Crypto crime - a recycled vignette

By Matt Hurd

The US filed against the Russian hackers today. The ever-vigilant Mr Kipp Rogers tweeted these wise words:
Twitterish linkage of sorts
(click to enlarge)
I remain convinced crypto-crime is the most likely threat to the longevity of various coins, including $BTC. Though crime is more of a problem with the coinage designed for completely anonymous transactions such as Monero, Dash, Zcash, etcetera.

Here is a forte reverberation of something I wrote a few months ago, previously buried in the mix of the article, "The market factory: things that make you go hmmm."

It seems a little more relevant today after the DoJ's filing. --Matt. _______________________ Bubbles come and go. Meh. Being libertine at heart -  even though the libertine part seems to be shrinking with age - I'm disturbed by my disturbance at the marketing around so-called virtual currencies. Octogenarian family friends, who can't use an iPad, make enquiries about BitCoin. I suspect you, as a knowledgeable technology or finance peep, have been asked similar questions even if you are no longer reading this all too long meander. If you are no longer reading I presume you will still know if you've been asked about such coinage - despite the breaking of the fourth wall. It is a worry the National TV News from the public broadcaster here has had BitCoin prices and commentary in the nightly finance report for many months. Crazy stuff for something with the mirage of the modest market cap of a single stock. When remote Tasmanian retail, or the shoe-shiner, asks about Bitcoin, you know you have a retail problem that needs some unfortunate regulatory consideration.

I wrote a child-like meander about crypto-currency and crime last week, "Your crypto-currency response will be weighed." It serves little purpose other than as therapy but I enjoyed the music. The important aspect is to realise, according to the UN, there are some 40,000,000 modern slaves in the world and they deserve their AML back. There are kids being abused and photographed with their pictures being hosted on servers paid for with BitCoin.

Yep, slavery is still a thing:

My musing meandered me to the point of view that crime may destroy BitCoin before other factors, say bubbles. The regulators have been asleep at the wheel. Perhaps with its minor transaction flow profile virtual currencies didn't deserve too much attention, but the genie escaped that bottle years ago. The regulators could have nipped this nightmare in the bud with some pretty simple regulations. They failed in their mission. Most disagreed with this point of view in comments sent back, though I appreciated some support. I'm hoping this is another Søren Kierkegaard moment where my minority view may be right.
Society has a point. There is a minor fraction of real currency that is laundered. There is a minority, estimated to be a much bigger minority, of virtual currency that is likewise laundered. For the non-virtual case, we've developed some pretty flawed regulations and laws in a ham-fisted attempt to stem such criminal activities. They have a point as the best we can do for now. The same regulations should be equally applied to virtual currencies. Money laundering is a pretty big deal:
(Sourced from PWC - click to enlarge)
unless you think $2 trillion a year is nothing to worry about.

I've been especially critical of the CFTC's and SEC's tepid response. That seems to be changing as they ramp up their rhetoric to counter their embarrassing lack of action. See this sensible Written Testimony from the last week by Chairman J. Christopher Giancarlo. There is a lot of good work in there, including this piece on virtual currencies,

