Bitcriminals… We need the Bit-Man

In today’s Exponential Investor…

  • Bitcoin, safe or dangerous? 
  • Do criminals really use it more than cash?
  • How blockchain fights fraud

Thank you all for your emails regarding my articles on bitcoin and crypto last week.

I’m so pleased that many of you found them helpful!

If you missed them – you can find them here (intro), here (the tech), and here (the idea).

I learned a lot myself, and it helped crystalise my first ever “dinner party definition” for why bitcoin has done so well – the holy duality concept of bitcoin being the product of an idea and a technology, which together have created something much greater than the sum of its parts.

But there was one key theme running through all the responses which I haven’t yet addressed directly, and that is security and legality.

A lot of people are concerned by the safety of holding bitcoin – having heard so many stories about theft and fraud.

Others, meanwhile, are righty concerned by all the reports of criminal groups and individuals using cryptocurrency to evade security.

So today I want to delve into those two main concerns, and hopefully clear some common misconceptions up too.

The first thing that can be said is that, as with so many things, bitcoin’s greatest strength is also its greatest weakness.

Trust.

It’s worth saying that the issue of trust and freedom falls down similar lines in cryptocurrency as in every other field.

Do you think that YouTube, Facebook and Twitter have an obligation to stop certain things from being published?

When ISIS posts execution videos up on social media, ought they to take it down?

I think I would say yes to that.

Well the bitcoin code says no.

If you want a solution to the problem of central bank and government control of money, then you have to accept the other side.

To escape the problems that a 3rd party brings to a monetary system, namely manipulation, you have to accept other problems – ie, the monetary equivalent of complete freedom.

So yes, criminal activity takes place using bitcoin.

However, it would be simplistic to imagine that criminal groups were really struggling to get their finances in order before bitcoin came along.

No, if anything, the more disconcerting truth which not enough people know about is that major criminal organisations, from Italy to Mexico, are the most lucrative organsiations in the world. They make Amazon look slow, Apple look ancient and Twitter look tame.

Crime has taken place using cash since forever – those are truly secretive transactions.

So it’s very controversial to say that without bitcoin, there would be less crime, or they would be less profitable.

What cryptocurrencies are good at is replacing online banking – but the drug cartels and mafia gangs over the world have had their fingers in the higher echelons of international banks for a long time.

HSBC has been rightfully fined, and insufficiently shamed for its role in laundering money and banking for huge amounts of criminal funds.

In fact, some make a strong case for saying that during the financial crisis, a large number of major global banks were kept afloat by criminal money, as they are the only remaining large-scale users of physical cash. They provided the reserves which helped the Western banking system survive the credit crash. It may not be completely true, but it’s a concerningly strong argument.

Anyway, the point is that to insinuate that bitcoin has in any way alleviated the financial stresses of criminals is, to my mind, scapegoating.

Money laundering and insufficient risk-controls at banks are serious issues that blaming bitcoin only distracts from.

Drug gangs in Mexico were posting briefcases of cash through a specially designed windows at certain international banks’ branches for years.

The level of complicity, ignorance and corruption is extraordinary.

Wachovia, now bankrupt, is another famous example.

The bitcoin code has created a currency or asset which allows for complete trust between parties.

But as Satoshi Nakamoto stepped back, and allowed the network to grow organically without altering the nature of it (by changing the computer code which built it), bitcoin does not have an overseer or corporate overlord, like many other cryptos which have been publicly “created”.

As a result, there is no watchful overlord.

However, it does seem to me from a few bits of reading or some conversations that total anonymity does not exist.

After all, the blockchain carries a digital record of every single transaction.

Now to you or I it may be as easy as reading the Bible backwards in Russian, but that implies that to a Russian… it might be possible.

So from what I’ve read, it does seem that the bitcoin blockchain has been used to track down or indict criminals based on transactions made.

Cybersecurity is already an important trend both in life, work, and investment. Crypto-security will probably go along similar lines, with specialist companies and workers who can protect us from things we just don’t understand.

No – not the most reassuring thing I’ve ever said, but that is roughly where we stand today – ie, to specialists working in the FBI, it is possible to trace transactions and unearth people or transactions of criminal origin – if you know what you’re looking for.

And as understanding of this new thing grows, I imagine that “crypto-capable” will be cropping up on more and more job specs for the investigative careers.

And yes, criminals will continue to use it just as they use traditional forms of money – gold, silver, dollars, and online banking.

And scams will continue too.

After all, incredible gains bring shady characters in any space, and Bernie Madoff lookalikes flocked to the crypto sector en masse from the mid-2010s.

They prey on ignorance and confusion, and that’s one reason why I think it’s so important to get clued up on this stuff as much as possible.

The other concern many of you had was the safety of your holdings, if you buy bitcoin or other cryptos.

On this topic, again it’s perfectly reasonable to be concerned. In fact, it would certainly be unreasonable if you weren’t. It’s your money and this is new territory.

But essentially, the “one-rule cyclists” handbook applies here as well as in most places: don’t be an idiot.

For cyclists this means don’t run reds, don’t squeeze through gaps, keep left, and don’t race other cyclists.

With bitcoin, this translates roughly to: stick to cryptos you know and understand, go through major exchanges as much as possible, don’t try and time the market too much, and seek help.

I’ve used Coinbase and it has come a long way in the last few years. It charges me fees when I transact, which is basically never.

As with cycling, you can become more advanced and while no one is going to make you wear Lycra to buy “alt-coins”: (other, newer crypto currencies and digital assets), you can get funky in terms of how you hold your bitcoin.

Remember, bitcoin is a digital asset – a line of code which only you have. If you transfer it, the code will change.

So you can write down your code on pieces of paper and put them in a drawer, a safe, or a vault.

Or you can put your codes in a Word document and save it on to your computer, or even better, a USB stick.

Those options are called “hard wallets”, and they are as safe as cash. Basically, someone has to physically nick it to get your coins.

Digital wallets are online banking accounts. Coinbase is an app which can be a wallet. There are others.

Some of them have gone bust, some have been frauds. If you have heard of more than three famous bitcoin frauds then you know more than I. Essentially, if you’re not a pro, stick to the mainstream.

And no – there is no FSCS scheme which protects your bank savings from a loss of up to £85k, but there is no central bank to inflate away your savings either so which would you prefer?

That’s the point.

Bitcoin is not criminal or legitimate, it’s not “safe or dangerous”, it’s a series of trade-offs.

The question is whether you would trade certainty of supply for uncertainty of demand.

Whether you mind the fact that criminals use bitcoin more than you mind that criminals use dollars, pounds and pesos.

Whether you are happier having a million average Joes authenticate your money or a hundred central bankers.

Whether you think inflation is a problem or a solution.

Whether you’re a saver or a debtor.

I think the conclusion this inevitably brings us to is that bitcoin is not an answer, it’s an alternative.

It’s many things to many people, and it’s not settled yet.

To me, it’s an interesting new investment asset, which I’m keen to dabble in and learn more about.

Finally, a number of you very astutely asked this question:

If bitcoin is a reward for verifying blocks of transactions on the chain, and the supply of bitcoin rewards is due to run out in 2040, then why would anyone bother verifying the data any more? Why would someone “mine” for no reward?

Well, in case you confused me with a real expert, I’ll reiterate that I am not one, and pass you over to Sam Volkering who answered this one quite beautifully in Monday’s Exponential Investor article.

Read his response here.

Best wishes,

Kit Winder
Editor, Southbank Investment Research

Category: Cryptocurrency

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