hardware’s

computing power. The investigators found that in September 2013, more than 20

000 consumers had not received the computers they had purchased.

4Butterfly Labs http://www.ftc.gov/news-events/press-releases/2014/09/

ftcs-request-court-halts-bogus-bitcoin-mining-operation?utm_source=

govdeliveryCryptocurrency: Financial crime focus Schwarzthal Kapital 39

http://www.ftc.gov/news-events/press-releases/2014/09/ftcs-request-court-halts-bogus-bitcoin-mining-operation?utm_source=govdelivery



Bitcoin Derivatives

Bitcoins are gaining mainstream acceptance and its value is constantlyfluctuating, many brokers saw an opportunity to provide their clients with avolatile asset to trade with.

IG Group was the first broker to offer Bitcoin option trading. However, IGGroup have since withdrawn Bitcoin as part of their pool of available assetciting it as a “management decision”.

Other brokers which offer Bitcoin as part of their trading options include:Any Option, SetOption, TradeRush At TradeRush, Bitcoin is offered as acurrency pair with the Bitcoin - USD rate as the most popular pair.

The Bitcoin/USD volatility can easily reached level of 100% which makes itthe most volatile exchage rate. In a strongly inefficient and incompletemarket, options’ pricing does not fit in the classic risk-neutral theory.


Stealing Gbits

“Time is money” says an old proverb, which can be adjusted in Bitcoin’s case to“Memory is crypto-money”. Butterfly Labs’ case shows that the main battle forBtioin is given in the hardaware field. Thus rogue miners can target not onlyaccount but also other computers in order to use their memory and processingpower for mining. In 2013 German authorities 5 arrested two people concerning amalware that generated the virtual currency by infecting its victims’ computers.The accused were behind a botnet that allowed its operators to secretly use otherpeople’s computers to carry out mining. Bitcoin’s mining is decentralized bynature and distributed computing is not something new. The emergence of thistype of memory fraud will follow the increasing need of capacity for mining.

5Five held over Bitcoin scams in China and Germanyhttp://www.bbc.co.uk/news/technology-25217386


http://www.bbc.co.uk/news/technology-25217386

Crypto-clipping

Figure : Clipping

Crypto-clipping is a scam based on the scenario that a malware or Trojan horse is

introduced in the Bitcoin Matrix and manages to shave a small portion of the

generated Bitcoin in such a way that the real miner would not acknowledge the

loss. This type of scam existed already in the banking, and on-line payment,

involving an account being infinitesimally shaved or a phone bill wire transfer

increased.


Rogue Mining Pools

By assuming that a node (or a group of nodes) may have an mining capacity γ higherthan the other nodes, it can be assessed what is the likelihood of observing roguevalidation in the transaction series. The mining ca be simulating using the hashcashalgorithm but with a smaller number of zeros in the header in order to make it replicableon a computer. By increasing the lengths of the input chain to be hashed the averagetime of solving the puzzle increases as exhibited.

Figure : Evolution of the mining time depending on the number oftransactions in the system: The average and the 10%quantile are exhibited


Rogue Mining Pools

Lets consider the variable Znt characterizing the event where a series of wtransactions enter in a rogue terminal. Znt takes the value 1 and zero otherwise.if the event occurs Assuming a series of transactions indexed nt , a series ofmining times τnt and a series of nodes indexes where the mining of the nttransaction is allocates Mnt , the likelihood Znt for a terminal M∗

P(Znt = 1|M∗) = P(Mi = M∗, τi < D−1τnt (γ)|M∗) (2)

=P(Mi = M∗,P(τi < D−1

τnt (γ))

P(M∗)(3)

where, i ∈ {nt, nt + 1, ..., nt + w} and P(M∗) is the probability that the terminal

M∗ is rogue. For the realization of the event Znt there are two conditions: first all

the transactions of the series should be allocated to the same terminal M∗ and

second this terminal should solve the puzzle before the other puzzles. If we

assume that the distribution of the solving times is Dτnt than the target terminal

should solve faster than the time corresponding γ quantile, γ being the weight

the total capacity allocated to M∗ .


