What Is It? What Is It Not? What Can You Do With It (Good ... · What Is It? What Is It Not? What...
Transcript of What Is It? What Is It Not? What Can You Do With It (Good ... · What Is It? What Is It Not? What...
What Is It? What Is It Not?What Can You Do With It (Good or Bad)?
2014 ACAMS - ACFE AML/Fraud ConferenceNorth Miami, Florida
November 7, 2014
Stephan Robinson, CAMS - Special Agent, IRS-CIBrian Stoeckert - Managing Director, CoinComply
Bitcoin
Concept, Background & History
How it works, Exchanges & Exchange Rates
Money Laundering Assessment
Terrorist Financing Assessment
Recent Events & Outlook
▪ Other Virtual Currencies
Case Examples & Questions
This program assumes the audience’s general understanding of:
The U.S. Money Laundering Statutes
The Bank Secrecy Act (BSA) & Regulations
Narcotics Trafficking Methodologies
The terms “crime” & “criminally derived” refer to one or more Specified Unlawful Activities (SUA) generating proceeds
Questions Are Encouraged
Money Laundering Definition: “Dirty” money is “laundered” to conceal and/or
promote the criminal activity associated with it▪ Narcotics Trafficking, Bribery & Public Corruption,
Prostitution & Human Trafficking, Illegal Gambling
▪ “Ponzi” Schemes, Health Care Fraud, Securities Fraud, Embezzlement, Mail & Wire Fraud, Hostage Taking ▪ Many other “specified” crimes
All money laundering conduct falls into one (or more) of three categories Illustrated by the “Money Laundering Model”
Integration
Layering
Placement
Money Laundering Model
Concept published in 2008 under pseudonym
Protocol launched in 2009
System began operating as the world’s first global virtual currency
Internet-based (P2P) medium of exchange
Neither issued nor backed by any sovereign jurisdiction
Not transacted through any country’s central bank or financial institutions.
A virtual currency (system/economy)
whose value is set and fluctuates against many of the world’s “real” – Fiat – currencies.
In their virtual state, Bitcoin transactions are:
▪ 1) irreversible
▪ 2) substantially, but not entirely, anonymous
▪ 3) do not move through any country’s financial system or financial institutions
▪ 4) perceived as beyond the control of any government
System operates by trust/faith of all users
Often referred to as Crypto-currency, the virtual Bitcoin system is attractive to persons:
Seeking to maximize their personal privacy
Who oppose government’s impact on its citizens and/or globalization
Criminals who wish to evade law enforcement detection & investigation, prosecution
▪ Avoid seizure of their illicit proceeds and assets.
Physical Bitcoin-denominated Coins
Formerly manufactured & sold by Casascius
▪ A U.S. Company based in Utah ▪ See https://www.casascius.com
▪ Coins contain an embedded “private key”
Must be purchased by & shipped to buyer
▪ Via Bitcoin Transactions & Other currencies
Notified by FinCEN to register as a MSB
▪ Owner shut down business operations▪ Parked website in 11/2013
Bitcoins can be created by anyone who downloads certain open source software
which is then used to solve a complex mathematical formula
▪ called a “Hash”
a process called “Mining”.
A completed hash is called a “Block” and serves as “proof-of-work”
▪ which is then verified by all of the members in the Bitcoin network.
Once verified, the miner is granted twenty-five (25) Bitcoins for each verified block.
Blocks create 25 new bitcoins at present.
▪ “Block Reward” is an incentive for people to perform the computation work required for generating blocks
Roughly every 4 years, the number of bitcoins that can be "mined" in a block reduces by 50%
▪ Originally the block reward was 50 bitcoins
▪ Halved in November 2012.
Users store their Bitcoins in a digital “eWallet”, “Bitcoin Wallet”, or “Wallet”
created by downloading software from Bitcoin
▪ Or several internet-based third party wallet vendors.
Once the wallet is established on a computer or mobile device, the user can receive and send Bitcoins.
Users who cannot mine must buy or otherwise obtain Bitcoins from a miner, a third party exchange, or another user.
Sources of digital wallets include:
Bitcoin
WeUseCoins
▪ www.weusecoins.com
Coinbase
▪ www.coinbase.com
MyWallet
▪ https://blockchain.info/wallet
and several others
The leading exchanges are Bitfinex (Hong Kong/BVI), Bitstamp (United Kingdom), BTC-E.com (Bulgaria), and LakeBTC.Com (BVI).
