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Virtual CurrenciesWilliam Voorhees; MFA, CAMS, C.F.E.
Financial Intelligence Unit ManagerBB&T
4/20/2018 1
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Ripped from the Headlines!
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• The Internet is very good at transferring information, but very poor at protecting it.
• Centralized databases represent a single point of failure.
• Blockchains were developed to protect information in a trustless system.
• Digital currency represents incentives for decentralized computers to maintain the Blockchain.
Different than other kinds of value transfer
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Centralized Systems• Account-based online payment systems
• Controlled by a single administrating authority
• Allow users to store value, transfer funds, receive payments from others
• Can deal in fiat or virtual currency
• Account for the vast majority ofvirtual currency transactions
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Decentralized Virtual Currency:Bitcoin
• Decentralized, peer-to-peernetwork-based cryptocurrency
• Anyone can download the free, open source software
• No central issuing authority, monitoring, or oversight
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Digital Currencies/Real Purchases
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What is Bitcoin?Protocol - /n/ - a set of rules and regulations that
determine how data is transmitted in telecommunicationsand computer networking
Bitcoin is a protocol released in January 2009 that uses bits to create consensus among entries in a distributed ledger.
In practical effect 'bitcoins' are purely digital 'objects' that are intrinsically limited in amount under mathematical law.
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Origin• Whitepaper by Satoshi Nakamoto
• Bitcoin: A Peer-to-Peer Electronic Cash System
• November 1, 2008: Published on The Cryptography Mailing list at metzdowd.com
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What do the rules enforce?• A protocol that allows for a triple-entry bookkeeping system utilizing a
distributed peer-to-peer network • It is comprised of the world's largest computing network - larger than the
500 largest supercomputers combined. • Ledger entries can be altered by anyone with the 'private key‘• Fundamental theorem of cryptography: Anything that can be done with a
central authority can be done without one.
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Distributed Network
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Blockchain Defined• Blockchain is a cloud based database shared by every participant in a given system
• Blockchain consists of blocks that hold time-stamped batches of valid transactions• Each block includes the hash of the prior block, linking the blocks together• The linked blocks form a chain, with each additional block reinforcing those before it• Think of it as a peer-to-peer ledger
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Server launches application
Customer scans
Server’s invoice
Customer sends payment
instructions
Server gets receipt
Sample “Real-World” Bitcoin Transaction Path
Credit: BitPay
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How Blockchain Works
Transactions are not valid until added to the Chain. Tampering is immediately evident. The Blockchain is regarded as safe as everyone in the network has a copy.
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Public Transaction Ledger
•All transactions are published to a public transaction ledger, called the blockchain
•Linking real-world identities back to wallet addresses can be difficult
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How is BTC initially obtained?• In person transactions
(https://localbitcoins.com)– App-based payments– Physical representations (coins,
checks, etc)• Exchanges (Coinbase, Bitpay) -
registered MSBs• Buying/Selling a product for Bitcoin • Mining (participating in the
validation process)• Cypto Currency ATMs: locations
(http://coinatmradar.com/)• Online “Faucets”
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Exchangers• VC Exchangers: third-party entities that exchange
cash, virtual currency, and/or other forms of real money for other forms of the aforementioned currencies
• Individuals typically use exchangers to deposit and withdraw money from VC accounts
• Accept a wide array of payments, including cash, wires, credit cards, and other VC
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Peer to Peer: Moving Value Without an Intermediary
YES• Cash• Precious metals and stones• Virtual currency
NO• Real estate• Banking• Credit cards• Money transfer businesses• Stored value cards
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VC Exchangers
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2010 > 2018 Bitcoin Price
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2017 > 2018 Bitcoin Price
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FinCEN March 18, 2013 Guidance• March 18, 2013, Application
of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies
• Interpretive guidance to clarify the applicability of the regulations implementing the BSA to persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies
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Suspicious Activity Reports
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LocalBitcoins.com
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4/20/2018 29
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Examples of Recent Investigations
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Additional Resources• Bitcoin Educational Resources:
http://www.forbes.com/sites/jonmatonis/2013/05/13/6-new-bitcoin-educational-resources/
• Bitcoin Education Project (Udemy):https://www.udemy.com/bitcoin-or-how-i-learned-to-stop-worrying-and-love-crypto/
• Bitcoin Primer for Policymakers:http://mercatus.org/sites/default/files/Brito_BitcoinPrimer_embargoed.pdf
• Bitcoin Wiki: https://en.bitcoin.it/wiki/Main_Page• Cato Unbound-The Private Digital Economy:
https://www.cato-unbound.org/issues/july-2013/private-digital-economy• CoinDesk: http://www.coindesk.com/• Contrarian Compliance: http://contrariancompliance.com/• Let’s Talk Bitcoin: http://letstalkbitcoin.com/• Khan Academy Bitcoin Series:
https://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking/bitcoin/v/bitcoin-what-is-it
• We Use Coins: https://www.weusecoins.com/en/ 31