Rogue Mining Pools

Figure : Rogue mining depending on the weight of mining capacity (γ) for oneallegedly rogue terminal. For a terminal having a capacity higher than 30%, at least1% of the transactions can be frauded. This ratio increasee fast as for a total capacityof 55% the proportion of rogue transactions is higher than 8%.


Money Laundering

The digital currency phenomena and its ties with organized crime is more

serious than one would imagine. For a fee of 9% of the nominal ammount,

criminal proceedings could be materialized in liquid cash through digital

currencies.

As pointed by [Bryans(2014)] the main features of Bitcoin that prove beneficial toits survival, and harmful to effective anti-money laundrying regulation. Whatmakes Bitcoin unique for money launderers is the fact the the crypto-currency canbe used in all three phases of the laundering process, compared only to first tothe second phase for previous digital currency.

Bitcoin can be used as payment for illegal activities or items or in exchangefor illegal funds, thereby being a possible underlying of the placement stage.For instance, Bitcoins have been reportedly used on Sheep Marketplace, theunderground service that replaced Silk Road, a web site processing trades fordrugs and other illegal goods.

As can circulate anonymously from one user to another and from onecountry to another, the layering step is the predilection use of Bitcoin

As some countries start to consider Bitcoin as a legal currency , theintegration phase can be conducted through the crypto-currency, therebyrepresenting the finality of the money laundering process.

Bitcoin and generally crypto-currencies qre currently the perfect underlying for

laundering funds. The massive increase in Bitcoin transactions can bring with it a

lot of illicit user and funds.


Uber-terrorism: What place for crypto-currency?

Uber-terrorism

Decentralized organization

Low costs actions

Financing avoiding the banking system

Logistic relies on local support

Economy of terror or Economic jihad

... Bitcoin looks like a perfect candidate


Conclusions

1 With the emergence of peer to peer credit or crowd-funding new tools would berequired. As underlined by [Lee(2015)] crypto-currencies are a serious vector forinnovation in the new economy and their integration on the massive scale in thecurrent environment is ineluctable.

2 Nevertheless it is not sure if Bitcoin or other of its current competitors wouldsurvive this early age of cryptomoney and arrive to be mainstream currency in thenew economy. The risks beared by the current crypto-money and its users are notenough studied and understood. The scenario of a shut down for Bitcoin and ofother peer currencies is probably the main weakness in their current development.

3 The most likely scenario is that a new generation of Crypto-currencies will arrivethat would be able to deal with the current issue sin order to eliminate or reducephenomena like money laundry , terrorism financing, and theft. Only whenfundamental risk would be addressed these currencies would be able to gainmomentum

4 Regulation is another stringent point that limits the evolution of the crypto money.No serious investor including major banks or pension funds will step in as long asthey are not sure that there is genuine regulatory framework. The second is forsure more complicated as the crypto-money is an innovation tool and the numberof products entering in this area could be massive.


Q&A

More on our website ...www.schwarzthal.com


www.schwarzthal.com

Bryans, D., 2014. Bitcoin and money laundering: Mining for aneffective solution. Ind. LJ 89, 441.

Chaum, D., Fiat, A., Naor, M., 1990. Untraceable electronic cash. In:Proceedings on Advances in cryptology. Springer-Verlag New York,Inc., pp. 319–327.

Frunza, M.-C., 2015a. Introduction to the Theories and Varieties ofModern Crime in Financial Markets. Academic Press.

Frunza, M. C., 2015b. Solving Modern Crime in Financial Markets:Analytics and Case Studies. Elsevier.

Grinberg, R., 2012. Bitcoin: an innovative alternative digital currency.

Lee, D., 2015. Handbook of Digital Currency: Bitcoin, Innovation,Financial Instruments, and Big Data. Academic Press.

Selgin, G., 2013. Synthetic commodity money. University of GeorgiaEconomics.


Crypto-currency focus

Documents

Transcript of Crypto-currency focus