Bitcoin and the risk of fraud recovery

For those who know me, I have struggled with the notion that it will become currency 2.0. Originally because of economic reasoning, but this thought struck me the other day whilst listening to a BBC podcast as I try to identify something that might even make me consider it having a viable place in my life beyond ethereal hyperbole. I am fed up with cryptohype, and this amazing panacea that is a cure (alternative) to the Banking system. Have they all missed the point that the Law governs what banks can do, the Banks would all rather it goes back to the days of loose laws and amazing expense accounts or did they all miss the point of why we have been in a decade horribilis!   

My motivation to write this is that BitCoin is the worst form of 'asset' to launder that has ever been invented. This I suspect will also be its undoing (in its current form), as it works well in an untrusted network. However, the problems arise when the coins themselves,  are or become the proceeds of crime. However, this as the property remains in specie unlike the folding stuff in your pocket. If you can identify this, then there is a potential for an action to recover.

To keep this simple and in an AML context, I need to explain the difference between currency and BitCoin and throw in a bit of old-school bank robbery. 

For those who were fans of the Sweeny (a 70’s Police drama, when coppers were coppers and you had the impression that they kept the Scottish whisky industry afloat through those dark economic days) the one thing that was always asked for by the villains was used notes. Why simple uncirculated notes the serial numbers would immediately connect the suspect to the crime. Yes, they did use to wash them, mainly to make them look used, but I digress.

In the pretty much cashless society there is no serial number, and for anyone who has ever wondered why the police have such problems with asset recoveries it was always the problem that the judiciary required that this was beyond reasonable doubt that money was the “same” money as the stolen funds.  

This gave rise to the prosecution using the Triggers broom argument (more TV!). In this classic scene, Trigger claims that he's had his road sweeper's broom for 20 years. But then he adds that the broom has had 17 new heads and 14 new handles. "How can it be the same bloody broom then?" asks Sid the café owner. Trigger produces a picture of him and his broom and asks: "what more proof do you need”.

Now the science bit. When a coin in created (mined) it has a unique identifier which is generated as the block reward, think of this as the row number in a ledger. Coins do not have a unique identifier, just as real coins do not have an identifier, however, BitCoin has a row number in a ledger, which is a unique identifier.

I imagine that using the term coin came about to give the concept a physical handle of understanding. This is what we were all taught from the age of 6 onwards, this has to be unlearnt. No one teaches 6-year-olds about ledger entries, and even old-school accounting principles taught accountants to close the ledger at the end of the final period and begin the next period fresh with an opening balance. Thanks to no paper and huge computing power there is no longer any reason to ever close a ledger even for the biggest of balance sheets.

Every denomination of bitcoin starts with a reward transaction, this is where the fun starts as each coin creates a transaction reference on its division, these could ultimately be split down to the maximum of 100 million times (a Satoshi), unlike normal money every division creates a transaction reference and this can be traced back to the originator block.

So why the fraud risk even if you have nothing to do with the fraud?

Here is a little thought exercise, based on a number of cases where recoveries have been made.  

Imagine if Bernard L Madoff had created a BitCoin Fund and it was part of a Ponzi (just look at the number of ICO's out there today!). It takes 6 years to discover the fraud and hence billions of transactions have taken place, the funds received at this point will contain the transaction numbers that are subject to the fraud recovery. Once this wallet is known and the aggrieved investors would disclose their wallets as part of the recovery. The judge decides to launch a recovery from those who profited from the fund. When you have the transmitting wallet you know who has been paid (it is the other way round that is difficult). Unlike real money these transactions can be traced all the way forward to the holder today, irrespective of the number of divisions that amount may have gone through. The anyomonimity only works backwards, from whom you receive the funds and its source.

So judge issues a worldwide freezing order, interestingly, we know who has profited and thanks to the transaction number whoever receives this identifiable property becomes a party to the risk of clawbacks. This could happen many, many years later.    

So with the number of dubious ICO (initial coin offerings), I would rather bet on how long, than if. Before a decent ICO Ponzi fraud goes to litigation.