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Bitcoin,
Blockchains &
Financial Crime
Juan Llanos
@JuanLlanos
info@juanllanos.com
ContrarianCompliance.com
BITCOIN MYTHS
“anonymous”
“untraceable”
“invisible to law enforcement & the taxman”
©2016 Juan Llanos
©2016 Juan Llanos
Digital Assets tend to be global, open, nodal and
evolutionary. They live on the Internet and vary
widely in scope and use...
an accounting system
software / program
database → blockchain
©2016 Juan Llanos
“A Peer-to-Peer Electronic Cash System”
Satoshi Nakamoto
“A peer-to-peer network that allows for the
proof and transfer of...
DOUBLE-SPEND: SOLVED
DISTRIBUTED CONSENSUS
TRANSPARENT LEDGER
TRANSFER & IDENTITY: SEPARATED
PROGRAMMABLE
©2016 Juan Llanos
HOW BITCOIN &
ITS BLOCKCHAIN WORK
Less technical video [5 minutes]
https://youtu.be/l9jOJk30eQs
More technical video [22 m...
Digital Payments Network (B)
Digital token (b)
Open Protocol (B)
©2016 Juan Llanos
©2016 Juan Llanos
Digital Payments Network (B)
fast, secure
low cost, global
transfer of value
©2016 Juan Llanos
Digital Token (b)
counterfeit-proof “online cash”
unit of transaction → bitcoin
dollar value → open mark...
©2016 Juan Llanos
Open Protocol (B)
applications beyond payments →
, escrow, tamper-proof voting, notary
services, etc.
PL...
©2016 Juan Llanos
freedom to own
freedom to transfer
freedom to innovate
censorship-resistance
permission-less innovation
end of 1/4
©2016 Juan Llanos
©2016 Juan Llanos
©2016 Juan Llanos
“Virtual currencies promise to benefit commerce
on many levels, from serving the unbanked to new
financial products. I cha...
©2016 Juan Llanos
…whoever as a business:
● Exchanges virtual currency for government
currency, and one virtual currencies for
another (e.g....
©2016 Juan Llanos
Exchanges Wallets
TPPPs MTs + Other
• Risky “product”(no value limits, global, etc.)
• No identity & location of either S or R (FT+T rules, Sanctions)
• Limit...
BITCOIN MYTHS
“anonymous”
“untraceable”
“invisible to law enforcement & the taxman”
Reid-Harrigan (2011), Meiklejohn et al...
• Direct (“self-help”) detection & investigation (vs. deputized)
• Global monitoring (vs. intra-company)
• Digital, global...
end of 2/4
CURRENT ISSUES
illicit purchases
theft
ransoms
©2016 Juan Llanos
Source: Mastering Bitcoin
©2016 Juan Llanos
Source: Coinalytics (Skry)
©2016 Juan Llanos
Source: Mastering Bitcoin
©2016 Juan Llanos
THIEVING TECHNIQUES
- AGGREGATIONS → bitcoins were moved from several addresses into a
single one
- FOLDING → addresses no...
BEHAVIORAL INDICATORS
- TRANSACTION VOLUME: observe transaction volumes and pay close attention to outliers from an expect...
©2016 Juan Llanos
Source: Skry
©2016 Juan Llanos
Source: Novetta
©2016 Juan Llanos
Source: Skry
Law Enforcement
end of 3/4
PRIVATE vs OPEN
BLOCKCHAINS
Source: Coindesk
©2016 Juan Llanos
©2016 Juan Llanos
Source: Antony Lewis
©2016 Juan Llanos
Source: Skry
©2016 Juan Llanos
ETHEREUM
Sidechains
BTC
Corda
©2016 Juan Llanos
O O
O
C
C
C
O
O
“The Real Value of Blockchain Technology” [6 minutes]
https://youtu.be/YIVAluSL9SU
©2016 Juan Llanos
Clearing & Settlement
Smart Contracts
Inheritance
Employees
Logistics
Legal
Asset Legitimacy
Wines
Jewelry/Art
Land
Electr...
Credential Certification
Energy Identity
Gaming
APPLICATIONS IN DIFFERENT INDUSTRIES
Source: Globant
Source: Bloq
©2016 Juan Llanos
end of 4/4
©2016 Juan Llanos
©2016 Juan Llanos
Thank You!
