bitcoin etf price

Bitcoin ETFs were all over the news during 2018. 

Many voices called them out as some kind of magical act that would lead the price of Bitcoin to its former glory and maybe even higher than that. 

While an approved ETF could be the catalyst that kicks off a new bitcoin bull run, there is still misunderstanding and misinformation among crypto enthusiasts. 

It’s time to answer some burning questions: what is a bitcoin ETF? What consequences will it have for the future bitcoin price? And, of course, how likely it that a bitcoin ETF is approved in the coming months?

What is an ETF? (A Simple Explanation)

To start with, let’s define an ETF itself.

ETF stands for Exchange-Traded Fund. It’s a fund that tracks and mirrors the price of an underlying asset (like gold, for example). An ETF might also track a basket of assets (like tech stocks).

Shares of an ETF are traded on real stock exchanges and generally do not differ from traditional stocks in terms of trading.

Some of the most popular ETFs include those for gold (GLD) and crude oil (USO).  

The main advantage of an ETF is simplicity and convenience. It is much easier to trade an ETF than it is to purchase gold or bitcoin or oil itself.

what's an etf
Credit: Stocks to Trade

Who Makes and Approves ETFs?

ETFs are created by asset management firms. The firm buys the underlying assets (i.e. bitcoin) and keeps them under custody before creating an ETF.

The US Securities and Exchange Commission (SEC) is responsible for approving an ETF. Once they are approved, investors can buy shares of the ETF from a stock exchange. 

An ETF share represents a certain percentage of the fund, but it does not represent ownership of the underlying asset. If you buy a bitcoin ETF, you are not buying bitcoin itself.

ETFs are popular investments for diversifying portfolios with minor monetary and timely expenditures. 

What is a Bitcoin ETF?

A bitcoin ETF is an investment tool that would track the price of bitcoin. If approved, it would introduce an easy way for investors to get exposure to bitcoin without having to buy or store it directly. Traders would be able to buy and sell shares of the bitcoin ETF on a regulated stock exchange.

Although Bitcoin is already one of the most liquid assets on earth, it still can’t be traded on a regular stock exchange.

As well as the added convenience, investors could buy the bitcoin ETF through their existing, familiar investment account.

bitcoin etf on the stock exchange

Why a Bitcoin ETF Could Lead to “Big Money” Institutional Investors

The most significant benefit of buying ETF shares instead of real bitcoins, apart from its availability on stock markets, is the fact that institutional investors don’t have to store it themselves. 

Therefore, there is no risk of the bitcoins getting stolen. 

Big institutions are currently prohibited from buying bitcoins directly, but an ETF would make their participation in the market a reality.

Regarding that, there are currently two different types of bitcoin ETFs proposed by multiple asset management firms: physical-backed ETFs and futures-backed ETFs.

What is a Physical-Backed Bitcoin ETF?

As you might have already suspected, a physical-backed bitcoin ETF gains its value through actual bitcoins. 

This means an asset management firm needs to buy bitcoins from the market and then store them in their own wallets or custody service. 

Price swings in the ETF should, therefore, be reflected by the price of an actual bitcoin. If bitcoin’s price increases by one percent, the price of a physical-backed ETF should rise by one percent as well.

What is a Futures-Backed ETF?

When trying to set up a futures-backed ETF, the issuing company does not have to buy actual bitcoins, but bitcoin “futures contracts”. Futures are financial instruments that are used to bet on the future price of that asset.

All futures contracts expire on a certain date, although there are different timeframes, e.g. weekly or quarterly. 

Futures traders are confronted with higher risks, but also higher rewards. Regarding the ETF, the issuing company has to update their future contracts every time the contracts expire.

Historic Bitcoin ETF Proposals and Rejections

Although Bitcoin ETFs received a lot of media attention in 2018, there have been dozens of attempts to push one through before. 

Two of the most popular applicants might be the Winklevoss twins, who have supported bitcoin for several years. As CoinDesk investigated in 2017, the brothers submitted their first ETF proposal in mid-2013, with numerous additional proposals in the following years. Unfortunately, the SEC was not satisfied with their offerings so far. 

