Hot Takes

Why ransomware criminals use Bitcoin and why that could be their undoing.

Last week's major ransomware attack put Bitcoin back into spotlight. With that comes questions about what Bitcoin is, how it works, and why it is apparently favored by ransomware hackers.

Coin Center director of research Peter Van Valkenburgh was on the Marketplace radio show yesterday to talk through these questions. On why hackers are using Bitcoin, he said:

"The efficiency of the network is what criminals are really using it for here. It's electronic cash, so it’s easy to write software that can automatically demand payment and automatically demand that payment has been made."

He goes into more detail on what that means in his blog post, "Why Bitcoin is not the root cause of ransomware:"

"Bitcoin is particularly useful here because it’s fast, reliable, and verifiable. The hacker can simply watch the public blockchain to know if and when a victim has paid up; she can even make a unique payment address for each victim and automate the process of unlocking their files upon a confirmed bitcoin transaction to that unique address.

The truth is that criminals have, as usual, very strict design parameters for the tools they use because there’s no tech-support, contract, or legal recourse for a criminal whose tools fail to perform as they should. Criminals are using Bitcoin in this case because it’s a reliable system that just works. Ransomware hackers are rather like the proverbial rumrunners of prohibition: they like fast custom cars because almost everyone else is still driving a Model T."

Of course, as many have pointed out, there is an inherent problem with the choice to use cryptocurrency in this attack. The open, transparent, nature of bitcoin blockchain transactions means that the global community is closely watching the ransom money. This is going to make converting it into fiat currency pretty difficult to get away with. As Peter told the International Business Times:

"In the US, every major bitcoin exchange is regulated by FINCEN. Right now the $50,000 extorted from victims is just sitting on the bitcoin network...that [exchange into local currency] is where you're vulnerable to being identified."

We’ve detailed how law enforcement can use the bitcoin blockchain to track criminals before and have already seen high profile cases in which blockchain forensics exposed criminals. All they need to do is slip up once and a global community of professional and enthusiast cyber crime fighters will jump on them.

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The Cryptocurrency Tax Fairness Act was offered as amendment to the House tax reform bill last night in Congress.

Video of the Rules Committee meeting is below and you can watch Rep. Jared Polis speak about the bill that he co-sponsored with Rep. David Schweikert. The amendment would have created a de minimis capital gains tax exemption for personal cryptocurrency transactions, and helped clarify how exchanges could offer third-party tax reporting.

While the amendment was not adopted, we applaud the bipartisan leadership shown by Reps. Polis and Schweikert. That they recognized this issue, introduced a bill, and got it this far means a lot and it shows the IRS that many in Congress believe that the existing tax treatment of cryptocurrencies needs to be updated. The bill’s language didn’t make it into the larger tax reform bill, but that doesn’t mean the bill itself is dead; it’s alive and well and we will continue to advocate for its passage by Congress, and we’ll continue to work to try to have the IRS adopt as much of it as it might be able to through rulemaking. For an ecosystem that is barely a decade old to get this far in Congress is remarkable, and we’re only just starting.

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We briefed the Senate Republican High-Tech Task Force.

Senator Orrin Hatch, chairman of the taskforce, convened a Blockchain 101 briefing for republican policymakers and their staff.

Coin Center executive director Jerry Brito was joined on the panel by four Blockchain experts from industry, academia, and government to discuss what Blockchain technology is, how it’s being used today, how it could potentially be used in the future, and how policymakers can best approach the issue. The other panelists were:

  • Robleh Ali, Research Scientist, MIT Media Lab
  • Jonathan Johnson, President, Medici Ventures
  • David Mills, Deputy Associate Director, Federal Reserve
  • Paul Snow, CEO, Factom
  • Alan Cohn, Steptoe & Johnson [Moderator]

Senator Hatch also gave remarks stressing the importance of understanding and fostering blockchain technology.

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Coin Center gave a regulatory update at Ethereum Devcon3.