Users must exchange U.S. Dollars (USD) or another accepted currency
For an equivalent amount/value of Bitcoins
▪ Ticker symbols: BTC, XBT, or ฿▪ At the current exchange rate.
Several other, smaller exchanges
▪ Trades via FOREX: Bid, Ask, Low, High, Avg., Vol.
Users exchange USDs or another accepted
currency, for an equal amount [value] of ฿ Historical USD-BTC exchange rate varied from $2
to $1,200
Some significant large fluctuations in 2013 & 2014
▪ Total BTC in 09/01/2013: 11,637,500
▪ Total BTC in 05/17/2014: 12,780,476
▪ Total BTC in 10/17/2014: 13,349,000▪ www.bitcoinwatch.com & www.bitcoincharts.com
Mt. Gox KK (Japan)
Largest Bitcoin exchange until February 2014
▪ Ceased trading & filed for bankruptcy
Admitted “losing” 850,000 of customer’s & Mt. Gox’s Bitcoins
▪ Approx. $470,000,000 worth of (USD) value vanished▪ 750,000 & 100,000, respectively @ $552.9412 per ฿
Blamed Fraud and Computers & Software
▪ “There was some weakness in the system, and the bitcoins have disappeared. I apologize for causing trouble.”
Recent BTC exchange rate moves (approx. $)
May 15 – Oct. 1, 2013 $90 - $130
Oct. 25, 2013 $200
Nov. 10, 2013 $325
Nov. 18, 2013 $500
Nov. 25, 2013 $800
Nov. 29, 2013 $1,125
Dec. 10, 2013 $980
Dec. 21, 2013 $525
Recent BTC exchange rate moves (approx. $)
Jan. 1, 2014 $730
Jan. 10, 2014 $910
Feb. 15, 2014 $610
Mar. 3, 2014 $580
Mar. 10, 2014 $680
Apr. 12, 2014 $375
May 17, 2014 $450
▪ Data Credit: www.bitcoincharts.com
September 1, 2013
Exchange rate: $124.02 - $145.11 = 1 BTC
▪ Average: $130.99 @ 11 different USD exchanges
September 1, 2014
Exchange rate: $504.00 = 1 BTC
October 17, 2014
Exchange rate: $377.02 - $450.00 = 1 BTC
▪ Average: $385.92 @ 17 different USD exchanges▪ A $114 – or 22.6% – loss of value in six weeks
Rates for 35 other currencies are available:
Euro British Pound Sterling
Russian Ruble Ukrainian Hryvnia
Bulgarian Lev Canadian Dollar
Mexican Peso Brazilian Real
Argentine Peso Peruvian Nuevo Sol
Chinese Yuan Japanese Yen
Hong Kong Dollar Thai Baht
Other currencies, Cont’d.
Singapore Dollar Indian Rupee
Israeli Shekel Swiss Franc
Norwegian Krone Swedish Krona
South African Rand Australian Dollar
All major geographic regions
Except for the Middle East
▪ Saudi Riyal is presently the only Middle Eastern currency for which Bitcoins may be exchanged.▪ Gov’t. policies, infrastructure, computer usage & internet access
Used to pay for goods and services at both online and physical locations.
Transactions are conducted by a buyer sending an agreed upon quantity of Bitcoins (or a portion of one BTC) from their digital wallet
To the “address” of the seller’s digital wallet.
▪ Escrow services may be employed for large transactions
The number of “bricks-and-mortar” businesses accepting Bitcoins is low, but always increasing
Many online resources available to identify or locate Bitcoin-accepting individuals and businesses
None of the largest internet-based companies, such as Amazon, eBay, or Apple* accept Bitcoins
▪ Overstock.com (12/2013) – by June 2014 TigerDirect.com (01/2014) – computers & electronics
▪ Virgin Galactic (11/2013) – spaceflight = $250,000
▪ Someone bought a Tesla S (12/2013) = $100,000+ (91.4)
▪ Cyprus – universal acceptance (02/2014)
Silk Road: the most notorious Bitcoin-accepting business
Anonymous, underground black market site
▪ Based in the “Deep Web”
Any kind of illegal drug can be bought or sold.