Winklevoss Twins bitcoin ETF
Credit: Forbes

Besides Cameron and Tyler Winklevoss, many other players are heavily interested in issuing a Bitcoin ETF. As Block Explorer previously reported, the SEC rejected nine applications solely in August this year. This includes multiple proposals for a futures-backed ETF by ProShares, Direxion, and GraniteShares, in collaboration with the New York Stock Exchange (NYSE) and the Chicago Board Options Exchange (CBOE).

Often referred to as the most promising ETF is a proposal given by a collaboration of the investment firm VanEck, the blockchain company SolidX and the CBOE. 

In this case, the ensemble is proposing a physical-backed ETF. Experts think this particular group has a higher chance of approval, due to their past experience issuing ETFs. 

The date for a decision has already been postponed by the SEC for the second time. While the next date would be on December 29, it is very likely that it will be changed another time. 

What Does the SEC Need to See Before It Approves a Bitcoin ETF?

According to most experts, it probably seems more logical to introduce a physical-backed ETF than a futures-backed one. 

However, from the angle of an asset management firm, it’s actually quite the opposite. Roughly 85% of all Bitcoin ETF applications are futures-backed ETFs. 

A major reason for this trend is, without a doubt, the frequently discussed custody question. Securely storing large amounts of cryptocurrencies has been a great stumbling block for many big players, like exchanges, in the past and present. 

Additionally, bitcoin futures are already a financial instrument open to institutions and have been approved by the SEC before. Consequently, it appears like a smaller step to introduce a futures-backed ETF. 

However, a very critical development the SEC wants to see, before approving an ETF, is a steep reduction of market manipulation and fraud attempts.

When rejecting nine ETF proposals in August, the SEC stated that 

SEC“…the Commission is disapproving this proposed rule change because, as discussed below, the Exchange has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular the requirement that a national securities exchange’s rules be designed to prevent fraudulent and manipulative acts and practices.”

 

Further reading: Bitcoin ETFs: Why Do They Keep Getting Rejected?

Bitcoin ETF Quotes and Predictions

Since ETFs are one of the hottest topics this year, there have been several voices expressing their opinions, about if and when an ETF could be on the cards.

For example, FIC Network Founder Arturs Ivanovs told Finance Magnates that:

“Volume from institutional investors would facilitate a significant regulated market that would reduce the scale of price manipulation thereby easing the SEC’s concerns. An ETF would also open up the market to more retail investors.” 

 

After being asked for a date, Ivanovs said, “2020 is my prediction.”

Income Locker CEO Csaba Csabai thinks that there might be other hurdles that need to be cleared. “There is still technological development needed to make Bitcoin exchange-tradable because when buying an ETF, someone has to actually purchase bitcoins,” he said in a conversation with Finance Magnates. Nevertheless, Csabai also sees a silver lining, as he went on with “if the rate of adoption continues to grow at the current pace, we will soon see an ETF, because it’s the only way institutions can access this asset class, so solving it as soon as possible is in their best interest.”

In an interview with ETF.com, Spencer Bogart, Needham & Co vice president of equity research said:

spencer bogart bitcoin etf quote“We have pegged the odds at less than 25 percent. That is because the very first thing the SEC lists in its own mission statement is protecting the investing public. When you think about the game theory aspect of this, if I work at the SEC and I approve this ETF. and it goes well, nobody is probably going to come around and pat me on the back and give me a promotion. But if I approve it and a lot of money flows into it, and something goes wrong, I am likely to lose my job.”

 

However, there are also parties that don’t believe in a Bitcoin ETF at all. Nouriel “Dr. Doom” Roubini believes that the crypto space has several issues, like fraud and manipulation, that will make an ETF not feasible in the near future. In a debate at CoinTelegraph’s BlockShow, Nouriel recently stated that “The academic evidence is, that this market is totally manipulated.” He later continued, “How do you expect anybody, who is an institutional investor, who has to be compliant with the rules and regulation, KYC/AML, to enter the space.” 

Could an ETF Influence Bitcoin’s Price?