Let’s turn to virtual currencies. Emerging financial technologies are taking us into a new chapter of economic history. They are impacting trading, markets and the entire financial landscape with far ranging implications for capital formation and risk transfer. These emerging technologies include machine learning and artificial intelligence, algorithm-based trading, data analytics, “smart” contracts, and distributed ledger technologies. Over time, these technologies may come to challenge traditional market infrastructure. They are transforming the world around us, and it is no surprise that these technologies are having an equally transformative impact on U.S. capital and derivatives markets.
Supporters of virtual currencies see a technological solution to the age-old “double spend” problem – that has always driven the need for a trusted, central authority to ensure that an entity is capable of, and does, engage in a valid transaction. Traditionally, there has been a need for a trusted intermediary – for example a bank or other financial institution – to serve as a gatekeeper for transactions and many economic activities. Virtual currencies seek to replace the need for a central authority or intermediary with a decentralized, rules-based and open consensus mechanism. An array of thoughtful business, technology, academic, and policy leaders have extrapolated some of the possible impacts that derive from such an innovation, including how market participants conduct transactions, transfer ownership, and power peer-to-peer applications and economic systems.
Others, however, argue that this is all hype or technological alchemy and that the current interest in virtual currencies is overblown and resembles wishful thinking, a fever, even a mania. They have declared the 2017 heightened valuation of Bitcoin to be a bubble similar to the famous “Tulip Bubble” of the seventeenth century. They say that virtual currencies perform no socially useful function and, worse, can be used to evade laws or support illicit activity. Indeed, history has demonstrated to us time-and-again that bad actors will try to invoke the concept of innovation in order to perpetrate age-old fraudulent schemes on the public. Accordingly, some assert that virtual currencies should be banned, as some nations have done.
There is clearly no shortage of opinions on virtual currencies such as Bitcoin. In fact, virtual currencies may be all things to all people: for some, potential riches, the next big thing, a technological revolution, and an exorable value proposition; for others, a fraud, a new form of temptation and allure, and a way to separate the unsuspecting from their money. 
Perspective is critically important. As of the morning of February 12, the total value of all outstanding Bitcoin was about $149 billion based on a Bitcoin price of $8,800. The Bitcoin “market capitalization” is less than the stock market capitalization of a single “large cap” business, such as Disney around $156 billion. The total value of all outstanding virtual currencies was about $430 billion. Because virtual currencies like Bitcoin are sometimes considered to be comparable to gold as an investment vehicle, it is important to recognize that the total value of all the gold in the world is estimated by the World Gold Council to be about $8 trillion, which continues to dwarf the virtual currency market size. Clearly, the column inches of press attention to virtual currency far surpass its size and magnitude in today’s global economy. 
Yet, despite being a relatively small asset class, virtual currency presents complex challenges for regulators. Chairman Jay Clayton of the U.S. Securities and Exchange Commission (SEC) and I recently wrote: 
The CFTC and SEC, along with other federal and state regulators and criminal authorities, will continue to work together to bring transparency and integrity to these markets and, importantly, to deter and prosecute fraud and abuse. These markets are new, evolving and international. As such they require us to be nimble and forward-looking; coordinated with our state, federal and international colleagues; and engaged with important stakeholders, including Congress.
 It is this perspective that has guided our work at the CFTC on virtual currencies. Our work has six broad elements: (1) staff competency; (2) consumer education; (3) interagency cooperation; (4) exercise of authority; (5) strong enforcement; and, (6) heightened review of virtual currency product self-certifications.
The interagency mess is quite troubling. Self-certification is also troubling in this domain. We have the various SROs, SEC, CFTC, FinCEN, FBI, DOJ, FSOC, FSB, IOSCO all with a stake. We have to be careful with our technology and regulations. Just because cameras are used for kiddie porn, we don't ban cameras. Similarly, mathematical truths and cryptography are too important for the good of humanity to limit or ban. The FBI and NSA are not too happy with solid cryptography being used in the wild. Shame on them. As a society, we have chosen another path. We choose to use society's lubricant, money, as one of the primary mechanisms to keep our children safe and to act against slavery. This, to me, remains a valid choice. Virtual currencies are subverting this due to a lack of oversight.

The docile and inactive FinCEN at least prosecuted the $4B laundry-o-mat that was BTC-e. A $110M fine was levied. Part of the case included highlighting not only the problem of bitcoin mixers but the clear and present danger of newer virtual currencies that provide untraceable features. Dash in this case:

With many next-generation coins, such as Zcash, and then Monero, improving on the usefulness of virtual currencies for crime, we need to wake up and process this nightmare that refuses to sleep. It is not possible for me to accept that Monero should be available for any reasonable transaction size given the impossibility of AML/KYC application to such a beast. Australia introduced new virtual currency laws recently but a punter can still buy Monero at exchanges touting AML compliance. Many buy BTC at Coinbase and then convert to Monero.  It would seem there needs to be a central body or regulation that has viral properties. You can't expect global rules to be negotiated or exist - certainly not in a timely manner. A viral approach where you can't transact with a non-member or a non-compliant body is the only workable solution. A cabal of countries agreeing would be better, but the US or the EU could go it alone if necessary, again. A further step would be for compliant venues to raise a Suspicious Transaction Report requirement for coinage going to non-compliant venues or being tumbled. It is right there in the chain and popular addresses are known or derivable. That is somewhat better than cash in that you can track the trackable, but not the new generation of crime-based coinage such as Monero. The viral possibilities in such an approach are better than what we have with cash. There is hope.

It does make you wonder if there is a grand conspiracy in that Bitcoin may be a long game where the US government is trying to corral all the criminals into a tight space where one sucker punch will bring many undone. Alas, government incompetence and Hanlon's razor makes this unlikely. Yet, it makes me go, "Hmmm."

Virtual currencies are a cesspool that need not be so. Regulators are belatedly picking up the ball, but not fast enough. ICOs and the vulnerability of poorly educated retail are one dimension but I worry more about crime. You should too. This is a thing that should make us all go, "Hmmm."