Bitcoin has inspired yet another technology that has some in the investor world worried that it will be used for the one thing bitcoin is commonly associated with: criminal activity.
The worry is over something called smart contracts. These crypto-enabled contracts are capable of serving as official documents for financial trades, legal agreements, etc. Their big value proposition? They take out the middle man often associated with getting official documents from person A to person B.
Where the cryptocurrency comes into play is that under the agreements, parties can engage in these official documents online and pay for the terms outlined in the cryptography-enabled documents using, well, cryptocurrency — at least when the parties are really trying to keep the deal under wraps.
This technology was the subject of a new research paper from Cornell Tech cryptographer and professor Ari Juels, who wrote about how this technology could be used to support illegal activity and where the connection to bitcoin and cryptocurrency comes into play. The research — which also includes the work of Cornell professor Elaine Shi and University of Maryland researcher Ahmed Kosba — specifically pinpoints bitcoin at the start of the paper.
“Cryptocurrencies such as bitcoin remove the need for trusted third parties from basic monetary transactions and offer anonymous (more accurately, pseudonymous) transactions between individuals. While attractive to some, these features have a dark side. Bitcoin has stimulated the growth of ransomware, money laundering, and illicit commerce, as exemplified by the notorious Silk Road,” the researchers wrote.
Hmmm…ransomware, money laundering, and illicit commerce. Sounds like the topics that come up in just about every PYMNTS Bitcoin Tracker.
So why the big deal?
“Criminal activity committed under the guise of anonymity has posed a major impediment to adoption for bitcoin. Yet there has been little discussion of criminal contracts in public forums on cryptocurrency,” the researchers concluded.
Where bitcoin’s technology also comes into the mix is through the blockchain, the decentralized ledger that moves money and cuts out the middle man (like a bank) when getting the funds transferred. Much like the technology of the smart contracts, the middle man (lawyers) are removed.
The researchers also explain that in their paper: “As bitcoin does for transactions, in a decentralized smart contract system, the consensus system enforces autonomous execution of contracts; no one entity or small set of entities can interfere with the execution of a contract. …Decentralized smart contracts offer several advantages over traditional cryptocurrencies such as bitcoin.”
Moreover, the researchers point to why decentralized contracts — like the smart contract’s technology entails — is a haven for criminals. And wouldn’t you guess: it’s got bitcoin-like characteristics written all over it.
“As decentralized smart contract systems typically inherit the anonymity (pseudonymity) of bitcoin, they offer similar secrecy for criminal activities. Broadly speaking, therefore, there is a risk that the capabilities enabled by decentralized smart contract systems will enable new underground ecosystems and communities,” the research states.
And that’s just the beginning of the research — research that shows how a contract may be created to encourage a hacker to breach a site, and then pay in bitcoin. The contract is created in a professional manner, but it may be encouraging the wrong type of people to use it.
“In some ways this is the perfect vehicle for criminal acts, because it’s meant to create trust in situations where otherwise it’s difficult to achieve,” Juels said.
It’s just another week in the bitcoin world, where it can’t seem to shake its association with criminal elements.
Bitcoin Tracker Week 86
The Good, The Bad — The Top Bitcoin Stories Of The Week
Bitcoins Takes Aim Into Illegal Gun Market
Keeping in theme of the illegal activity associated with bitcoin, how about the case of the Michigan man accused of using bitcoin to both buy and sell illegal gun components.
On the Dark Web. As a result, Benjamin James Cance faces 20 years in prison alone for just shipping the guns since they were shipped internationally. He faces charges for shipping illegal arms and money laundering, among others.
Inflation? Not A Problem For Bitcoin, Says One Economist
At the Texas Bitcoin Conference, Economist Robert Murphy attempted to make his case about why inflation issues don’t impact the value of bitcoin. Some economists have argued that deflation is one reason why bitcoin can’t be a viable currency, but Murphy spent his time trying to debunk that theory.
“Part of where this fear of deflation comes from is, historically, it’s associated with very bad economies. So, during the Great Depression of the ’30s, there were falling prices. And there are other periods where prices fell when things were bad, but I would argue that the causality was the other way around. Partly what was going on there was people were concerned because the economy was so terrible,” Murphy said. “And, so what do you do when you’re afraid? You don’t want to invest in companies and things like that. You rush to liquidity. You rush to hard money. That’s why you often see in periods of panic people will rush to the money, so you see prices of all other things quoted in money fall. So, it’s not that the falling prices caused the bad economy. It’s the other way around."
The Batman Of The Bitcoin World
There’s a new type of criminal catcher in town, and while it’s not exactly a hero like the Dark Knight is to Gotham City, there are startups in the blockchain world that are trying to crack down on criminals faster than law enforcement can keep up with.
Sabr.io was just one of many companies that was highlighted as being a company that’s attempting to help investigators crack the code on bitcoin crime — and illegal bitcoin marketplaces.
“Law enforcement has been and continues to be our partner in the development of this technology. They’ve shared their needs with us and we’re building solutions to meet those needs. Our technology enables them to do their very important work,” Sabr.io CEO David Berger said in an interview.
“I am excited about the future of bitcoin and am determined not to let it be hijacked by criminals. I have no qualms about helping to put child pornographers, terrorists and arms dealers behind bars,” he added.
Bitcoin Ransom Sparks Fear Of Bombings
Yes, another bitcoin ransom. But this time, the consequences are rather grim.
A case in the Netherlands shows that an unknown criminal has been placing small explosives in supermarket chains and demanding large amounts of bitcoin ransoms in order to avoid detonating the bombs. The first case began in May, but police were able to defuse the bomb. Weeks later, another was discovered.
The case continues for now as police keep getting notes that the criminal will not stop until the undisclosed bitcoin amount is paid.
NSA Codebreaker Joins Ranks At Bitcoin Exchange
While bitcoin is a little bit secretive itself, the bitcoin exchange itBit just secured a new member on its board of directors who knows a little something about security and technology. Ed Giorgio, a NSA veteran, will be joining the board to help direct its technology initiatives.
“Jim brings over 20 years of investment experience developing and advising technology companies, and Ed’s expertise in cryptography and cybersecurity will help ensure that itBit’s bitcoin exchange and our next generation of blockchain-based products remain the safest and most secure in the industry,” said Chad Cascarilla, itBit’s CEO and co-founder.
Is Bitcoin The Next Big Thing In Cross-Border Commerce?
Some may wonder “why does bitcoin matter?” Well, in a recent interview, Xapo CEO Wences Casares made an argument that bitcoin — much like the invention of the Internet — is important to help people conduct cross-border commerce.
As more focus has been on getting Internet access to to the developing world, the CEO wants to make a case as to why breaking open access to an online payment ledger (the blockchain) could be a big move in helping money move around the world. And that could mean a lot for digital commerce, he suggests.
"When there are problems with a currency like I saw growing up in Argentina, the poor get the worst end of that trade, right? The rich can move their assets somewhere, but the poor can’t. Bitcoin changes all of that. Now, anyone with a little bit of cash — all you need is a cellphone. Anyone with a cellphone can get bitcoin and participate in the digital economy. And have an alternative to the local currency they don’t trust. Both of those things are incredible,” Casares said in an interview.
Casares is also the person who said that the value of a bitcoin would go between $500,000-$1 million dollars in April 2014. It’s trading today at just above $265.