The Russian invasion of Ukraine and ensuing sanctions has illuminated the growing reach and efficacy of regulators to combat money laundering and crime, and to enforce sanctions in the cryptocurrency (crypto) space. Recent developments provide a front-row seat to observe the participation of entities providing critical infrastructure for crypto and decentralized finance (DeFi) in the global response to sanctions. It is always important to remember that illicit activities represent a very small fraction of transactions within the crypto space. As a tool for money-laundering, crypto “remains far below that of fiat currency and more traditional methods” according the the US Treasury Department’s 2022 National Money Laundering Risk Assessment. Despite this, the rise of crypto and DeFi has led to assertions that these emerging innovations pose a bigger threat than they do in actuality. The use of crypto or DeFi platforms by nation states to avoid sanctions is not a practical one, as acknowledged in a report by the Atlantic Council. Firstly, amassing sufficient crypto to have an impact on their sanction-evading project would result in significant buy-side activity that would lead to price appreciation; increasing the cost of their endeavour. Moreover, there are very few cryptos that could address scale, liquidity, and risk concerns of a nation state. Of the top five cryptocurrencies, three are controlled by central entities subject to Anti-Money Laundering and Sanctions regulations. One is integrated into a platform that supports numerous regulated DeFi services. The last one standing is bitcoin. If 2021 has taught us anything about bitcoin’s role in fighting illicit activity it is this: governments and law enforcement have embraced the transparent bitcoin blockchain as a highly efficient tool to follow the money and seize it. We have witnessed this in the Colonial Pipeline ransomware attack and ensuing bitcoin seizure, and more recently in
Of the many noteworthy developments in the growing Bitcoin-inspired ecosystem in 2021, I have selected four that take top spots for their significance. The China ban, adoption of Bitcoin by El Salvador as legal tender, NFTs, and the persistent threat of cyber criminals rank at the top of my list of takeaways for 2021.
Social utility underpinned the genesis of Bitcoin, and social utility will remain an essential element of the digital currency in the years ahead. We observe Bitcoin’s social utility in its capacity to address a fundamental human right; financial inclusion. The digital currency was designed to enable transactions that were not previously possible or practical, such as accessible peer-to-peer exchanges, and in the process enable millions of unbanked to participate in a global financial system.
Gaining unauthorized access to financial accounts and withdrawing funds is an insidious attack that plays out repeatedly on deposit accounts at financial institutions, but what happens when the account is stored in the account-holder’s brain and the funds on the blockchain? Enter the world of Bitcoin brain wallets. Successful account takeovers are commonly link to social engineering, identity theft, the use of malicious code, and breach of familial trust. However, regardless of the method employed, in each case a digital credential-holding platform is exploited. Bitcoin enables users to create a variety of wallets for storing credentials that secure digital currency in a blockchain. The most secure wallets are not connected to the internet where they are vulnerable to attack. Bitcoin wallets store credentials, not bitcoin, and the host comes in several forms: (1) cloud wallets, (2) mobile wallets, (3) USB cold storage wallets, (4) paper wallets, and (5) brain wallets. All of these wallets use random data to create unique private encryption keys that are required to access funds stored in the blockchain. For example, a private encryption key that is impractical to recreate by brute force attack can easily be generated by applying a strong encryption algorithm to twelve randomly selected dictionary words. Perhaps the least known Bitcoin wallet is the brain wallet. With the brain as its host, the brain wallet enables the Bitcoin user to exercise global mobility without concern of losing their encryption key through the loss, destruction or confiscation of a computing device or a piece of paper. The brain wallet also protects against loss arising from fraud committed by unscrupulous exchange operators who provide wallet custody services on their cloud platforms. At this point, you are likely wondering how brain wallets are created, so we will take a look at this next. Whereas wallet
In the cryptocurrency space, a Proof of Keys campaign is akin to a Bank Run where clients – fearing liquidity of their deposit-holding institutions – withdraw all of their funds to prove that the funds are actually available. The collective action exposes custodians who through undisclosed hacks, fraud or any other reason do not have sufficient cryptocurrency on hand to cover deposits. On January 3, 2019 some cryptocurrency market participants orchestrated the first annual Proof of Keys movement. Yesterday marked the second annual Proof of Keys Day. Execution of this stress test of sorts lies within the cryptocurrency user community, however only a small segment actually participate. With recent reports of cryptocurrency exchange hacks robbing cryptocurrency holders of hundreds of millions of dollars, the apprehension is understandable, but is the Proof of Keys campaign a more effective way to guard against the failure of a Virtual Asset Service Provider (VASP) than regulation? The leading practice for cryptocurrency exchanges is to store most digital currency in cold storage wallets that are not accessible by internet. A mass run on an exchange may result in significant amounts of cryptocurrency being transferred to hot wallets that are accessible to customers but also more susceptible to hacks. This creates a honeypot for cyber criminals and vulnerability for those exchanges with security shortcomings. It is tantamount to saying take the gold out of the vault and place it under the till. A false sense of security can also be established when only a fraction of depositors withdraw cryptocurrency from an exchange without incident. This does not guarantee that the exchange is solvent. Moreover, cryptocurrency users should be mindful that transferring funds to a cold storage device which they own and which stores their private keys does not necessarily mean that the user is in complete