To answer this question, one clearly needs to distinguish between a futures-backed and a physical-backed ETF. As already elaborated in the beginning, to create a physical-backed ETF the issuing firm needs to buy bitcoin from the market.

Although those deals wouldn’t be made on a regular crypto exchange, it would inevitably have an effect on bitcoin’s price, due to the immense amounts of bitcoin that would be needed for an ETF. 

In addition, an approved ETF would attract countless speculators, who would probably buy bitcoin right away.  So yes, a physical-backed ETF would, with almost full certainty, have a great impact on the price of bitcoin. 

In regard to a futures-backed ETF, the impact might not be as big as with the physical one. The issuer would only need to buy futures contracts, hence the price wouldn’t be directly affected. 

Futures would most probably help to spread adoption in institutional circles, but this would only be valid in the long term. In the worst case, it could even have a negative impact on bitcoin, as the past has already shown when bitcoin futures were introduced for the first time. 

Still, we can’t be sure about the impact before an ETF has even been officially approved.

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CNBC’s cryptocurrency analyst Ran NeuNer is no stranger to bold statements about bitcoin. Last month, he said bitcoin was about to “explode,” claiming he was loading up on the cryptocurrency for his parents.

But his most ambitious statement, made in February 2018, was that bitcoin would surge to more than double its all-time high by the end of the year.

He even pinned the tweet:

ran neuner bitcoin tweet

That pinned tweet has now been replaced with a new one backtracking the price prediction:

ran neuner tweet bitcoin

 

After phenomenal excitement at the beginning of the year, bitcoin has entered a deep bear market with the price sitting almost 70% down from its all-time high.

The bitcoin price is little changed this week, trading in a small range just above $6,300.

Time to Quit the Crazy Price Predictions?

Neuner wasn’t the only one with ambitious price targets for bitcoin. Infamous bitcoin bull Tom Lee still maintains his $20,000+ target for the end of the year. Lee’s fund, Fundstrat, has predicted that bitcoin will hit $64,000 at some point in 2019.

Venture Capitalist Tim Draper has predicted $250,000 by 2022, while John McAfee’s prediction is perhaps the most bizarre of all: $1 million by 2020.

As bitcoin continues its protracted cool-off period, NeuNer might not be the only one retracting his wild price predictions.

a large crowd at cryptocurrency conference

Block Explorer scours the globe for the best blockchain conferences and events every month. In November the action is spread all over the world from Hangzhou to St. Petersberg to California. You’ll find a complete list of events at our Conference Schedule, but for now, let’s look at some of the best crypto conferences this October.

Blockchain Expo

Santa Clara, November 28th-29th

blockchain expo conference

Blockchain Expo takes place in the heart of Silicon Valley this November. It brings together some of the leading figures in the tech industry with blockchain experts. On the speaking lineup, you’ll see representatives from General Electric and Boeing alongside blockchain pioneer Nick Szabo (inventor of smart contracts).

It’s a strong sign that the wider world is waking up and taking blockchain technology seriously. 

The agenda itself is packed full of events focusing on blockchain for business and how cryptocurrencies fit into the world of financial services. It all takes place at the Santa Clara Convention Center.

Key speakers: Nick Szabo (smart contracts inventor), Craig DeWitt (Ripple), Sherry Li (General Electric).

View Blockchain Expo in our calendar schedule

Money 20/20

Hangzhou, November 14th-16th

Money2020_China_2

After October’s wildly successful event in Las Vegas, Money 20/20 moves to Asia. Hosted in the Chinese city of Hangzhou, the event will play host to C-Suite executives, directors, and VPs. 

Money 20/20 will see more than 400 speakers over 100 sessions discuss the next stage of blockchain and fintech development. 

Key speakers: Natalie Ceeney CBE (Innovate Finance), Chris Chen (PWC)

View Money 20/20 in our calendar schedule

Shift Money

Zagreb, November 26th-27th

Shift_Money

Shift Money firmly cements itself as one of the must-attend conferences in Europe with representatives from Google, Microsoft, and Deloitte in attendance. 

The most exciting aspect of Shift Money is its list of speakers. We’ll hear from Coinbase, Ripple, Dash, IBM, The Economist, and Mashable. It truly brings together experts in the technology and finance world.