Juan Llanos
@JuanLlanos
info@juanllanos.com
ContrarianCompliance.com
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United States - TX, CA, CT & IL Verafin FRAMLxpo

Educational keynote directed to community bankers, credit unions and local law enforcement. I attempted to present a balanced view of the promise and peril of open blockchain technologies like Bitcoin and Ethereum, and how they have inspired similar distributed ledger technologies that are ushering in the Blockchain Era.

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United States - TX, CA, CT & IL Verafin FRAMLxpo

  1. 1. Bitcoin, Blockchains & Financial Crime Juan Llanos @JuanLlanos info@juanllanos.com ContrarianCompliance.com
  2. 2. BITCOIN MYTHS “anonymous” “untraceable” “invisible to law enforcement & the taxman” ©2016 Juan Llanos
  3. 3. ©2016 Juan Llanos
  4. 4. Digital Assets tend to be global, open, nodal and evolutionary. They live on the Internet and vary widely in scope and use. browser tokens rewards 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 Bitcoin Open Source Protocol Solves Double Spend Problem via Open Ledger e-Gold WOW Ripple Protocol R3 Corda Monero Dash Zcash Source: Hub Culture ©2016 Juan Llanos
  5. 5. an accounting system software / program database → blockchain ©2016 Juan Llanos
  6. 6. “A Peer-to-Peer Electronic Cash System” Satoshi Nakamoto “A peer-to-peer network that allows for the proof and transfer of ownership without the need of a trusted third party.” Goldman Sachs “An open platform for value exchange.” Richard Brown (R3) ©2016 Juan Llanos
  7. 7. DOUBLE-SPEND: SOLVED DISTRIBUTED CONSENSUS TRANSPARENT LEDGER TRANSFER & IDENTITY: SEPARATED PROGRAMMABLE ©2016 Juan Llanos
  8. 8. HOW BITCOIN & ITS BLOCKCHAIN WORK Less technical video [5 minutes] https://youtu.be/l9jOJk30eQs More technical video [22 minu tes] https://youtu.be/Lx9zgZCMqXE Public-Key Cryptography Explainer [5 minutes] https://www.youtube.com/watch?v=3QnD2c4Xovk ©2016 Juan Llanos
  9. 9. Digital Payments Network (B) Digital token (b) Open Protocol (B) ©2016 Juan Llanos
  10. 10. ©2016 Juan Llanos Digital Payments Network (B) fast, secure low cost, global transfer of value
  11. 11. ©2016 Juan Llanos Digital Token (b) counterfeit-proof “online cash” unit of transaction → bitcoin dollar value → open market Inflation-proof → total capped
  12. 12. ©2016 Juan Llanos Open Protocol (B) applications beyond payments → , escrow, tamper-proof voting, notary services, etc. PLATFORM FOR INNOVATION
  13. 13. ©2016 Juan Llanos freedom to own freedom to transfer freedom to innovate censorship-resistance permission-less innovation
  14. 14. end of 1/4
  15. 15. ©2016 Juan Llanos
  16. 16. ©2016 Juan Llanos
  17. 17. ©2016 Juan Llanos
  18. 18. “Virtual currencies promise to benefit commerce on many levels, from serving the unbanked to new financial products. I challenge our innovators: devise creative solutions to prevent virtual currency abuse.” 2013, Jennifer Shasky Calvery, former FinCEN Director ©2016 Juan Llanos
  19. 19. ©2016 Juan Llanos
  20. 20. …whoever as a business: ● Exchanges virtual currency for government currency, and one virtual currencies for another (e.g., exchanges) ● Mines and makes a payment to a third party on behalf of a customer (e.g., for-profit miners) ● Accepts value from A and delivers it to B (e.g., some wallets) ● Accepts value from A and delivers it to A at a different time or place (e.g., vaults) …whoever ● Mines, uses or invests virtual currency for own benefit ● Provides network access services to money transmitters ● Acts as a payment processor by agreement with a seller or creditor ● Acts as intermediary between BSA-regulated institutions ©2016 Juan Llanos
  21. 21. ©2016 Juan Llanos Exchanges Wallets TPPPs MTs + Other