The year 2020 is shaping up to be a defining moment in the epoch of virtual assets. With the FATF global regulatory guidance slated for implementation, state-issued digital currency poised to go live in China, the Facebook initiated Libra cryptocurrency drawing global regulatory attention, and my passion – the social utility of cryptocurrency to drive financial inclusion for the 1.7 billion unbanked – entering the narrative, I suspect that in the year ahead we will witness a meaningful movement in the needle of progress. Repeatedly, I am asked to take a zero knowledge approach to initiate the steady flow of new individuals taking interest in cryptocurrency. This article aims to demystify cryptocurrency and blockchain. To the layperson, cryptocurrency and blockchain are often thought of as two separate entities. It may surprise some to know that both technologies came into existence at the same time through the innovation of Bitcoin. Without Bitcoin there would be no blockchain. Let’s take a look at what these technologies are, and why they are gaining so much attention. For reasons of simplicity, a blockchain is sometimes described as a new type of database. However, while a blockchain is a system that stores information in some ways similar to a database, it operates more like a revolutionary ledger that store transactions. A blockchain is a protocol for storing transactions that track tangible and intangible assets in a decentralized, immutable, and censorship-resistant digital ledger. The asset (such as lettuce, a diamond, money, or a patent) is depicted in the blockchain as a transaction that is sometimes referred to as a token representing the underlying asset. For example, a transaction with a unique reference number stating that a diamond with a specific serial number and characteristics which was at a specific GPS coordinate at a specific date and time, would represent
QuadrigaCX was Canada’s largest cryptocurrency exchange by volume until their website suddenly went offline on January 28, 2019. The exchange reportedly held about CAD $250 million in customer cryptocurrency and fiat. Leading up to the cessation of operations, customers had been reporting on social media that they were experiencing delays with fulfilling withdrawal requests. However, things seriously began to unravel on January 31, 2019 when the message at quadrigacx.com citing maintenance as the reason for being offline – was replaced with a notice that the company had filed with the Nova Scotia Supreme Court for creditor protection. It will likely be some time before investors get a sense of what this all means, but what has been revealed to date paints a portrait of utter dismay. According to a filing with the Ontario Supreme Court of Justice released – November 9, 2019 – Canadian Imperial Bank of Commerce (CIBC) had frozen about CAD $25.7 million linked to QuadrigaCX’s cryptocurrency exchange operations, and which the bank had considered to be disputed funds. The filing suggested that the frozen funds represented money transferred to Custodian Inc. – a processor for QuadrigaCX. Custodian Inc. was reportedly established for the sole purpose of receiving and holding deposits for individuals transacting on the QuadrigaCX platform, however, CIBC observed that the sole officer and director of Custodian Inc. transferred a portion of deposited funds to his personal account with CIBC. QuadrigaCX attributed delays in customer withdrawals to the freezing of funds by the bank according to media reports. Customers took to social media to complain about issues concerning withdrawal requests. On January 14, 2019, a Tweet from the QuadrigaCX account announced that Gerald (Gerry) Cotten – the company founder and CEO – had passed. The affidavit filed in the Supreme Court of Nova Scotia by his widow Jennifer
Bitcoin reveals everything. When one party hands a $5 bill to another, the fungible quality of the note creates a firewall separating the transaction from the personal finances of the transacting parties. Transferring $5 in bitcoin, on the other hand, unlocks the vault doors of both parties – allowing each to peer deep into the personal financial history of the other. Imagine sharing a restaurant bill with a friend; she pays the total amount on her credit card, and you hand her $25 in cash for your share of the lunch bill. The transaction to split the bill raises no privacy concerns because the cash transferred from one friend to the other reveals nothing about the transacting parties private finances. Cash is fungible; there are no distinguishing characteristics about a $20 bill held by a person that links the note to the person or their financial history. The bill is an independent instrument that is interchangeable with any other $20 note. There is no such thing as a Jane Doe $20 bill or a John Doe $5 bill. However, when bitcoin is transferred from one party to another, not only does the sender expose her entire financial history to the recipient – the recipient also does the same. Bitcoin is not fungible; every bitcoin or fraction thereof that is transacted, is permanently linked to the bitcoin addresses that it interacts with – from the moment that the bitcoin was mined into existence. Bitcoin’s architecture is based on a transparent public ledger by design. This approach works well for applications where it is desirable to maintain a transparent accounting of transactions that can be accessed by any person with a computing device. However, I am going to go out on a limb and wager that most people would not be in
Stablecoins are on the rise, and they are filling a void for the burgeoning tokenized economy. A void created by unintended consequences of the cryptocurrency success story; they incentivize trading and investing at the expense of use as a medium of exchange. A common conundrum faced by crypto owners who believe that a price surge is around the corner is – do I hold, or do I spend? The crypto movement has created an active community of holders. As the community feverishly works to resolve the scaling problem and bring transaction volume closer to par with Visa, we are still left with tokens that some are reluctant to use as a medium of exchange. While this may be temporary – as decentralized cryptocurrencies evolve, it certainly poses a challenge for projects that rely upon a stable value token to facilitate transactions today. Stablecoins offer a solution that promises to enable some projects in the tokenized economy to gain traction. These centralized solutions, however, are not without quirks that may render them undesirable under certain circumstances. A stablecoin is essentially a token, such as bitcoin, on a blockchain – but one that is pegged to a state-issued currency such as the U.S. Dollar, where one token equals one dollar. This stable value token can be purchased with fiat currency or cryptocurrency. It can be redeemed at any time for the underlying currency on which it is based. You can think of stablecoin as the tokenization of fiat currency, a digital proxy for cash, or a cash-collateralized token. Tokens offer several benefits over the underlying currency. To name a few: as a proxy for fiat currency – they can be as reliable as the dollar, they are not vulnerable to counterfeit like paper money, they can be used in smart contracts to transfer value without