The truth behind the lie will not bring absolution to cryptocurrencies
In the wake of the terrorist attacks in Paris, the spotlight has fallen on how ISIS is financing its operations. ISIS is thought to have accumulated $2 billion in assets through criminal activity, oil sales and even state sponsorship. Could they be using Bitcoin to solicit donations and fund terror cells?
An unsubstantiated claim that ISIS owned a Bitcoin wallet worth $3 million was enough for news editors to rush out hysterical headlines and ask if Bitcoin should be banned. At a time when Bitcoin already faces an uphill struggle to establish itself, being falsely linked with terrorist financing can only harm its chances of mainstream adoption. Of course, ISIS could be secretly using Bitcoin or some other virtual currency, but conventional wisdom on terror funding says cash is still king.
So what are the implications for Bitcoin companies?
First, it’s been a long-standing problem for Bitcoin start-ups to open bank accounts and this might have just gotten harder. Worse still, if banks decide to derisk and wash their hands of existing customers, companies may find themselves abruptly cut off from the banking system and face potential ruin – like what happened recently in Australia. As part of a company’s contingency planning, it would be prudent to open a second bank account with a different financial entity, making sure the two banks are not part of the same holding group. If possible, have these banks fall under different legal jurisdictions.
Second, Bitcoin companies are going to have start getting familiar with the alphabet soup of regulations: know your client (KYC), anti-money laundering (AML), combating the financing of terrorism (CFT). We don’t usually hear about entrepreneurs seeking out lawyers as key hires or including them as part of the founding team, but it could soon become best practice for Bitcoin start-ups. A pitch deck might even score brownie points by including a plan to secure legal counsel and implement compliance processes, so the business is positioned as best as possible to avoid hefty fines.
Third, expect to see an increase in surveillance of Bitcoin transactions from both law enforcement and companies adopting AML/CFT processes. This will be a boon for Bitcoin analytics and compliance services. Perhaps one of these start-ups will emerge as the Palantir of the Blockchain?
- Chainalysis (Barclays accelerator)
- Coinalytics ($1.1m, 500 Startups, The Hive)
- Elliptic ($2m, Octopus Investments)
- IdentityMindGlobal ($12.6m, Benhamou Global Ventures)
- SABR ($1m, 500 Startups, Digital Currency Group)
- Tradeblock ($2.8m, Andreessen Horowitz)
We might see blockchain forensics emerge as a field in its own right, so keep an eye on data mining and visualization tools such as:
- Bitiodine (open-source, Github)
- BlockSeer (example: U.S. Marshals auction of Silk Road Bitcoins)
All of the above can make for depressing reading.
Many in the Bitcoin community are unhappy with the growth of surveillance tools which chip away at privacy and disrupt the smooth functioning of the network. Throw in cumbersome KYC/AML processes at popular online Bitcoin services (which can shut down accounts at any time and for any reason) and suddenly Bitcoin doesn’t look so different from PayPal.
There is perhaps one silver lining amid the Orwellian gloom. Consider for a moment that the more capable and invasive these tools become, the more confident law enforcement will be that they have mastered the domain. Regulators might then be more open to facilitating mainstream adoption of Bitcoin, and banks subsequently willing to take on Bitcoin businesses as customers.
Is the loss of privacy a price worth paying, if it improves the odds of Bitcoin’s long-term survival?
In contrast to Bitcoin’s transactions, payment transactions using the Zerocash protocol do not contain any public information about the payment’s origin, destination, or amount.
If Zerocash achieves its goals, it would be a surprise if criminals and terrorists didn’t try to use it, so I fully expect Zerocash to be in the headlines for all the wrong reasons. Maybe then Bitcoin will be left alone or perhaps in a remarkable turnaround even lauded by the media as a family-friendly regulated currency for the digital age.