Benjamin Johnson, Áron Lászka, Jens Großklags, Tyler Moore
Cryptocurrency exchanges are frequently targeted and compromised by cyber-attacks, which may lead to significant losses for the depositors and closure of the affected exchanges. These risks threaten the viability of the entire public blockchain ecosystem since exchanges serve as major gateways for participation in public blockchain technologies. In this paper, we develop an economic model to capture the short-term incentives of cryptocurrency exchanges with respect to making security investments and establishing transaction fees. Using the model, we derive conclusions regarding an exchange's optimal economic decisions, and illustrate key features of these conclusions using graphs based on real-world data. Our security investment model exhibits horizontal scaling properties with respect to reducing exposure to losses, and may be of special interest to exchanges operating in markets with high price volatility.
Bitcoin mining is a process that serves to both verify sets of transactions and slowly introduce new currency into the system. As a reward for performing this process, miners are paid in bitcoin for the blocks they mine. It was originally thought that there was no incentive in trying to subvert the mining protocol—in other words, there was no reason to believe that miners could be profitable by somehow cheating the system. As it turns out, a specific strategy called “selfish mining” was discovered to increase profitability for miners under certain conditions. This paper presents the selfish mining strategy, traverses a revenue model associated with the strategy, and then simulates the bitcoin network to see how this revenue model holds up under complicated network conditions. Specifically, the selfish mining revenue model typically assumes there is one selfish miner in the network—I simulate the more realistic case of there being many selfish miners in the network. We find that the revenue model can overestimate selfish miner revenues by up to 100% and underestimate them by up to 300% depending on network variables such as the number of selfish miners, the power of those miners, and network latency (the speed of block propagation from one miner to another).
Revisiting analytically the notion of embeddedness and its connections with the concept of trust, this paper shows that contrary to Bitcoin’s premises and promises to be a trust-low or even trust-less currency, trust enters the system at many various levels and with different nuances. Applying a conceptual framework that conceives embeddedness as both the possible source and outcome of trust, it is pointed out that Bitcoin should better be regarded as doubly embedded: in technology and in its peculiar social structure. Due to the existence of computational and cognitive asymmetries within the system, in fact, trust is necessary for the very functioning of this new form of money, as well as for its future prospects.
Christopher S. Henry, Huynh, Kim, Nicholls, Gradon
Bitcoin, digital currencies and FinTech have been the subject of vigorous discussion. There has, however, been limited empirical evidence of its adoption and usage. This paper proposes a methodology to collect a nationally representative sample via the Bitcoin Omnibus Survey (BTCOS) in order to track the ubiquity and usage of Bitcoin in Canada. The paper reveals that about 64 per cent of Canadians have heard of Bitcoin, but only 2.9 per cent own it. Awareness of Bitcoin is strongly associated with men, and those with college or university education; additionally, Bitcoin awareness is more concentrated among unemployed individuals. On the other hand, Bitcoin ownership is associated with younger age groups and a high school education. Furthermore, the current authors have constructed a test of Bitcoin characteristics to attempt to gauge the level of knowledge held by respondents who were aware of Bitcoin, including actual owners. Knowledge is positively correlated with Bitcoin adoption. This paper attempts to reconcile the difference in awareness and ownership by deconstructing the transaction and store-of-value motive for holding Bitcoin. The paper concludes with some suggestions to improve future digital currency surveys, in particular to achieve precise estimates from the hard-to-reach population of digital currency users.
Jakob Demant, Rasmus Munksgaard, David Décary-Hêtu, Judith Aldridge
Objective: There is broad agreement in the literature on the transformative potential of drug cryptomarkets that allow sourcing on a global market and consequently the circumvention of existing supply chains between producer and end user. We examine whether the transformative potential of drug cryptomarkets has been realized in two ways: Are cryptomarket drug sellers found in production and transit countries? and Do we see the increased use of shipping across international borders over time? Method: Using data collected by the DATACRYPTO software tool between 2013 and 2016, we characterize cryptomarket buyer behavior through the product reviews (i.e., sales transactions) posted on 15 cryptomarkets. Findings: Cryptomarket drug sellers are predominantly based in countries of Europe, North America, and Oceania. For both cannabis resin and cocaine sold on cryptomarkets, we find that known production and transit countries are not the primary sources of supplied drugs but rather key countries of consumption. In the case of 3,4-methylenedioxymethamphetamine, we observe that the Netherlands, a known production country, is the largest supplier. We further observe tendencies over time toward increased localization of cryptomarkets with regard to product destinations. Discussion: Though cryptomarkets offer a potentially global platform for drug distribution, they do not tend to be used as such. We explain our results with reference to buyers’ preferences regarding safety, risk, and convenience, alongside structural limitations for cryptomarket use such as bitcoin availability.
