Instructor: Roger Royse, Founder of Royse Law Firm Course Title: The Business Basics of Blockchain, Cryptocurrencies, and Tokens Location: Stanford Continuing Studies Week: 3 (of 7) The third session focuses specifically on cryptocurrencies. We will discuss the history of digital currencies from Bitcoin to Ether and others. We will review core concepts and terms and more highlight the major events in cryptocurrency space, new opportunities and existing problems that remain to be solved.

1. Royse Law Blockchain Initiative
Cryptocurrency
Roger Royse
rroyse@rroyselaw.com
www.rroyselaw.com
Research Assistant: Justin Sher
1
Stanford Continuing Studies FALL 2018 BUS 35
The Business Basics of Blockchain, Crypto Currencies, and Tokens
Week 3 July 8, 2019

2. Recap : Technology review
2
The double spend problem:
Preventing someone making a purchase
with digital cash from reusing the same
token to purchase again

3. Crypto Currency defined
3
A cryptocurrency (or crypto currency ) is a digital asset designed to work as a medium
of exchange that uses strong cryptography to secure financial transactions, control the
creation of additional units, and verify the transfer of assets. (Wikipedia)

4. Cryptocurrency
I. Financial Crisis and a New Trusted Protocol
II. Problems with Cryptocurrency
III. Cryptocurrency Forks
IV. Legal Frameworks
V. Privacy Coins and Zero Knowledge Proofs
VI. Cryptocurrency Market Overview
VII. Future Authoritarian Government Cryptocurrencies
4

5. I. Financial Crisis and New Trusted Protocol
5
• Financial Crisis of 2008 affected trust in intermediary
Source: Medium where they describe what
happens after a financial crisis
5

6. Current Banking System
6
• Bank transfers; Slow, Expensive
• Western Union slow and 7%
charge
• Paypal: Expensive and not
universally available
Source: Medium where they describe
transferring money mechanism before bitcoin

7. Launch of Bitcoin
7
Source: Reddit where they describe transferring
money mechanism after bitcoin

8. ABRA: P2P remittance network via smartphone
8
Source: Abra website

9. Altcoins (Bitcoin alternatives):
• Bitcoin: P2P, PoW, limited supply, 10 minutes per block
• Ether: P2P, PoW (new consensus algorithm under development,
called Casper), 18 million per year, 15 seconds per block, need Ether
to run on Ethereum
• LiteCoin: P2P, an early bitcoin spinoff or altcoin, started in October
2011. Technically nearly identical to Bitcoin.
• Chia: Farmers instead of miners, Based on storage capacity (not
computing power), Rewards for verification of transactions.
9

10. Ripple
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Source: Abra website
• Ripple is built upon a distributed open source internet protocol,
consensus ledger and the decentralized native cryptocurrency known
as XRP (the 3rd largest coin as of June 2018)
• Banks can exchange funds in different currencies quickly and at low
cost
• Ripple supports tokens representing fiat currency, cryptocurrency,
commodity or any other unit of value such as frequent flier miles or
mobile minutes
• Used by MIT, UniCredit, UBS, and Santander (Source: NY Times)

11. • From chain.com, as compared to centralized systems
• Slow
• Expensive
• Less scalable
• Worse user experience
• Volatile and uncertain governance
• Volatile
• Fixed money supply?
• Smart contract bugs can be devastating
• Not used as medium of exchange
• Many users rely on wallets
• Mt. Gox Hack
• Coinbase Subpoena
• Cryptocurrency Forks
11
Source: Coindesk
Problems with Cryptocurrencies

