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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blockchain island Malta

When the market-leading cryptocurrency exchange Binance announced in March it was moving its operations to the Mediterranean island of Malta, it made the industry sit up and take notice. The move raised a multitude of questions and a few proverbial eyebrows.

What makes Malta an attractive hub for cryptocurrency companies?

Why would a major exchange such as Binance go through the arduous process of setting up shop in such a seemingly isolated place at the other side of the world?

Does Malta make special exemptions and concessions for crypto-based firms operating on the island?

What’s the deal?

Binance Moves its Operations to Malta

binance malta blockchain island

Malta was once primarily known more for its stunning natural features such as its dominating cliff faces, its crystal blue waters and its world-class dive spots. These days it is becoming known as Blockchain Island and the home of major crypto exchanges, investment firms, and blockchain tech startups, with Binance leading the exodus from Asia and beyond.

Chased Out of China

Although originally founded in China, Binance has since become locked in legal disputes across not only its homeland but also in Japan and Hong Kong.

As crypto regulations tighten across Southeast Asia for exchanges as well as ICO projects, Binance was one of seven crypto-based firms that received a warning letter from the Securities and Futures Commission in Hong Kong not to trade digital assets.

Regulatory crypto crackdowns across Asia fueled Binance’s decision to seek pastures new. The crypto exchange decided to move their whole operation to Malta. And they also suggested that others should follow suit, which they did. When first announcing their move, Binance CEO Changpeng Zhao made a statement on his Twitter feed that said:

“Malta is very progressive when it comes to crypto and fintech. We think it is a good place for other crypto businesses to look into as well.”

 

Binance CEO cz tweet about Malta

The following message from the Maltese prime Minister Joseph Muscat on his Twitter account welcoming Binance gives a fascinating insight into the difference in attitude between Blockchain Island and the current restrictive crypto climate across Asia.

Malta prime minister tweet Binance

Other Crypto Companies Now Operating in Malta

When a company as large and integral to the crypto industry such as Binance moves its operations to Malta and encourages others to do the same, that’s exactly what happens.

Other massive crypto exchanges such as Bittrex and OKEx are also running some or all of their operations out of Malta. The list of blockchain-related companies continues to rise as crypto investment firms such as Neufund and Coinvest have also made the move.

From blockchain startups to ICO platforms Malta is now a melting pot of crypto-related businesses such as Decentralized Ventures, STASIS, Loci Nexus, the non-profit organization Bitmalta, nChain and the Maltese crypto startup Learning Machine, just to name a handful.

Malta - blockchain island

Why Does Malta Appeal to Crypto Companies?

The obvious reason why so many crypto companies are making Malta their home is largely due to the favorable digital currency regulations on the island. On June 4, 2018, Malta became the first nation to create official regulations for crypto operators.

The Maltese parliament passed three bills that established clear and concise regulatory framework for cryptocurrencies, blockchain technology and distributed ledger technology (DLT). The three Maltese crypto regulatory bills are as follows:

Malta Digital Innovation Authority Act (MDIA Act)

This act was created to establish the Malta Digital Innovation Authority and can certify DLT platforms. This law is in place to focus largely on internal governance and to outline the Authority’s responsibilities to certify distributed ledger platforms to ensure authenticity and the legal compliance of those wishing to make use of a DLT.

Innovative Technology Arrangement and Services Act (ITAS Act)

This bill is used to set up crypto exchanges and other crypto companies. It’s called the Innovative Arrangement and Services Act (ITAS Act) and is also primarily created to deal with DLT certification and platforms.

Virtual Financial Assets Act (VFA Act)

The third and final bill of this three-pronged attack focuses on regulating ICO projects, wallet providers and exchanges. The Virtual Financial Assets Act (VFA Act) was created to establish a regulatory regime that can keep the crypto industry in Malta in check.

The most interesting factor in regards to the three bills is they can be applied to a wide range of industries and technologies and are not necessarily anchored directly to the crypto or financial sector in Malta.

“We Understood Early on That the Serious Operators Wanted Legal Certainty”

When talking about new regulations, the Junior Minister of Financial Services, Digital Economy and Innovation, Silvio Schembri said:

Malta representative“When we started looking into what was needed for the blockchain industry to flourish, we understood early on that the serious operators wanted legal certainty. As of now, operators are functioning in jurisdictions of legal uncertainty. Operators fear that one day a government in that particular legislation will tell them they aren’t within the law – even though there are currently very few laws in place. This is creating legal uncertainty and we wanted to change this

 

Clear, concise, common sense and straightforward thinking are the foundations of Malta’s cryptocurrency regulations and the main reason why this picture-perfect Mediterranean island is now the most desirable destination in the world for all manner of crypto-related businesses.