Achieving government’s goals for cannabis regulation requires legal cannabis to be a cheaper, more attractive consumer alternative compared to the illegal market. This goal may be undermined by the costs and disadvantages of traditional regulatory management. A Canada wide, real-time blockchain tracking system appears to be a viable technical solution architecture. A permissioned blockchain network could be tested alongside traditional tracking. This investment, if proven effective, could reduce regulatory costs for government and red tape for business, helping to achieve Governments’ objectives to:Enhance public safety by ensuring quality and monitoring product salesUndermine illegal markets to reduce crime and prevent product diversion
The emergence of block-chain technology in the form known as “cryptocurrency” is an evolution of the global monetary system that is here to stay. The rise of this new variant of distributed ledger technology has been dismissed by some who believe it offers no real value and denigrated by others who believe its prevalence raises national security concerns. Many of these concerns stem from the common misperception that all cryptocurrencies have cryptographic properties which render them anonymous and can be used by terrorists and other undesirables to fund their criminal enterprises. After discussing the basic technical components of blockchain technology, this article distinguishes that, contrary to popular belief, most cryptocurrencies are not what could be classified as “anonymous,” but are instead “pseudonymous.” These pseudonymous cryptocurrencies can actually enhance law enforcement’s ability to track criminal users’ financial activities. It further refines the notion that all cryptocurrencies are the same by noting that some are more anonymous than others, and some are in fact more identifiable than fiat currencies. Instead of resisting cryptocurrencies altogether, this article argues that the United States government should embrace those cryptocurrencies that are pseudonymous and should further study those which are considered anonymous.
Since the rise of the Islamic State of Iraq and Syria (ISIS, also known as Daesh and ISIL) in 2014, antiquities have been a widely publicized source of funding for what has become one of the most technologically savvy terrorist organizations of the modern era. The globalization of technology and rise of popularity in cryptocurrencies has changed the face of black-market trade and the actors that carry out these crimes. While art and antiquities have long served as a market with susceptibilities to laundering, the emergence of Dark Web markets, identification-masking software, and untraceable cryptocurrencies such as Bitcoin have opened new doors to potential vulnerabilities. The anonymity that is offered by these technologies acts as a roadblock for authorities, while attracting the likes of terrorists and transnational criminals. Investigative research using cyber security platforms to identify digital artifacts connected to potential traffickers provides the opportunity to unmask the seemingly untraceable actors behind these activities. The evidence of illicit antiquities trafficking on the Dark Web displayed in this article can generate a new discussion on how and where to study black-market antiquities to gain needed insight into combating the illicit trade online and the transnational criminal groups it may finance.
Rolf van Wegberg, J.J. Oerlemans, Oskar van Deventer
Purpose -This paper aims to shed light into money laundering using bitcoin. Digital payment methods are increasingly used by criminals to launder money obtained through cybercrime. As many forms of cybercrime are motivated by profit, a solid cash-out strategy is required to ensure that crime proceeds end up with the criminals themselves without an incriminating money trail. The authors examine how cybercrime proceeds can be laundered using services that are offered on the Dark Web.
Soon after its introduction in 2009, Bitcoin has been adopted by cyber-criminals, which rely on its pseudonymity to implement virtually untraceable scams. One of the typical scams that operate on Bitcoin are the so-called Ponzi schemes. These are fraudulent investments which repay users with the funds invested by new users that join the scheme, and implode when it is no longer possible to find new investments. Despite being illegal in many countries, Ponzi schemes are now proliferating on Bitcoin, and they keep alluring new victims, who are plundered of millions of dollars. We apply data mining techniques to detect Bitcoin addresses related to Ponzi schemes. Our starting point is a dataset of features of real-world Ponzi schemes, that we construct by analysing, on the Bitcoin blockchain, the transactions used to perform the scams. We use this dataset to experiment with various machine learning algorithms, and we assess their effectiveness through standard validation protocols and performance metrics. The best of the classifiers we have experimented can identify most of the Ponzi schemes in the dataset, with a low number of false positives.
In this work, we propose a novel approach, called Conflicts Check Protocol (CCP), which enables preventing potential attacks on bitcoin system. Based on the observation and discovery of a common symptom that many attacks may generate, an arbitration mechanism is proposed to determine the approval or abandon of certain transactions involved in confliction. Experimental results verified our statistical assumption and proved that the CCP is robust in handling many transactions in confliction scenarios and can significantly enhance the security of the current bitcoin systems. Unlike many of the existing efforts, this work examines the security issue of bitcoin from a new perspective, which can be extended further to a much larger scope of attack analysis and prevention.