12. Cryptocurrency Volatility
12
Source: Coinmarketcap.com

13. Fixed money supply
• Bitcoin’s Money Supply Regulation
• Programmed into the underlying software and fixed
• To avoid devaluation
• Prevent creation of unauthorized funds
• Avoid “double spend”
• Economic Perspectives on Fixed Money Supply (Optional Material)
• Deflation and Cryptocurrencies
• https://medium.com/peercoin/deflation-and-cryptocurrencies-the-long-term-ramifications-of-fixed-
supply-currencies-c192f44dddc1
• However, higher inflation systems such as Dogecoin have been proposed and implemented,
but have not gained anywhere near the popularity of Bitcoin
• https://arstechnica.com/information-technology/2014/02/dogecoin-to-allow-annual-inflation-of-5-
billion-coins-each-year-forever/
• Bitcoin’s has a far lower inflation rate vs. fiat currency
• https://www.cryptovibes.com/analysis/bitcoin-inflation-rate/
Stanford Continuing Studies BUS 35: Business Basics of
Blockchain, Crypto Currencies, and Tokens
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14. Total Bitcoins over time
Stanford Continuing Studies BUS 35: Business Basics of
Blockchain, Crypto Currencies, and Tokens
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Source: https://commons.wikimedia.org/wiki/File:Total_bitcoins_over_time.png

15. Total USD (M2) over time
Stanford Continuing Studies BUS 35: Business Basics of
Blockchain, Crypto Currencies, and Tokens
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Source:https://fred.stlouisfed.org/series/M2

16. Stablecoins
• A stablecoin is a cryptocurrency that has price stable characteristics
• Fiat collateralized,
• central entity holds money as collateral and issue a token that represents the money held by
the entity
• Tether
• Facebook’s Libra
• Crypto collateralized
• A user is required to deposit crypto assets into a smart contract upon which he receives a
certain number of stablecoins
• if the cryptoassets in collateral do go through significant value depreciation, the loans taken
out by users are automatically liquidated
• Non-collateralized
• Basecoin and Carbon
• the supply of the coin will be dictated by the price of the stable coin
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17. Facebook’s Libra Coin
• Stablecoin – Backed by a basket of currencies. Control of supply is centrally
managed by a small consortium of companies and based on the reserves held by
the consortium. Reserves are invested and earn interest for the consortium, but
not token holders. Promises to control conversion to fiat and comply with
government regulation.
• Targeted to launch in the first half of 2020
• Governance model will allow removal of nodes and other governance actions,
recorded on the blockchain, if 75% of nodes agree.
• Smart contract language similar to Ethereum called “Move” with built in libraries.
• Overview
• https://libra.org/en-US/white-paper/
• Technical Paper
• https://developers.libra.org/docs/assets/papers/the-libra-blockchain.pdf
Stanford Continuing Studies BUS 35: Business Basics of
Blockchain, Crypto Currencies, and Tokens
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18. Speed and Scalability Problem
• When the number of
transactions
approaches Bitcoin’s
fixed maximum,
transaction fees
increase rapidly.
• The Lightning Network
is a workaround now in
use to help increase
these transaction limits
by performing
transactions off-chain.
Stanford Continuing Studies BUS 35: Business Basics of
Blockchain, Crypto Currencies, and Tokens
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Source: Bitcoinfees.info

19. Crypto security
• Strong passwords – password managers
• 2FA, with OTP like google Authenticator or Authy
• Exchanges
• Never store tokens on an exchange
• Wallets
• Store of private keys
• Hardware wallet – Ledger Nano, Trezor Keepkey
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20. Coinbase Subpoena
20
Source:
https://arstechnica.com
• In November 2016, a federal judge granted
an IRS application to serve a John Doe
summons on Coinbase
• Two taxpayers admitted that they disguised
the amounts they spent purchasing
bitcoins as deductible technology expenses
• The summonses asked Coinbase to identify
all United States customers who
transferred convertible virtual currency
from 2013 to 2015
• The John Doe warrants are just the
beginning of this enforcement process for
the IRS.

