(written for the Flying Money conference, Amsterdam, May 22-23, 2018)
“Wasting money puts you in a real party mood.” Andy Warhol
Flying Money asks the question how local authorities can position themselves in a dynamic financial environment, considering their specific role in tackling illicit financial flows. Global developments in digital currencies and flows of money are unfolding at breakneck speed. Blockchain, cryptocurrencies and the emergence of parallel banking systems such as mobile money, Hawala and local currencies impact the ideas in society about the future of money. What happens when central banks lose the monopoly on who defines what money is? Once money is digitized and stored in private electronic wallets, the national currency is only one of many forms of value storage and exchange systems. This turbulent period of transition also expands the playing field of organized crime—and this is where the Flying Money focus will be.
As more of us rely on electronic rather than tangible forms of money on a day-to-day basis, and the world’s financial systems appear to become more and more complex, many are left to ponder who is in charge of the new forms of money and the value and stability of these exchange systems. In this regard it is important to understand what opportunities organized crime has. Cash is often seen as murky business, a way for criminals to launder money, and digital money can seem like an attractive solution to this problem. The association of cryptocurrencies with pump & dump schemes, rampant internal trading, its use in ransomware and dark web platforms like the Silk Road marketplace shows the cracks in this way of thinking.
Speculation with cryptocurrencies is no accident, or sign of a projected high demand in the near future but a built-in feature. As Nathaniel Popper noticed in his 2014 book Digital Gold, the Untold Story of Bitcoin: “The notion of Bitcoiners around the world sitting on their private keys and waiting to become rich begged the question of the intrinsic value of these digital files. What were all these locked-up virtual coins really worth if no one was doing anything with them?” Summing up Bitcoin’s first five years, Popper states that although the virtual currency attracted talented people, “it was still almost entirely used for speculation, gambling and drug dealing.” The software’s architecture encourages people to hold on their Bitcoins rather spend them. Hoarding is the feature, not a bug. This is why cryptocurrencies are considered the new gold, not the new Dollar. This makes them an ideal medium to store value, apparently out of sight of authorities.
Since the 2008 global financial crisis many citizens have lost trust in traditional institutions in the financial sector. New players are taking up space in this field. How can governments deal with such radical societal shifts? What should its relation with the platform economy giants be? Do we have to wait for a severe crash for regulators to step in? How can the new playing field be monitored for criminal activity? What does the future of democratized digital money forms look like? Will it be state-issued, or will globalization play its part in this sphere as well? What are the consequences of a cashless society?
As money is man-made, it can be reinvented to positively influence relations in the social, environmental and economic domain, to better serve our individual and collective needs. Community currencies sit between a loyalty value system that a local shop might organize on one side, and a currency like the Euro on the other side. While Makkies are used in a specific neighborhood of Amsterdam, a currency like the Brixton Pound has created a large community and funding structures around itself. What is the value of local currencies, and what does their existence make possible for their users and is larger oversight needed?
Experimental means of payment have different names on a national and international level. They may be called virtual, digital, alternative, or cryptocurrencies, money or coins. The European Banking Authority defines virtual currencies as a digital representation of value that is neither issued by a central bank or public authority, nor necessarily attached to a legal tender. Despite not being backed by the authority of a state, virtual currencies are used by many individuals, either as medium of exchange or investment capacity, and accepted by an increasing amount of businesses. What are the cultures and communities like that have sprung up around the various virtual currencies? What are the reasons for investing in a highly volatile and unregulated currency, besides the prospect of big returns? What are the societal uses of blockchain-based organizational structures outside of the speculative realm and how should governments handle the pseudonymous nature of accounting on the blockchain?
There’s good news and bad news for forensic investigators doing blockchain transactional analyses. The good news is that Bitcoin’s blockchain is a publicly-accessible ledger containing all the transactions ever conducted in Bitcoin since its inception in January of 2009. The bad news is the pseudonymous nature of those transactions, which don’t refer to names or email addresses. Instead, they use Bitcoin addresses, which look like this: 1yXfRNBg9E2URDEcrdZx5R1ZPxTcUJGTH. The challenge for forensic investigators, as usual, is to identify the person behind the keyboard, which may be accomplished with a mixture of traditional investigative and digital forensic techniques. Ultimately, nothing can be kept secret. We need to look at anonymity and the cracking of crypto code as part of an arms race. With most authorities still ignorant about the related issues, organized crime uses the temporal confusion, knowledge deficit and lack of competence to use cryptocurrencies for tax evasion purposes, drugs deals and illegal real estate deals—knowing that ultimately the secret code can, and will be, cracked. If there is no competent cybercrime research staff that can deal with the overwhelming amount of cases, little can be done to fight organized crime. Gathering ‘big’ data alone will not do the job.