Talking points include machine learning, the everyday spending of crypto, and cross-border payments. 

Key speakers: Connie Yang (Coinbase), Robert Wiecko (Dash), Ross D’Arcy (Ripple).

View Shift Money in our calendar schedule

Blockchain Life

St. Petersburg, November 7th-8th

Blockchain-Life-Conference-2018

Blockchain Life is the largest crypto event in Russia and Eastern Europe with 5,000 attendees from over 70 countries. 

The biggest draw for Blockchain Life is their recently announced key speaker, Roger Ver, the head of bitcoin.com. Ver will address the conference via Skype, while some of Eastern Europe’s most prominent blockchain figures take the stage. 

Crypto startups and blockchain projects are also invited to set up a stall and pitch their ideas throughout the conference.

Key speakers: Roger Ver (bitcoin.com), Aldrich Victorino (OKEX), Klim Geram (NEM).

View Blockchain Life in our calendar schedule.

World Blockchain Summit

Amsterdam, Nov 9th

World Blockchain Summit

After a phenomenal event in Dubai, World Blockchain Summit continues its globe-hopping tour to Amsterdam. Its series of 15 events lands in Europe this month and features a star-studded lineup of discussions and panels.

Among the speakers are Roger Ver, Bloomberg’s Justina Lee, and Vanessa Grellet from Consensys.

The discussion points are particularly intriguing. We’ll see talks on blockchain’s integration with self-driving cars and how blockchain could reshape media and advertising.

Key speakers: Roger Ver (bitcoin.com), Justina Lee (Bloomberg), Vanessa Grellet (Consensys)

View World Blockchain Summit in our calendar schedule.

Canadian FinTech Awards

Toronto, Nov 26th

Canadian Fintech awards

The 4th annual Canadian FinTech Awards arrive at the end of the month. The ceremony highlights the most innovative and exciting projects in fintech, blockchain, and artificial intelligence.

Award categories include “Blockchain Company of the Year,” “FinTech Leader of the Year,” and “Global Impact Award.”

The judges are a high-profile bunch with representatives from Facebook, Microsoft, Google, Twitter, Visa, Mastercard, and Instagram.

View Canadian FinTech Awards in our calendar schedule.

dorian nakamoto

Ten years ago, on October 31st, 2008, Bitcoin quietly emerged on an obscure cryptography mailing list.

A user known simply as Satoshi Nakamoto wrote:

“I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.”

Satoshi Nakamoto followed it with a link to the now-famous Bitcoin White Paper.

Bitcoin was born.

But Satoshi Nakamoto kept his identity fiercely secret. To this day, no-one truly knows who he/she is. We don’t even know if it’s a single person or a group.

So who is Satoshi Nakamoto?

We’ve put together 24 clues or bits of information that we do know about Satoshi Nakamoto, the elusive creator of Bitcoin.

1. Satoshi Nakamoto writes in British English

The first strange clue is that Nakamoto uses British English spellings. In his forum posts, he uses words like “colour,” “organise,” “defence,” and “analyse.” He also posted: “writing a description of Bitcoin for general audiences is bloody hard.” The phrase “bloody hard” is a very British way of speaking.

2. He almost never made a spelling mistake

We know that Satoshi Nakamoto was incredibly detailed and thorough, but that also extended to his writing. You can count on one hand the number of spelling mistakes he made in his forum posts, suggesting that he thought very carefully about everything he posted.

In other words, if he wanted us to believe he was British, he may have done it on purpose.

3. He was part of an obscure cryptography mailing list

The Bitcoin White Paper was first posted on a cryptography mailing list originally called metzdowd. You can see a preserved version of Nakamoto’s post here. The niche nature of the mailing list means there are only a small handful of cryptography pioneers that could realistically be Satoshi Nakamoto.

satoshi bitcoin cryptography mailing list

4. He claims to be a 43-year-old Japanese man

According to his P2P Foundation profile, Satoshi is Japanese and born in 1975.