21. 21

22. Exchange Transparency
• Digital currency associated with criminal activity can be traced
• Frozen accounts
• Mt Gox
• Linode hack
22

23. Decreased Financial Privacy
• Pseudonymous
• Transparent
• Identities can be reverse engineered on transaction graph analysis
23

24. Pseudonymous: Bitcoin
• Contrary to popular belief, bitcoin is not, strictly speaking, anonymous. In
fact, it’s pseudonymous
• Why not anonymous?
• Bitcoin provides less anonymity than cash transactions in that all of your transactions
are publicly available to the entire bitcoin network.
• Because the transaction block chain acts as a “public ledger”, anyone can readily see
the records of all of the transactions that have ever involved your bitcoin address.
• Even though bitcoin possession and transactions aren’t tied to your real name, your
email, or your physical address, it is tied to only your randomly-generated bitcoin
address
• However, your anonymity isn’t compromised unless someone can connect
your bitcoin address to your real-world identity.
24

25. Bad Actors: Fraudulent Exchange
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Source: CNN Money
• New York: A man running unregistered securities exchange and
converting user’s bitcoin to his personal use was pled guilty to
securities fraud (July 24, 2018)
• Korea's Biggest Crypto Exchange Raided Over Suspected Fraud (May
12, 2018)
• Ukraine: Four Arrested for Running Fake Crypto Exchanges (June 22,
2018)
• India: Multiple criminal investigations were sparked by the death of
the owner of the QuadrigaCX Crypto exchange. His death, which some
believed to have been faked, lead to $190 million in cryptocurrency
being lost. (Jun 4, 2019)

26. Bad Actors: Silk Road
Stanford Continuing Studies BUS 35: Business Basics of
Blockchain, Crypto Currencies, and Tokens
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Source: CNN Money

27. Smart Contract Bugs Can Be Devastating
• Curious user exploring the parity wallet smart contract accidently
permanently froze $150 million dollars in cryptocurrency due to a bug in its
implementation.
• https://blog.springrole.com/parity-multi-sig-wallets-funds-frozen-
explained-768ac072763c
Stanford Continuing Studies BUS 35: Business Basics of
Blockchain, Crypto Currencies, and Tokens
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28. III. Forks: Soft and Hard Fork
• Forks: a developer makes a copy of a project’s source code and begins
independent development
• Soft Fork vs. Hard Fork
• Soft Fork: new version compatible with older versions
• Hard Fork: new version no longer compatible with older versions
• Cryptocurrency fork
• Most altcoins are technically hard forks of Bitcoin since they are based on the Bitcoin
codebase but are not compatible with the Bitcoin network.
• When a hard fork has been created as the result of a split within the community,
sometimes the fork adopts the existing blockchain history of the cryptocurrency they
split from and multiple cryptocurrencies will share a blockchain history. Owners of
cryptocurrency on the pre-existing blockchain will now own cryptocurrency on both
blockchains (e.g., Bitcoin and Bitcoin Cash).
• Taxation?
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29. Case: Ethereum Forks
• Ethereum split in July 2016: high-profile hack of The DAO, roughly $50
million in ether (Ethereum’s native currency) was stolen
• Ethereum holders voted on whether to institute a hard fork to return
all ether taken from the DAO.
• Two blockchains with a nearly-identical history were created by split
• Majority voters agreed with the hard fork: Ethereum
• A sizeable minority protested to the hard fork: Ethereum Classic
• Ethereum Classic have operated independently of the main Ethereum
network ever since.
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30. 30
IV. Legal Frameworks
• The scale of money laundering is increasing rapidly with illegal activities
in crypto world
• In 2009 money laundering was estimated at 2.7% of the world’s GDP (US$1.6
trillion)
• What to do avoid supporting illegal activities?
• Anti-money Laundering (“AML”)
• Know Your Client or Customer (“KYC”)
• Bank Secrecy Act (“BSA”)

31. AML & KYC in Crypto Practice
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• Identify the client and their beneficial owner: identify high risk
countries and clients
• Keep pace with new ways in which money laundering is carried out
• Maintain an adequate AML program in place and ensure AML
compliance in domestic and foreign business
• Report suspicious transactions: report to finance intelligence unit