▪ Silk Road accepts no payment types other than Bitcoins
Silk Road operators indicted/arrested
Website shut down by U.S. Gov’t. (10/2013)
▪ Bitcoin exchange rate dropped to $85
U.S. leads in most Bitcoin adoption-related categories
Availability of physical businesses selling consumer goods & services varies widely
▪ Groceries House Wares
▪ Clothing Legal Advice
▪ Restaurants Other Services, Etc.
No large providers of local, national, or international transportation or tele-com services
▪ Other than Internet/ISP, VPN, Email, VOIP, and SMS
Resources to Locate Bitcoin Acceptors:
Bitcoin Merchant Forum
▪ http://bitcoin.org/en/resources
BitcoinWiki
▪ https://en.bitcoin.it/wiki/Trade
▪ www.redd.com/r/bitcoin
SpendBitcoins
▪ https://www.spendbitcoins.com/places/
Recent Bitcoin Adoption Activity
PayPal, September – October 2014
▪ Partnered with Bitcoin Processors▪ BitPay
▪ Coinbase
▪ GoCoin
▪ To expand PayPal’s own merchant payments processing services
eBay, September 2014
▪ Announced possible Bitcoin processing applications▪ Through its Braintree unit
Recent Bitcoin Adoption, Continued
Apple, July – October 2014
▪ Resumes sales of Bitcoin Wallet Applications▪ Still does not accept Bitcoins for direct sales
AirBaltic, July 2014
Latvian State-owned airline
▪ 50+ destinations & 25 aircraft
Dell.com, July 2014
Through partner Coinbase
Expedia.com, June 2014
Bitcoin use differs from country to country
Depending on the availability of internet access
The level of technology acceptance/use
Societal trust regarding governmental operations and privacy
Basic awareness of the Bitcoin network and communities.
▪ See “Mapping Bitcoin’s Global Adoption” by Tyler Darden, http://www.zerohedge.com/print/474469.
There are many legitimate uses for Bitcoins
As a Peer-to-Peer (P2P) Value Transfer System
▪ Bitcoin.org
▪ The Bitcoin Foundation▪ www.bitcoinfoundation.org
With any currency, financial vehicle/product, or VTS, there is a potential for misuse, fraud & criminal activity
Particularly if the Gatekeepers can be undermined manipulated or corrupted
Usefulness of the Bitcoin system to launder money is relative & varied
Depending on where in the Money Laundering Model the illicit funds are located
▪ The type (form) of criminally derived funds involved
Money Laundering Model – or Cycle – Steps
▪ “Placement”
▪ “Layering”
▪ “Integration”
Integration
Layering
Placement
Money Laundering Model
Bitcoin, as a digital, internet-based currency:
A poor option for laundering the proceeds of contraband crimes
▪ Which generate large volumes of “real” currency
▪ The cash still must be “placed” into the financial system
▪ Then traded, via one of the exchanges, to purchase ฿▪ Volatility in the BTC exchange rates could significantly
impact the value of the laundered funds. ▪ Lose Value – More Likely
▪ Increase in Value - Perhaps
Bitcoin exchanges are considered Money Service Businesses (MSBs)
Under the U.S. Bank Secrecy Act (BSA) and regulations – administered by FinCEN
▪ Subject to mandatory MSB registration
▪ Currency & Suspicious Transaction Reporting▪ Anti-Money Laundering & Customer I.D. Programs
FinCEN issued guidance regarding applicability of the BSA to virtual currencies
▪ FinCEN Document: FIN-2013-G001 (March 18, 2013)
Criminal enterprise could spend the Bitcoins
However, the benefit of anonymous transactions is undermined
▪ By the limited number merchants/vendors/outlets accepting Bitcoins.
The same challenges exist for “White Collar” and “Cyber” criminals.
The “Placement” stage is bypassed
▪ Funds are already in the financial system
▪ Exchange Rate Risk & Few Spending Options Remain
Significant advantages as a “Layering” tool:
Irreversible transactions
Substantial anonymity of transactors
Ability to convert Bitcoins “back” into thirty-five different countries’ currencies.
Many of the present online services involve currency exchanges & other financial services
▪ Assumes successful “Placement” of sufficient volumes of “dirty” cash occurs on a continuing basis.