Today, more than 100 blockchain projects created to transform government systems are being conducted in more than 30 countries. What leads countries rapidly initiate blockchain projects? I argue that it is because blockchain is a technology directly related to social organization; Unlike other technologies, a consensus mechanism form the core of blockchain. Traditionally, consensus is not the domain of machines but rather humankind. However, blockchain operates through a consensus algorithm with human intervention; once that consensus is made, it cannot be modified or forged. Through utilization of Lawrence Lessig’s proposition that “Code is law,” I suggest that blockchain creates “absolute law” that cannot be violated. This characteristic of blockchain makes it possible to implement social technology that can replace existing social apparatuses including bureaucracy. In addition, there are three close similarities between blockchain and bureaucracy. First, both of them are defined by the rules and execute predetermined rules. Second, both of them work as information processing machines for society. Third, both of them work as trust machines for society. Therefore, I posit that it is possible and moreover unavoidable to replace bureaucracy with blockchain systems. In conclusion, I suggest five principles that should be adhered to when we replace bureaucracy with the blockchain system: 1) introducing Blockchain Statute law; 2) transparent disclosure of data and source code; 3) implementing autonomous executing administration; 4) building a governance system based on direct democracy and 5) making Distributed Autonomous Government(DAG).
Darcy W E Allen, Alastair Berg, Brendan Markey‐Towler
We apply institutional cryptoeconomics to the information problems in global trade, model the incentives under which blockchain-based supply chain infrastructure will be built, and make predictions about the future of supply chains. We argue blockchain may fundamentally change the patterns and dynamics of how, where and what we trade by: (1) facilitating new forms of economic organisation governing supply chain coordination (e.g. the V-form organisation) (2) shifting economic power towards the ends of supply chains (e.g. primary producers) by decreasing information asymmetries (3) de-commoditising goods and disaggregating price signals by changing the dimensions along which goods may be reliably differentiated and (4) lowering reliance on proxies (e.g. production within national borders) for the quality of goods.
Cecilia Anthony Das, Krishna Prasad, Shibley Sadique
This paper seeks to review the current regulatory regime governing cryptocurrencies, namely Bitcoin, in United States, United Kingdom, Canada and Singapore, and traces the regulatory trend in those identified countries. These developments are compared to the Australian context. From the comparative analysis conducted be-tween regimes available in other jurisdictions and those in Australia, the authors conclude that the Australian regulatory regime in relation to cryptocurrency, in particular Bitcoin, are comparable in some respects and in others are much progressive. This is specifically in light of the 2017 amendments relating to anti-money laundering legislation which places Australia as a strong forerunner to legislate on Bitcoin and anti-money laundering legislation. However, to successfully achieve this, Australia must address its lag in relation to the classification of Bitcoin and cryptocurrency respectively. As such, it is concluded that the regulatory regime of cryptocurrency both internationally and at the Australian level is far from satisfactory.
Thiago Bottino do Amaral, Christiana Mariani da Silva Telles
EnglishThe purpose of this article is to study bitcoins in order to verify (i) whether it serves as an instrument for the practice of money laundering; (ii) how national and international regulators are positioning themselves on the issue; and (iii) propose regulatory alternatives. The paper is divided into five parts, which demonstrate how Bitcoin System works and discusses whether, in the context of money laundering crime, bitcoins differ from traditional assets such as electronic money, cash, artwork and precious metals. Aspects related to the pricing of bitcoins and their anonymity are also discussed. Regulation is analyzed through the examination of the measures adopted in Brazil, in the United States and in the framework of the Financial Action Task Force (Gafi/FATF). Finally, alternatives are presented with the purpose of contributing to the improvement of regulation. portuguesO presente artigo tem por objetivo estudar os bitcoins com o fim de verificar (i) se a citada criptomoeda pode servir como instrumento para a pratica do crime de lavagem dinheiro; (ii) como os reguladores nacionais e internacionais estao se posicionando sobre o tema; e (iii) propor alternativas regulatorias. O artigo e dividido em cinco partes nas quais se demonstra como funciona o Sistema Bitcoin e se discute se, no contexto do crime de lavagem de dinheiro, a citada criptomoeda se diferencia de ativos tradicionais como moedas eletronicas, dinheiro em especie, obras de arte e metais preciosos. Sao tambem discutidos aspectos relacionados com a fixacao do preco dos bitcoins e com o seu anonimato. A regulacao da materia e analisada por meio do exame das medidas adotadas no Brasil, nos Estados Unidos e no âmbito do Grupo de Acao Financeira Internacional/Financial Action Task Force (Gafi/FATF). Por ultimo, sao apresentadas alternativas com o proposito de contribuir para o aprimoramento da regulacao.