32. Outsourced AML/KYC services
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33. Bank Secrecy Act in Crypto
• The Bank Secrecy Act (“BSA”): financial institutions share customer
information with the Financial Crimes Enforcement Network (“FinCEN”)
• In 2013, FinCEN published a guidance on the “Application of FinCEN’s
Regulations to Persons Administering, Exchanging, or Using Virtual
Currencies” (the “Guidance”).
• The Guidance invented a new term called “Virtual Currency”
• The Ripple XRP Example: Settlement Agreement in 2015, fining Ripple for
violating BSA requirements
• “Acting as a money services business (MSB) and selling its virtual currency, known as
XRP, without registering with FinCEN, and by failing to implement and maintain an
adequate anti-money laundering (AML) program designed to protect its products
from use by money launderers or terrorist financiers.”
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34. V. Privacy Coins and Zero Knowledge Proofs
• First proposed in 1985 by MIT researchers
• A zero-knowledge protocol is a method by which one party (the prover) can prove to another
party (the verifier) that they know a secret, without revealing any information apart from the
fact that they know this secret.
• Zero knowledge proof in blockchain
• In regular blockchain transactions, when an asset is sent from one party to another, the details
of that transaction (3 aspects) are visible to every other party in the network
• A cryptocurrency transaction has 1) the sender’s address, 2)the receiver’s address, and
3)the amount being sent.
• By contrast, in a zero knowledge transaction, the others only know that a valid transaction has
taken place, but nothing about the sender, recipient, asset class and quantity.
• The identity and amount being spent can remain hidden, and problems such as “front-
running” can be avoided
• Why and How zk-SNARK Works: Definitive Explanation
• https://arxiv.org/pdf/1906.07221.pdf
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35. Zcash, Monero, and Zero Knowledge Proofs
• Zcash (ZEC)
• Started in October 2016, the most prominent blockchain-based system using
zero-knowledge proof
• Considered the most bleeding edge cryptography available: special zero-
knowledge proofs called zk-SNARKs.
• Monero (XMR)
• Started in 2014, based on the CryptoNote protocol
• Monero’s PoW utilizes a hashing algorithm called CryptoNight
• Other blockchain-based systems have incorporate zero-knowledge
proofs into their solutions
• Ethereum : implemented zk-SNARKS as part of the Byzantium upgrade
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36. • US/Israeli Cryptographers
• Israel is known as a nation having the best cryptography researchers and
developers
• Most of the top cryptography researchers are Israeli
• Anonymous
• Untraceable
• Others
• Zcoin – users mint new coins with no history
• Dash – obscures transaction flow
36
Zcash, Monero, and Zero Knowledge Proofs

37. VI. Cryptocurrency Market Overview: Top
Cryptocurrencies
37Source: CoinGEcko where they describe top 20 cryptocurrencies

38. Market Caps: Cryptocurrencies (Jun 2019)
38Source: Coin 360 where they describe top 10
cryptocurrencies market cap

39. Top Cryptocurrency Exchanges
39
Source: As of June 6, 2019; Currency in US$ 24 hour trading
volume; coinmarketcap.com

40. Where is Bitcoin legal and illegal?
40
Source: https://coin.dance/poli where they describe
Legality of bitcoin by country or territory

41. Cryptocurrency market: Recent Volatilities
41

42. VII. Future Authoritarian Government Crypto
Currencies
• Centrally controlled crypto to compete with bitcoin
• Ecuador’s failed experiment with electronic money
• The ‘Petro’, Venezuela’s attempt to circumvent US sanctions with an oil
backed cryptocurrency
• Russian and China crypto currencies being developed, also Sweden and
Canada
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43. Take-away
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• Financial Crisis: A rise of bitcoin
• Problems with Cryptocurrency: Bad actors
• Legal Frameworks: KYC, AML, and BSA
• Zero Knowledge Proof
• Top 10 cryptocurrencies, exchanges, and market share
• Future Authoritarian government crypto currencies?

44. Week 4: Smart Contracts
• We will shift our focus to smart contracts
• Smart contracts provide cheap verification, reduce costs and
automate many routine transactions.
• We will explain:
• What is a smart contract?
• How does it work?
• Where can it be implemented in different business?
44

45. ROYSE LAW FIRM, PC
For questions , Contact
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45
Royse Law Blockchain Initiative