5. But he probably doesn’t live in Japan…

Satoshi Nakamoto almost never communicated between 2pm-8pm Japanese time. One Swiss coder, Stefan Thomas, who was active in the early bitcoin development, looked through all Nakamoto’s posts to come up with this information. It suggests he doesn’t live in Japan or he slept very strange hours (not completely unreasonable in the developer world).

6. He codes in C++ language

Some people have tried to identify Satoshi Nakamoto by analyzing his coding style. Just like a writing style, every coder has their own flair and style. Nakamoto coded Bitcoin in C++, which isn’t unusual, but it does dismiss a number of potential candidates who code in C or other languages.

7. He was suspicious of the banking system

On January 3rd, 2009, Satoshi Nakamoto mined the very first Bitcoin block, known as the “genesis block.” Written into the code was a secret message:

“03/Jan/2009 Chancellor on brink of second bailout for banks.”

It could be argued that he included the message as a simple timestamp. This was the headline of The Times newspaper on the 3rd January. However, it’s no coincidence that Bitcoin emerged in the fallout of the banking crisis. The message is not-so-subtle dig at the banking system.

As a further clue, the message refers to a British newspaper.

Times bitcoin genesis block

8. He owns more than one million BTC

As a prolific early miner, Satoshi Nakamoto amassed more than one million bitcoins. At today’s price, that’s more than $6 billion. At the peak of bitcoin’s popularity in December 2017, it made Nakamoto the 44th richest person on the planet.

9. He hasn’t moved the bitcoins since…

Other than a few small transactions to prove bitcoin’s functionality, Satoshi Nakamoto has never moved his bitcoins. All one million remain in his wallet.

Further reading: What is Bitcoin? Absolutely Everything You Need To Know (Beginner’s Guide)

10. Satoshi Nakamoto was weird, paranoid, and bossy

Laszlo Hanyecz was one of the early developers who worked on Bitcoin with Nakamoto. You might also know him as the man who ordered two pizzas with bitcoin (at a cost of 10,000 BTC, or $7 million at today’s prices). 

Hanyecz has since described Nakamoto as weird, paranoid, and bossy. Although Hanyecz worked on bitcoin on a voluntary basis, he claimed that Nakamoto treated him like an employee.

Laszlo Hanyecz
Laszlo Hanyecz and this first pizzas bought with bitcoin

11. “He” could actually be a group of people

Although Satoshi Nakamoto is usually referred to as a man, there’s no proof that’s the case. In fact, it could be a pseudonym for a group of developers. As Laszlo Hanyecz explained, “Bitcoin seems awfully well designed for one person to crank out.”

12. Or a group of companies…

One (admittedly far-fetched) conspiracy theory claims that Satoshi Nakamoto is actually a group of four major technology companies: Samsung, Toshiba, Nakamichi, and Motorola.

If you look closely, their letters spell out Satoshi Nakamoto:

Samsung

Toshiba

Nakamichi

Motorola

13. Or the CIA…

An even more bizarre conspiracy claims that bitcoin was actually created by the CIA. The theory posits that Satoshi Nakamoto’s name translates to “Central Intelligent.” Motherboard journalist Daniel Oberhaus even filed a Freedom of Information Act request to the CIA for documents about Satoshi Nakamoto. The CIA replied saying they could “neither confirm nor deny” the documents existed.

14. It *might* be Nick Szabo

Of all the wild theories and sensible guesses, this one is generally considered closest to the mark. Nick Szabo has been involved in the cryptography community for over a decade. He invented the “smart contract,” which is now the defining feature of Ethereum.

Is Nick Szabo Satoshi Nakamoto?
Credit: 101Blockchains

Perhaps most important though, Szabo invented BitGold, a form of digital currency that came before bitcoin. BitGold shared a lot of technology with Bitcoin and the ideas were shared among the same community.

Lastly, Szabo’s writing style is very similar to Satoshi Nakamoto’s. “It’s uncanny,” said researcher Jack Grieve.

Nick Szabo has always denied the claim.

15. It’s definitely not Dorian Nakamoto

The most high-profile hunt for Satoshi’s identity came from Newsweek. After months of investigation, Newsweek announced they had found the real Satoshi: an elderly Japanese man named Dorian Nakamoto.