Significant advantages as a “Layering” tool:
Other online financial services include
▪ Investments & Securities Trading
▪ Precious Metals & Commodities
▪ IBC, Business Formation & Trusts, Etc.
However, most of these outlets involve “trusted” third parties
▪ Possible transaction reporting in foreign jurisdictions
Negatives include exchange rate volatility
▪ Risk of Fraud and/or Loss
The same positives and negatives generally apply to “Integration” applications
The lack of places to spend Bitcoins
▪ Particularly in large amounts
Few exchanges able or willing to process transactions in excess of $10,000
▪ Exchanges must register w/ FinCEN▪ Likely U.S. transaction reporting requirements
▪ Subject to U.S. jurisdiction & judicial process▪ Further limit usefulness for successful criminal enterprises
Presently, no commercial exchanges convert BTC into the currencies of
Colombia
Bolivia
Venezuela.
Geographically a better money laundering tool other than in the U.S. or South America
Europe
Asia
Bitcoin, as a digital, internet-based currency:
More advantageous for T/F than M/L
Relative anonymity of participants
Transactions conducted outside of the financial system
Little or no exposure to regulatory or law enforcement scrutiny
Global access
A digital wallet loaded on a “pay-as-you-go” mobile cellular device
Would be a useful logistical and operational tool
Difficult to trace or intercept
High-capacity USB flash drives (with or without encryption)
Small, readily concealable, and easily transferred between individuals
▪ Or transported across international borders undetected.
Donors and Financiers
Likely have access to the financial system
▪ And Internet Services
Can use Bitcoin to send their support “off-the-grid”
▪ both concealing and layering their transactions in a single step.
The funds may later re-emerge in another jurisdiction
▪ as a different currency or under someone else’s control.
Underground marketplaces and forums that accept Bitcoins
Provide potential access to contraband other than drugs
▪ including restricted goods & materials
▪ illegal services
▪ Tele-Comm. Services: ISP, Email, Cellular, VOIP, SMS
Such as the former Silk Road
Successor websites & illicit service providers
Disadvantages remain formidable
The lack of physical outlets at which to spend Bitcoins & poor physical infrastructure
Limited types of goods and services available from online sources
Conversion back into any “real” currency requires the use of an exchange
▪ Which creates records - that can be traced
▪ May trigger currency and/or suspicious transaction reporting
Disadvantages remain formidable, Cont’d.
Saudi Riyal is presently the only Middle Eastern currency for which Bitcoins may be exchanged
Limited or lack of access to reliable internet services throughout the region
▪ Many governments monitor/restrict internet access
Adversarial, Faltering or Failed Governments
▪ Throughout the Middle East & Horn of Africa
Low Bitcoin adoption among populations
▪ Poor Education & Technology Familiarity
Bitcoin was the first deployed virtual currency
Most successful concept & system…so far
Highest adoption, scope, and transaction volume
▪ But so was Wang Labs
Several alternative & competitor systems
Particularly in response to Bitcoin adversity
▪ OTB: Other Than Bitcoin
Most OTB VC systems operate similarly
Usually differences in Mining, Supply & Security
Adoption & volume of OTB VC systems is far below Bitcoin’s levels
Users & Vendors are limited to acceptance levels
Exchanges / Rates will be fewer, less transparent
All are essentially Internet-based systems
May or may not be truly Non-Sovereign
Or independent of OTB VC system operators May not covert to USD or limited other currencies
Value may not transfer outside of OTB VC system
Some active OTB VC Systems
E-Gold
▪ First internet-based digital currency (1996 – 2007)▪ Prosecuted by FinCEN as an Unlicensed MSB
Litecoin
▪ Reported as #2, behind Bitcoin▪ www.litecoin.org
Peercoin
▪ Reported as #3, behind Bitcoin▪ www.peerecoin.net
Some active OTB VC Systems, Cont’d.
Open Coin Project
▪ Based on "digital cash“ concept▪ A protocol to use the original idea of electronic cash in daily life
▪ Also developed a system consisting of minting software, wallet software, Etc.▪ Everything that is necessary to have a system for anonymous
electronic transactions
▪ www.opencpoin.org
▪ Not to be confused with Open Coin, Inc.▪ See Ripple – next slide
Some active OTB VC Systems, Cont’d.