Tax-evasion and crypto-taxation
In April 2016 the Panama Papers uncovered some of the most incriminating evidence against an alleged international tax-evasion scheme ever. Over 150 politicians and their close associates have been linked to hundreds of thousands of offshore shell companies, reportedly used as tax havens to shield billions of dollars. The 2017 Paradise Papers served as an equally big sequel to the offshore investment story. Instead of criminal schemes of individuals that outright break the law, the backbone of these tax evasions are the loopholes of government regulations. The current scale of acquisitions in real estate indicate a systematic
transformation in the pattern of land ownership in cities, which has deep and significant implications for equity, democracy and rights. What used to be small and/or in public hands is becoming large and private—a transition that is often done with active local government support. By changing the way value is digitally stored and exchanged, blockchain technology is altering the way real estate is recorded, transferred, financed and managed globally. This technology has the potential to improve compliance, reduce costs, and enhance efficiency and speed while strengthening anti-money laundering standards in the financial system. But will it?
Flying Money intents to address the governance issue. On the one hand this is an issue of regulation, EU-wide and ultimately on a global level. On the other, there is the concrete issue of local and national taxation. The discussion about the relation between cryptocurrencies and the nation state boils down to the following choice: buy cryptos to speculate, pay tax; buy them to use, no tax. As countries make steps towards digital tax reporting, this paves the way for blockchain technology to offer a more sophisticated level of transparency, security, and immediacy. Blockchain and smart contracts in particular can change the way we handle taxes completely. This by implementing real-time tax, meaning real-time as the payment or charge is automatically done in every single incoming and outgoing transaction.
Governing decentralized financial flows
No one, central organisation or government is in charge of the internet, and its governance has taken shape over the decades in the form of decentralised global network of organisations (like ICANN, IETF, IGF etc.). Even if pundits like Don and Alex Tapscott (authors of Blockchain Revolution) consider blockchain as internet 2.0, this networked system of governance has not taken on the governance of blockchain technology. What does “internet 2.0” actually mean? Internet without governance? Hardly. The world of money creation is tough. What else do you expect? Today, computer code is literary producing money, supposedly out of nothing (we’re not talking about the unsustainable energy waste here). This is a world of difference compared to the innocent not-of-this-world attitude of many computer science engineers. Who will step in there and define the terms? Liberal ideas such as the “multi-stakeholder approach” and human rights are completely absent in the blockchain discourse that has so far dominated by libertarian anarcho-capitalists. Welcome to the Wild West.
Both the internal and external governance of cryptocurrencies is a complete mess, to put it mild terms. Not even the most basic rules and ways of working as practiced in the internet governance and free & open source contexts apply. There is no running code and consensus as in internet 1.0. The rapidly expanding internet fintech universe of the past decade was neither claimed by traditional internet governance nor by banks or international bodies such as Swift. In the midst of the confusion national regulation proposals pop up everywhere by financial market regulators. The current hacking cases are immense in terms of stolen money, with cryptocurrencies fluctuation wildly. Will the predominantly young crypto investors be bailed out? Unlikely.
It has been 10 years since the last financial crisis, and some have already predicted that the next one is near. Whenever it comes, it will likely have its roots in computer
code and algorithms, operating from somewhere in the cloud, not the old school stock exchanges such as Wall Street. Financial technology (or “fintech”) markets are populated by small startup companies, the exact opposite of the large, institutionalized Wall Street banks that have for so long dominated finance. These new companies have brought great benefits for investors and consumers. By automating decision-making and reducing the costs of transactions, fintech has greased the wheels of finance, making it faster and more efficient. It has also broadened access to capital to new and underserved groups, making finance more democratic than it has ever been.
Is Wall Street no longer the future of finance? Will Silicon Valley players such as Apple and Amazon at some point take over? Or rather Alibaba? A lot of questions do come up concerning the monetization and sale of personal financial data. How will digital money be integrated with content? Over the past 20 years online services have been strictly separated from payment systems that were mostly controlled by traditional bank and credit card companies. What will happen when money and data are seamlessly integrated? Who will the new intermediates? Regulations on how to use data and governance of fintech markets will be vital to tackle illicit financial flows. Additionally, while fintech startups swoop in with the latest innovation, attempting to disrupt yet another sector, governments need to be ready to respond to new business models and concerns around privacy. Are people still primarily citizens of a country, or have governments ceded this authority to something like the networked nation?
Amsterdam, May 8, 2018
(thanks to all of the Flying Money editorial team for their input and comments)