The advent of Bitcoin and other forms of cryptocurrency has left a permanent mark on the world as we know it, regardless of what percentage of the populace will ever touch or comprehend cryptocurrency in its lifetime. Thanks to the advent of blockchain technology, cryptocurrency has given rise to expedited international exchanges, increased protection of consumer identity, and secured methods for logging transactions. But cryptocurrency’s nebulous nature makes it inherently vulnerable to a slew of hacks, cyberattacks, and run-of-the-mill theft. Moreover, its indeterminate qualities make cryptocurrency incredibly difficult for federal law to wrangle. But, perhaps most chillingly, the rise of cryptocurrency has given organized crime a new look, swapping society’s Kuklinskis1 and Capones2 for pseudonymous sleuths and computer-clad criminals, and underground operations for “dark web” schemes that transcend international borders at the click of a button. This Recent Development will examine how organized crime leverages cryptocurrency, and how U.S. federal law can adapt to stop it.
The rise of centralized mining pools for risk sharing does not necessarily undermine the decentralization required for permissionless blockchains: Each individual miner's cross-pool diversification and endogenous fees charged by pools generally sustain decentralization, because larger pools better internalize their externality on global hash rates, charge higher fees, attract disproportionately fewer miners, and thus grow more slowly. Instead, mining pools as a financial innovation escalate the arms race among competing miners and thus significantly increase the energy consumption of proof-of-work-based consensus mechanisms. Empirical evidence from Bitcoin mining supports our model predictions. The economic insights inform many other blockchain protocols as well as the industrial organization of mainstream sectors with similar characteristics but ambiguous prior findings.
This thesis will examine the ways in which various cryptocurrencies have impacted certain traditional crimes. While crime is always evolving with technology, cryptocurrencies are a game changer in that they provide anonymous and decentralized payment systems which, while they can be tracked in a reactive sense via the blockchain, are seen by criminals as having better uses for them than traditional fiat currencies, such as the ability to send money relatively fast to another party without going through an intermediary, or the ability to obscure the origin of the money for money laundering purposes. Every week there are new cryptocurrencies flooding the market, and it doesn’t look like it will abate any time soon. Blockchain technology, the underlying technology behind all cryptocurrencies, has uses that far surpass just the currency aspect. Criminals also see the potential that sending money anonymously, without a middleman beholden to regulations and tracking those transactions has. Any new technology while being revolutionary, will always trickle down to seedier elements of society who will always find a use for it. This paper will look at how cryptocurrencies have impacted drug trafficking, money laundering, and ransomware. I will also explore a new kind of crime called cryptojacking that has become possible because of cryptocurrency mining. Law enforcement may be playing a reactive and not a proactive role in the age of cryptocurrencies, but this paper will provide information that can be useful for law enforcement and applicable to their investigations.
Cryptocurrencies are private, decentralized currencies that operate via the Internet and have attracted criminals because of the convenience and virtual anonymity they offer. While there are many descriptive accounts of cryptocurrencies and their use both in legal and illegal operations, to date there is no empirical research to understand the use of cryptocurrencies in transnational crime operations, specifically why transnational criminals may find them attractive to either conduct business or to launder their illicit proceeds. Using the environmental criminological framework, this study analyzed 100 cases of cryptocurrency use in transnational crime activities identified through various secondary sources, including online newspaper articles and publicly available court case information. Essentially this study used both quantitative and qualitative analysis to examine the ways in which cryptocurrencies facilitate transnational crimes. The findings indicate that criminals have been using cryptocurrencies to conceal the enormous amounts of money they are receiving for their crimes, specifically money laundering, drug trafficking (illicit drug sales), and terrorism financing. It was found that offenders can conduct business, launder money, and make a profit by using cryptocurrencies to facilitate their crimes, creating for crime opportunities permitted by cryptocurrencies. These opportunities include the ease of floating from one crime to another and using cryptocurrencies to cover offenders’ tracks, where cryptocurrencies can transact, launder, and conceal all in one. It was found that offenders gravitate towards using bitcoin to facilitate their operations, most likely due to its popularity and reliability. When looking at the crime of money laundering and illicit drug sales specifically, it was found that offenders can generate higher operation amounts, spanning into billions of dollars, all while evading detection. With the assumption that transnational criminals are rational beings, money laundering using cryptocurrencies has enormous benefits with these high operation amounts. This coupled with the low chances of being caught by law enforcement, makes money laundering a feasible crime where the benefits far outweigh the risks. This exploratory research is innovative and imperative to expanding academic knowledge on the evolution of crime with the use of cryptocurrencies and assisting in reducing the opportunities cryptocurrencies allow in transnational crime operations.