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Madrid - Digital Currency Summit 2015-04-23

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My most provocative presentation so far. I argue that the current policy goal priority of national security, tax compliance and financial crime prevention, as well as the current identity paradigm (government-issued) are factors that contribute to financial exclusion and hamper innovation. I focus on the challenges to our mental models created by the advent of Bitcoin and cryptocurrencies, and innovation opportunities in AML/CFT, privacy, identity, data analysis and security. Finally, I present my three Is theory of "Responsible Evolution" as a viable strategy for entrepreneurs to make their projects viable.

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Madrid - Digital Currency Summit 2015-04-23

  1. 1. A M L / C F T p r i v a c y b i g d a t a DIGITALIDENTITY s e c u r i t y Redefining
  2. 2. FINTECH MONEY
  3. 3. Of the 7 billion people alive on the planet, 1 . 1 B I L L I O N subsist below the internationally accepted extreme- poverty line of $1.25 A DAY. The Economist
  4. 4. IDENTITY LAW ENFORCEMENT
  5. 5. 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 browser tokens rewards WOW Ripple Protocol EGold Bitcoin Protocol Ven Ripple XRP Litecoin Linden Dollars Entropia Universe QQ Online Exchanges Altcoin Explosion Regulated Exchanges Beenz Flooz Colored Coin Smart Contracts Ethereum Square Cash Amazon Coin Sovereign Coin Real Estate Equities Derivatives ? B i t c o i n O p e n S o u r c e P r o t o c o l S o l v e s D o u b l e S p e n d P r o b l e m v i a O p e n L e d g e r
  6. 6. PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER PEER NO central authority or financial institution in control M AT H - E N F O R C E D T R U S T
  7. 7. REVOLUTIONARY
  8. 8. Every transaction that has ever occurred in the history of the Bitcoin economy is publicly viewable in the an open ledger called BLOCKCHAIN. Privacy without anonymity  Pseudonymity
  9. 9. REVOLUTIONARY
  10. 10. identity + payment
  11. 11. identity + payment
  12. 12. CONSUMER privacy protected MERCHANTno chargebacks / fraud Payment only
  13. 13. PARADIGMS CHALLENGED trust security custody control
  14. 14. A M L / C F TTODAY - national security and crime deterrence are top public policy priorities - unintended consequence → selective inclusion facilitates fiscal surveillance but creates financial exclusion of underprivileged - stick over carrot (heavy hand) - anonymity and privacy are anathema TOMORROW - carrot over stick (lighter hand) - measure proportion and results - layered, zero-knowledge, identity systems could meet both law enforcement and civil liberties goals
  15. 15. I D E N T I T Y TODAY - Countries have the monopoly over a person’s identity (mostly, for fiscal reasons) - Not all countries have reliable identification systems - Government-issued IDs are not necessarily effective in deterring crime/unmistakably identifying humans TOMORROW - Alternative identity systems that transcend borders and facilitate identification of previously disenfranchised persons - Identity systems that balance both transparency and privacy (ID3/Windhover Principles)
  16. 16. “ Yo u r I P a d d r e s s i s y o u r ‘ i n t e r n a t i o n a l ’ i d e n t i t y c a r d ”
  17. 17. P R I VA C Y TODAY - Radical transparency jeopardizes privacy - Slowly being eroded via tax compliance regulations, elimination of secrecy havens, digitization of money TOMORROW - Leverage zero-knowledge proof technology → tokenization (Windhover Principles) - Privacy without anonymity = pseudonymity (first payment; then, identity)
  18. 18. B I G D ATA “With a bit of data mining, my concern is that [companies & the government] will get a lot of information. The things people are doing to protect themselves today are pretty naive compared to the kinds of clever data mining tricks that exist. I’m worried that a lot of people are doing things that are leaving a permanent history and will then inadvertently leave some trace that reveals their actual identity.
  19. 19. Anonymous Untraceable “Invisible to law enforcement and the taxman”
  20. 20. • The entire history of Bitcoin transactions is publicly available. • “Using an appropriate network representation, it is possible to associate many public-keys with each other, and with external identifying information.” • “Large centralized services such as the exchanges and wallet services are capable of identifying and tracking considerable portions of user activity.” A n A n a l y s i s o f A n o n y m i t y i n t h e B i t c o i n S y s t e m – B i t c o i n i s N o t A n o n y m o u s by Fergal Reid and Martin Harrigan (2011)
  21. 21. • The demonstrated centrality of these services makes it difficult for even highly motivated individuals— e.g., thieves or others attracted to the anonymity properties of Bitcoin—to stay completely anonymous, provided they are interested in cashing out by converting to fiat money (or even other virtual currencies). • The increasing dominance of a small number of Bitcoin institutions (most notably services that perform currency exchange), coupled with the public nature of transactions and our ability to label monetary flows to major institutions, ultimately makes Bitcoin unattractive today for high-volume illicit use such as money laundering. • A well and fairly regulated virtual currency industry makes it exceedingly difficult for bad actors to use the system for illicit activities. A F i s t f u l o f B i t c o i n s by Sarah Meiklejohn et al (2013)
  22. 22. Anonymous Untraceable “Invisible to law enforcement and the taxman” Myths enhanced surveillance and control
  23. 23. S E C U R I T Y TODAY - role-based access control - Digital tokens are bearer instruments: lose the key, lose the asset forever - Information security risks increase with digitization TOMORROW - customer-centric custody and security (via multi- signature escrow)
  24. 24. A M L / C F T p r i v a c y b i g d a t a DIGITALIDENTITY s e c u r i t y Redefining
  25. 25. MUST WANT CAN © 2015 Juan Llanos WANT – MUST = CAN
  26. 26. RETHINK REDEFINE REINVENT
  27. 27. INNOVATE & Reinvent the World INFLUENCE Public Policy IMPLEMENT Mandatory Rules © 2015 Juan Llanos
  28. 28. INNOVATE IMPLEMENT Clientelism Inflexibility Exclusion Inequality © 2015 Juan Llanos We innovate within outdated, inflexible, anachronistic legal and regulatory frameworks
  29. 29. INNOVATE INFLUENCE Disarray Capture Recklessness Chaos © 2015 Juan Llanos We innovate and influence policy to accommodate our interests, but we really don’t implement effective controls.
  30. 30. IMPLEMENT INFLUENCE Monopoly Entropy Ossification Irrelevance © 2015 Juan Llanos We stay where we are because we don’t have an innovation-friendly environment
  31. 31. INNOVATE & Reinvent the World INFLUENCE Public Policy IMPLEMENT Mandatory Rules © 2015 Juan Llanos Responsible Evolution
  32. 32. @JuanLlanos Thank you!

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