A “Calculated Risk”

Maltese Prime Minister Joseph Muscat admits that its new laws are a “calculated risk” by fast-tracking blockchain companies and removing bureaucracy. For the moment, however, it appears to be paying off.

Is Malta the Future Epicenter for Cryptocurrency in Europe?

A recent report by a blockchain investment company called Fabric Ventures has shown a massive shift in worldwide ICO token sales. Europe is now leading the world in crypto-asset token sales with $4.1 billion in 2018, which vastly dwarfs Asia with $2.6 billion and the USA with a total of $2.3 billion.

As Europe leads the way for crypto and blockchain technology adoption, could Malta become the future epicenter for blockchain and cryptocurrency in Europe, which ultimately means the world?

Malta might be one of the tiniest nations in Europe, but small things can sometimes cast a big shadow. With a growing reputation as the world’s first blockchain island, easy-to-follow regulations and a welcoming attitude that doesn’t just accept blockchain and crypto, but actually encourages them, it’s no wonder that megalodon crypto exchanges Binance has made Malta its home.

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hooded man with hand out bitcoin regulation

Welcome to your daily Block Explorer roundup. Hope you had a great weekend! Today we’re looking at bitcoin regulation as Coinbase’s UK CEO claims we need more. But first, let’s take a glance at the markets.

All the top 20 coins are in the green today after a fairly quiet weekend.

1. Bitcoin – $6715 (+ 0.7%)
2. Ethereum – $277 (+ 1%)
3. Ripple XRP – $0.33 (+ 1.8%)

Things are strangely calm out there at the moment. In fact, bitcoin is around the least volatile it’s been all year. Historically, a period of calm is usually snapped by a wild swing upward or downward, so don’t be surprised if we see some big price movements this week.

Biggest winner and loser in the top 20

IOTA crypto logo transparent background

Biggest winner: IOTA (+ 15%)
Biggest loser: Zcash (- 0.1%)

IOTA is leading the pack today after Fujitsu said it is “well-equipped to help roll out IOTA as the new protocol standard.” IOTA aims to facilitate the ‘internet-of-things’ using blockchain technology, so a partnership with IT giant, Fujitsu, will open a lot of doors.

Does crypto need more regulation?

“[Regulation] is the best way to provide individuals and institutions a safe environment to invest.”

That’s the verdict from UK Coinbase CEO, Zeeshan Feroz. He told CCN that regulation is a good thing for the cryptocurrency market in 2018, explaining that a lack of regulation leads to risk in the market.

“We see the value in having some form of regulation for crypto exchanges as a means of ensuring due diligence and transparency in the crypto space.”

The issue of regulation in crypto is a controversial one. Many claim it will bring transparency to the market (and allow institutional investors to wade in). Others, however, see it as destroying the values and decentralized ethos on which bitcoin was built.

Where do you stand on bitcoin regulation? Do we need more to help attract  investors? Or should we keep bitcoin as decentralized as possible? Let me know in the comment section below.

Wild bitcoin price predictions 2018: from $3,000 to $20,000 +

Over the weekend we’ve had yet more wild price predictions for bitcoin.

The bull: Tom Lee of Fundstrat Global Advisors doubled down on his previous prediction that bitcoin will rise above $20,000 by the year-end.

He says hedge funds are playing a bigger role in bitcoin behind the scenes which could lead to a surge in prices. He also pointed to the correlation between bitcoin and emerging market stocks.

The bear: Anthony Pompliano had originally predicted a $50,000 price tag by the end of 2018. He now says he was wrong, by about four years.

He sees bitcoin plunging to $3,000 and says the market might not bottom out until late 2019. As for a full recovery, that’s not on the cards until 2023, based on how long it took bitcoin to recover from previous spikes.

With four months left in the year, where do you see the price of bitcoin going? $3,000 or $20,000+?

That’s all for today’s roundup. We’ll see you back here tomorrow.

In case you missed it: Why do Bitcoin ETFs Keep Getting Rejected?

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The Canadian Securities Administrators (CSA) released a Staff Notice this week (June 11, 2018) providing additional guidance on the securities law implications for offerings of coins and tokens.  The notice was prepared by the CSA in response to common inquiries from cryptocurrency businesses and their advisors. Specifically, the notice addresses the sale of “utility tokens” and identifies scenarios where these sales may also have elements of investment contracts and be subject to securities regulation.  