For proof, Newsweek pointed to his true birth name (Satoshi Nakamoto) and his background as a computer engineer. The media descended on Dorian Nakamoto’s home, but it all unraveled from there. Nakamoto said he’d never heard of it, and reportedly referred to it as “Bitcom.”

dorian nakamoto
Credit: Business Insider

16. It’s probably not Hal Finney

Another good theory points to Hal Finney. Finney worked on the early development of Bitcoin and shared many emails with Satoshi Nakamoto. He was also on the same mailing list as Nakamoto and even has a similar writing style.

Finney was so influential to Bitcoin’s development that the community now refers to a small denomination of BTC as a “Finney.”

However, the biggest evidence against Hal Finney is that he coded in C, a different language to Nakamoto’s C++.

17. It’s not Craig Wright

Craig Wright is one of the few candidates to publicly “out himself” as Satoshi Nakamoto. He said he was part of a team that created Bitcoin and was the true Satoshi.

Wired and Gizmodo both reported the story, but Wright eventually admitted it was not him.

18. It’s probably not Shinichi Mochizuki

Other have pointed to Japanese mathematician Shinichi Mochizuki. The evidence is only circumstantial (that Mochizuki is capable of creating bitcoin).

19. Is it Gavin Anderson?

Gavin Anderson took over Bitcoin development when Satoshi Nakamoto disappeared in 2011. At least one source has named him at Satoshi based on stylistic programming similarities.

20. Or Jed McCaleb?

Jed McCaleb is a serial crypto entrepreneur. He was among the co-founders of Ripple before moving on to Stellar. He was also the founder of the infamous Mt. Gox exchange (he left well before the hack and subsequent bankruptcy).

21. What about Dustin Trammel?

Dustin Trammel is a security researcher who exchanged a number of emails with Satoshi Nakamoto in the early days of Bitcoin. He reportedly fixed bugs and made suggestions about the system. However, he publicly denied the claim on his blog.

22. Ross Ulbricht?

Ross Ulbricht is the man behind the infamous Silk Road – a dark-web, black marketplace used to sell drugs and weapons using bitcoin.

Researched believe they have found a transaction made from the earliest days of bitcoin (January 2009) to Ross Ulbricht, fueling speculation that he was actually Satoshi Nakamoto. But the exact identity of that early bitcoin account has never been proven. Ross Ulbricht is currently in prison on charges related to the Silk Road.

ross ulbricht

23. No, it’s probably not Elon Musk

People often point to Elon Musk (without any real evidence) as the Bitcoin creator. Musk has denied the claim and says he actually lost any cryptocurrency he had.

24. Satoshi Nakamoto disappeared in 2011

Satoshi Nakamoto was last seen or heard seven years ago. His final email read: “I’ve moved on to other things. It’s in good hands with Gavin [Anderson] and everyone.”

Conclusion

We may never discover Satoshi Nakamoto’s true identity, and maybe that’s a good thing. Nakamoto gifted us one of the most powerful, controversial, and talked-about technologies in history. And it’s only ten years old. Here’s to the next ten!

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bitcoin crime

At the FinTech Canada conference this August, leading cryptocurrency trial attorney Brian Klein gave an excellent overview of how cryptocurrencies have been used for illegal purposes and what law enforcement officials are doing to crack down on it.

Known for representing high-profile clients like Bitcoin early-adopter Erik Voorhees, Brian Klein is the founder and chair of the non-profit Digital Currency and Ledger Defense Coalition (DCLDC) and the chair of the American Bar Association’s blockchain technology, digital currency, and ICO national institute.

In his talk, Klein points to the law enforcement efforts and litigation around the Silk Road as an early example of crime with a cryptocurrency element. At the time, the closure of the online black market and related arrests made headlines worldwide.

But how have things moved on in 2018?

Cash (not Crypto) is Still King in Criminal Activity

In criminal law, cash is still king.

While cases like the Silk Road made sensational headlines, cryptocurrency rarely plays a truly innovative role when it comes to more traditional criminal activity. 