  22. 22. • Risky “product”(no value limits, global, etc.) • No identity & location of either S or R (FT+T rules, Sanctions) • Limited monitoring: blockchain data insufficient (no transaction metadata + dark web) • “Evil” smart contracts • Regulations designed for intermediaries, not P2P • Clash with privacy/confidentiality FINANCIAL CRIME CHALLENGES ©2016 Juan Llanos
  23. 23. BITCOIN MYTHS “anonymous” “untraceable” “invisible to law enforcement & the taxman” Reid-Harrigan (2011), Meiklejohn et al (2013) ©2016 Juan Llanos
  24. 24. • Direct (“self-help”) detection & investigation (vs. deputized) • Global monitoring (vs. intra-company) • Digital, global, real-time information sharing (vs. analog & after-the-fact) • Traceability + attribution+ immutability • Third-party doctrine (privacy forfeited voluntarily; no warrants/subpoenas/MLATs) • New layers - Algorithmic/programmatic enforcement FINANCIAL CRIME OPPORTUNITIES ©2016 Juan Llanos
  25. 25. end of 2/4
  26. 26. CURRENT ISSUES illicit purchases theft ransoms ©2016 Juan Llanos
  27. 27. Source: Mastering Bitcoin ©2016 Juan Llanos
  28. 28. Source: Coinalytics (Skry) ©2016 Juan Llanos
  29. 29. Source: Mastering Bitcoin ©2016 Juan Llanos
  30. 30. THIEVING TECHNIQUES - AGGREGATIONS → bitcoins were moved from several addresses into a single one - FOLDING → addresses not associated with the theft, used to “clean” the stolen money - SPLITS → a large amount of bitcoins was split among two or more addresses - PEELING CHAINS → small amounts were peeled off from a succession of one-time change addresses Source: A Fistful of Bitcoins ©2016 Juan Llanos
  31. 31. BEHAVIORAL INDICATORS - TRANSACTION VOLUME: observe transaction volumes and pay close attention to outliers from an expected distribution as they may stem from a major theft. - OBFUSCATION PATTERN: aggregations, foldings (i.e., combining blacklisted transactions with clear transactions), splits and peeling chains - FREQUENCY OF USAGE: the thief must construct his fake transactions fast, resulting in a short time span between transactions involving these coins. This motivates measuring transaction frequency to use it is an indicator of risk. Whenever frequency increases above average values, there are reasons for suspicion. - CHANGE ADDRESSES & MULTI-INPUT TRANSACTIONS: heuristics such as the detection of change addresses or the combination of addresses from multi-input transactions, which are likely to belong to the same user, can detect connections between apparently unrelated transactions. - COINBASE TRANSACTIONS: these transactions do not have inputs, i.e., they create new bitcoins without using up the bitcoins from other transactions. Source: Towards Risk Scoring of Bitcoin Transactions ©2016 Juan Llanos
  32. 32. ©2016 Juan Llanos Source: Skry
  33. 33. ©2016 Juan Llanos Source: Novetta
  34. 34. ©2016 Juan Llanos Source: Skry Law Enforcement
  35. 35. end of 3/4
  36. 36. PRIVATE vs OPEN BLOCKCHAINS
  37. 37. Source: Coindesk ©2016 Juan Llanos
  38. 38. ©2016 Juan Llanos Source: Antony Lewis
  39. 39. ©2016 Juan Llanos Source: Skry
  40. 40. ©2016 Juan Llanos
  41. 41. ETHEREUM Sidechains BTC Corda ©2016 Juan Llanos O O O C C C O O
  42. 42. “The Real Value of Blockchain Technology” [6 minutes] https://youtu.be/YIVAluSL9SU ©2016 Juan Llanos
  43. 43. Clearing & Settlement Smart Contracts Inheritance Employees Logistics Legal Asset Legitimacy Wines Jewelry/Art Land Electronics Generics Internet of Things APPLICATIONS IN DIFFERENT INDUSTRIES Source: Globant
  44. 44. Credential Certification Energy Identity Gaming APPLICATIONS IN DIFFERENT INDUSTRIES Source: Globant
  45. 45. Source: Bloq ©2016 Juan Llanos
  46. 46. end of 4/4
  47. 47. ©2016 Juan Llanos
  48. 48. ©2016 Juan Llanos
  49. 49. Thank You! Juan Llanos @JuanLlanos info@juanllanos.com ContrarianCompliance.com

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