 

On the topic of utility tokens, CSA Staff Notice 46-308 states:

“We have received submissions from businesses and their professional advisors that a proposed offering of tokens does not involve securities because the tokens will be used in software, on an online platform or application, or to purchase goods and services. However, we have found that most of the offerings of tokens purporting to be utility tokens that we have reviewed to date have involved the distribution of a security, namely an investment contract. The fact that a token has a utility is not, on its own, determinative as to whether an offering involves the distribution of a security.”

 

The notice goes on to highlight a few common scenarios for proposed coin and token offerings that could give rise to various securities law implications.  These scenarios include situations where:

  • A token is intended to be used in the operation of software or an online application that does not yet exist or is still under development, or the token is intended to be used to purchase goods and services that are not yet available
  • Tokens are not immediately delivered to buyers once purchased
  • The stated purpose of the offering is to raise capital, which will be used to increase the coin or token’s value or support the business issuing the coin or token
  • A business offering the coin or token or involved in its sale makes statements suggesting that the coin or token will become more valuable, or take other steps to create an expectation of profit

 

The CSA advises that any business seeking to offer coins or tokens to Canadians consult qualified securities legal counsel.  The CSA also invites applications to the CSA Regulatory Sandbox, which allows fintech companies an opportunity to test and develop innovative business offerings in an environment where they can work collaboratively with regulators and have temporary exemption from some consequences of securities regulation that may otherwise apply.  The sandbox approach to regulation is something that has also been pursued in Bermuda and the UK.

Who are the Canadian Securities Administrators (CSA)?

While most countries have national securities regulators, Canadian securities regulation is solely the jurisdiction of provincial and territorial governments.  The Canadian Constitution divides powers between the federal and provincial government and gives provinces the jurisdiction to regulate property and civil rights.  These provincial and territorial regulators are participants of the Canadian Securities Administrators, which is an organization that aims to promote consensus and harmonized regulations across the different jurisdictions.

 

What are “Staff Notices”?

Staff notices are issued either by a single regulator or by a group of regulators, such as the CSA.   Staff notices do not change securities legislation, reporting requirements or other policies and procedures.  Instead, the notices provide businesses and the public with insight into how regulators are interpreting and applying existing regulations.  The notices often focus on recent issues or areas of concern for the regulator and attempt to provide guidance on these matters to businesses and other market participants.  

Reddit and GitHub user iminehard noticed their cellphone experienced interference while near their impressive GPU mining farm. Following this, iminehard investigated the issue and found that there was a definite increase in noise around a specific LTE range. iminehard’s testing methodology and results are covered in more detail below.

“TL;DR – Large number of GPUs in open air crypto currency mining “rigs” emit substantial spurious emissions/noise on portions of the LTE spectrum used in the United States.”-GitHub and Reddit user iminehard

Testing for interference

iminehard documented their testing methodology along with their results. Testing made use of a Laptop, an RTL-SDL tuner, and an omnidirectional antenna for said tuner. SDL, or Software Defined Radio, allows you to use a computer to capture and produce RF signals, using its CPU to process the signals. This is different from regular radio, which uses specialized hardware to process the signal. Iminehard used this to capture the frequencies on which LTE operates.

Chart comparing parts of the RF spectrum between tests
Mining in blue, idle in green

The first pair of tests iminehard performed was a single GPU inside a case, first at idle, but overclocked and with fans on, and the second with the mining software bminer running. No perceptible difference can be seen on the charts comparing the LTE spectrum between the two tests. The lack of difference between the charts could mean a few things. Namely, it could mean that the case used blocked or grounded out the interference. Otherwise, it could mean that the interference generated by a single GPU is undetectably negligible.

Moving forward, iminehard tested their mining farm, with interesting results:

 

iminehard's GPU mining farm
iminehard’s GPU mining farm

iminehard used the same testing method that was used above on their farm. And unlike the previous test, there was a significant change in what iminehard called “range 1” of the LTE spectrum used by the United States (617-746 MHz).

Chart of RF spectrum showing the difference between tests
Mining in blue, idle in green. Sourced from iminehard’s investigation on GitHub

Results of interference

As shown above, there is some definite interference caused by large-scale GPU farms. This interference may cause service disruptions for those trying to use cell phones within the field. Due to the fact that this may cause service interruption, the farms may break federal laws regarding intentional interference. Or may cause the FCC to come knocking on your door asking you to knock it off.

Shielding to prevent interference

The above tests were performed on ‘open’ GPUs. ‘Open’ referring to the fact that the GPUs were not mounted in a metal case. A metal case may provide some shielding for the interference that the GPUs release, either due to grounding or construction. Aside from being sure to mount all GPUs in a real case, one could build a Faraday cage around the entire farm. A correctly built faraday cage should contain all the interference within the cage. One major downside to using a Faraday cage is that Faraday cages are conductive. If it collapses, it could damage equipment.