Ripple Protocol
▪ Open-source, distributed payment protocol
▪ Enables free and instant payments with no chargebacks
▪ in any currency, including dollars, yen, euros, bitcoins, and even loyalty points.
▪ Businesses of any size can easily build payment solutions such as banking or remittance apps, and accelerate the movement of money on Ripple▪ To move value like information moves today.
▪ www.ripple.com (formerly Open Coin, Inc.)
Some active OTB VC Systems, Cont’d.
Freicoin
▪ Based on Bitcoin protocol with adjustments
▪ Smallest operating OTB VC system▪ www.freicoin.org
Linden Dollars
▪ VC system component of Second Life virtual world▪ Primarily used to pay for internal fees & purchases
▪ Controlled by Second Life operators
▪ Limited system to transfer value outside of Second Life
Some active OTB VC Systems, Cont’d.
MintChip Challenge
▪ Research project by Royal Canadian Mint
▪ Invited software developers to create innovative digital payment applications using MintChip▪ a R&D phase technology available only to challenge participants.
▪ Developers and the public were also encouraged to share ideas for how a digital currency can be used.▪ Challenge ran for 4 months & closed.
Different from Virtual Currencies
Non-sovereign issued medium of exchange
Peer-to-Peer Transactions
Operates outside any country’s financial system
Virtual Banking
Internet-based financial transactions
Transactions by / through a “trusted” 3rd party
▪ Usu. traditional bricks-and-mortar financial institutions
Operated within the global financial system
Examples
PayPal
▪ Electronic Payments System
▪ Clears transactions through countries’ financial systems
Ally Bank
▪ Internet-based U.S. Financial Institution▪ Few, if any, physical locations
GreenDot Cards & Similar Products
▪ Stored Value / Funds Transfer System
▪ Operates within the traditional financial systems
Examples, Cont’d.
Liberty Reserve
▪ Described as a VC, but Digital Currency is more accurate
▪ Operated as a virtual bank based in Costa Rica
▪ Within the traditional U.S. / Global financial system▪ USD & other currency-denominated Transactions
▪ Chose to ignore legal & regulatory requirements▪ Customer Identification Program (CIP)
▪ Know Your Customer (KYC)
▪ BSA Currency & Suspicious Transaction Reporting
▪ Shut down by U.S. Government in May 2013
Much has been written about Bitcoin during the last 24-months
Several high-profile rises & declines in the BTC exchange rates
▪ Generated positive and negative publicity
▪ Encouraged the public’s curiosity about Bitcoin.
Commentators appear evenly divided, for and against.
Much has happened Re: Bitcoin, of late:
The U.S. and other governments have sought to understand and regulate Bitcoin
▪ FinCEN has been aggressive recently▪ Issuing Guidance, Rulings & BSA Enforcement Actions
▪ IRS has issued guidance & rulings for tax treatment
Several countries have sought to regulate or ban Bitcoin transactions
Failure & Bankruptcy of Mt. Gox - major event
Several high-profile adoptors have emerged
Other current events:
U.S. federal seizure warrant for a Mt. Gox KK subsidiary’s U.S. bank account
Securities & Exchange Commission (SEC) action against an alleged Bitcoin-based Ponzi scheme
A “Breach of Contract” lawsuit against Mt. Gox KK and others
A SEC application for a Bitcoin-based Exchange Traded Fund (ETF) investment product.
Other current events, Cont’d.
Take-down of Silk Road
▪ Indictment and arrest of Operators & Facilitators
▪ Suspension (take-over) of website by U.S. Gov’t.▪ Seizure of 26,000 Bitcoins
Chinese Government’s decision to outlaw Bitcoin
Continuing FinCEN regulations
▪ Ongoing BSA Guidance / Enforcement / Prosecutions
Emerging VC competitors - “Bitcoin 2.0”
▪ Many believe all these things will strengthen Bitcoin
Stephan Robinson, CAMS Office: 561-616-2038
Cellular: 561-719-9046
Facsimile: 561-616-2160
Address:
▪ 1700 Palm Beach Lakes Blvd.
▪ Suite 500, Stop 65-05
▪ West Palm Beach, Florida 33401
Email:
Brian Stoeckert Managing Director
Chief Strategy Officer
CoinComply New York
Silicon Valley
1.917.554.9903 [email protected]
www.coincomply.com
@coincomply