Cryptocurrency may offer advantages for long-distance transactions and online shoppers, but most criminal acts today are still paid for in cash. 

The crypto element may add a modern flair and conjure images of shadowy figures in Guy Fawkes’ masks but, for the most part, digital currencies remain a payment method rather than a new frontier in criminal acts.

bitcoin silk road
The now-defunct black market Silk Road website used to buy drugs with bitcoin

Cryptocurrencies Are the New Swiss Bank Account: Money Laundering and Tax Evasion

You might still see movies where bank robbers demand that funds be wired to a Swiss bank account, but when it comes to money laundering and hiding assets, cryptocurrency has increasingly replaced the wiring of funds to jurisdictions that favor banking secrecy. 

A key advantage of cryptocurrency is that it’s not tied to a single jurisdiction or set of laws – unlike Switzerland, which tightened its banking regulations after a large tax evasion investigation in 2008.

With cryptocurrency, there’s also no need to rely on intermediaries to handle transfers. And while a bank can be forced to turn over someone’s account information, there is no central authority for the Bitcoin system.

However, as noted in Klein’s talk, most current digital currencies operate on a public, permanent ledger. Bitcoin, for example, isn’t fully anonymous as many believe. Each transaction can be tracked, analyzed and de-anonymized — if the authorities can link a wallet address to a particular criminal – now or in the future.

The Emergence of Privacy Coins

Privacy coins circumvent some of the potential risks of making cryptocurrency transactions available on a public ledger. 

Indeed, Bloomberg noted that criminals are increasingly ditching bitcoin for privacy coins like monero and zcash. 

Monero logo

While there are different types of privacy coins, they typically obscure their ledger through a variety of methods including single-use wallets and transaction keys, as well as “coin mixing”, which involves pooling different transactions together to obscure the amount and parties involved in any given transaction. 

In his talk, Klein notes that privacy coins are a key source of concern for law enforcement and regulatory agencies.

Fraud and Initial Coin Offerings (ICOs)

Reports suggest that as many as 80% of ICOs offered in 2017 were fraudulent. 

Perhaps the largest was Pincoin, an ICO that raised $660 million during the ICO fever of 2017. Shortly after raising the money, Pincoin vanished, taking investor money with it. This is what’s known as an “exit scam.”

As a result of these scams, investors have asked securities regulators to intervene.  The problem? In the US, there’s no set answer on whether ICOs are “securities.” 

What’s a security? A security is a financial instrument, like a stock, bond or investment contract, that you are able to trade or transfer to someone else. If something is a security, it is often subject to regulation and must be registered with the regulators.

Until ICOs are classified as a security, we don’t know if they are something the Securities Exchange Commission (SEC) can regulate.

So long as they remain unregulated, ICOs fall outside the oversight and authority of securities regulators, potentially leaving investors more exposed to fraudulent activity

Although the SEC’s Chairman has previously claimed that ICOs are securities, the issue is still relatively untested in the courts. This leaves many ICOs operating in a grey area. 

How Are Law Enforcement Officers Cracking Down on Illegal Crypto Activity?

This is still relatively new territory for law enforcement agencies and governments. However, they are increasingly capable of de-anonymizing transactions and tracking criminal activity. Below are just a few of the ongoing themes of law enforcement activity in the crypto space:

  • Governments and law enforcement are collaborating on an international scale. This includes sharing information, joint investigations, and global agreements around extradition.
  • Law enforcement is increasingly capable of tracking cryptocurrency transactions, especially where the ledger is public. AI and machine learning are also making it easier to analyze the blockchain and pierce anonymity.
  • On the blockchain, transaction history is not just public – it’s permanent. This can create a permanent chain of evidence for law enforcement to review and rely on, especially over time, as new data is gathered and different wallets and accounts are identified.

Conclusion

Bitcoin has been linked to illegal activity ever since the infamous Silk Road black market emerged. The cryptocurrency ecosystem has also played host to its fair share of scams, hacks, and frauds. 

However, we should also remember that every bitcoin transaction, by design, is recorded in a permanent, transparent log. If bitcoin is used for nefarious purposes, that transaction is preserved forever.

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