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

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

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

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.

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

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

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

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.

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

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”

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

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

VC Exchangers

2010 > 2018 Bitcoin Price

2017 > 2018 Bitcoin Price

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

Suspicious Activity Reports

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LocalBitcoins.com

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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