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So, what's this blockchain thingy? - a World Money Laundering Report exclusive (part 6)

Outstanding risks

Outstanding risks

If it's all so safe and all so secure, and if there is at least the potential for identifying account holders and for asset freezing and asset recovery, what can possibly go wrong?

There are two risks, one of which is financial and one of which is an issue for society.

The financial one is this: all blockchain applications can be "forked." This is a serious issue. Bitcoin itself has been forked and now there are two types of bitcoin. There is talk of a further fork to create three types. BTC is the original and that's the one that's been creating ever-higher trading values in mid to late 2017. When it hit USD5,000 prudent people said "it's a bubble." As of late November, it's reached 10,000. It's still probably a bubble but it's one that those who did what was widely considered the foolhardy thing six months earlier and have now sold out have done very well out of. Those who are still in? Who knows?

When there is a fork, there are many consequences. Generally, though, there is a surge in value but it doesn't last. But depending on the way the fork is handled, those holding coins in the original might find they hold a similar number in the new version, creating a windfall. Think of it as a rights issue in securities although it's not actually a security.

Forks create uncertainty and uncertainty is, by definition a risk and, in the current state of development, something that those who are financially vulnerable probably should not take.

The risk that is one for society about financial crime and, because it's the biggest financial crime risk, I want to focus on just one problem.

Anyone who has or can buy the technical know-how can build their own blockchain and create their own digital currency. Worse, they can do so in complete secrecy. There is, at present, absolutely no means by which any authority can identify a new blockchain unless its promoters choose to make it public.

Why is this such a problem?

First, to create a blockchain on Ethereum takes someone with fairly basic programming skills less than an hour, according to Lauren Stephanian of www.lstephanian.com

For those who simply want to clone bitcoin's blockchain (and make completely new coins unrelated to bitcoin) there are a plethora of off-the-peg versions. It seems that most people recommend using bitcoind which can be found at https://github.com/bitcoin/bit....

Note: this is not mining software (i.e. the thing that allows people to generate coins, seemingly from thin air). This is the actual platform.

Having installed and set up the platform, the operators have the ability to control the creation and issue of the currency. That helps keep it secret. Depending on the use it intends to make of it, that's either a good thing or it makes life difficult.

If the plan is that a large organised crime gang wants to use its own currency then its only challenge is interchange. But once it's funded, interchange becomes less of a problem: it can operate its own parallel, global, invisible, instant and private economy.

More than 100 years ago, workers were paid in tokens that they were required to spend at company-owned shops. It was called "truck" and in the UK, at least, The Truck Acts outlawed the scheme. In some drug growing areas, farmers are compensated not with cash but with goods. We know that drug dealers' biggest problem is how to move cash and how to store it once they have it. And we know that terrorists' use very small amounts of money to commit large acts but even so international payments are susceptible to discovery.

A private crypto-currency solves all of those problems for criminal networks. They can operate a parallel economy, invisible to the outside world, in which they buy and sell goods and services. All the way down to the street level drugs dealer, there can be total invisibility. How does the street level dealer interact with the private currency? He simply hands over this cash and is paid in private currency which he then spends in shops, etc. owned by the criminal enterprise and which operates outside the identifiable accounting system.

But there may be no reason to go that far to protect the privacy of the system at the pointy end. It might actually make more sense to make drugs users to use one of the more visible crypto-currencies to purchase their drugs and then to periodically convert the dealer's holding to a second currency and then onto the private one. Quite simply, for the amounts likely to be involved, the cost of tracing individual small transactions would be too high for all but the most highly resourced authorities to bear.

For terrorist financing, the use of a private currency would allow value to be moved around the world, entirely transparently. Again, it would be best if groups collected "donations" in a public currency which is then laundered into a private currency which can then be used to deliver money, goods or services to those engaged in terrorist activity. The broader the spread of support in the target country, the more the currency can be used for the purchase of items for terrorist purposes.


part 1:

Part 2:

Part 3:

Part 4:

Part 5:

Part 6:

part 7:

Part 8:


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