At the Ethereum community’s largest conference, executive director Jerry Brito and director of research Peter Van Valkenburgh took the stage after the project’s lead developers to give the audience an update on Coin Center’s work and regulatory issues that could affect developers building on this technology.

The update covered Coin Center’s work in pushing for a more developer friendly money transmission licensing system, advocating for these technologies in Congress, and addressing questions about securities regulation for crypto-asset tokens.

[Image courtesy of Rhys Lindmark]

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CFTC commissioner: tokens that start as securities may “transform” into commodities.

Yesterday I participated in a panel discussion on cryptocurrencies at Georgetown University’s first annual “fintech week,” where the subject of ICOs was unsurprisingly much discussed. One thing that stood out for me were comments by CFTC Commissioner Brian Quintenz that echoed a policy view we have long held: that a crypto-token may initially emerge through a securities offering, but later be considered a commodity just as Bitcoin is. Here’s what he said, according to Politico:

Digital currencies "may actually transform at some point from something that starts off as a security and transforms into a commodity," CFTC Commissioner Brian Quintenz said at the event hosted by Georgetown's law school. "That's going to be a very difficult but important conversation for us to have to give the market certainty, to allow for innovation to flourish and continue, but to make sure that we're being consistent in how we apply commodity law and protection of consumers across all products."

And here is Bloomberg’s account:

“It was right to classify it as a commodity, but we still have a lot of work to do,” he said yesterday to reporters at the FIA conference. “ICOs, these things can transform. They may start their life as a security from a capital-raising perspective but then at some point -- maybe possibly quickly or even immediately -- turn into a commodity.” His comments were some of the most specific from the CFTC on the nature of ICOs.

“There are new challenges all over the place with virtual currencies and commodities,” Quintenz said.

This is a very welcome statement that helps clarify how regulators are seeing this innovative space.

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Two podcasts that will help you understand the token boom.

Our director of research Peter Van Valkenburgh has been invited on as an expert in two podcasts. These make a good primer on what is hot in the cryptocurrency world.

The Invest Like the Best podcast’s Hashpower series gives an overview of what cryptocurrency is, what is driving investment in the ecosystem, and the promise that open decentralized blockchain protocols have for improving the internet’s infrastructure. It includes some of the most prominent voices in the cryptocurrency community. Peter is in episode three. Listen here.

The StartUp podcast focuses on the token sale held by messaging company Kik. In the face of staggering competition Kik has turned to tokens as an inventive way to both fundraise for itself and incentivize meaningful user participation within its app. Listen here.

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The CFTC published a new report on cryptocurrencies today

A new primer released today by LabCFTC, the Commodities Futures Trading Commission’s FinTech initiative, is a helpful report that that outlines the agency’s relationship to the virtual currency and blockchain space.

The report explains that the agency considers cryptocurrencies to be commodities, what kinds of trading activities fall under its jurisdiction, what types of activities require approval, and how other agency’s jurisdictional interpretations interact with its own. It also outlines operational risks for cryptocurrency exchanges, and we’re happy to see that their conclusions mirror those in the report on cryptocurrency risk factors we developed for Lloyds of London.

Innovators building cryptocurrency businesses that may cross into the CFTC’s jurisdiction will no doubt be appreciative of the clarity offered by this report. We applaud the CFTC for publishing this articulation of its approach to cryptocurrencies.

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We taught Congress about ICOs.

The Congressional Blockchain Caucus held a briefing on token sales on Capitol Hill today. Coin Center, along with experts from the cryptocurrency industry, taught policymakers and their staff about how the law can approach this exciting method for crowdfunding distributed public networks in a way that sensibly protects consumers while preserving an innovation-friendly environment in the U.S.

Peter Van Valkenburgh laid out our thinking on a sensible approach to tokens for securities regulators. In short: lots of tokens are probably securities but there are is a small subset, those that are useful for purchasing distributed network goods and services, which are not. He was joined by Joel Monegro of Placeholder Capital, Ken Nguyen of CoinList, and Erik Kintner of Snell and Wilmer. Congressman Jared Polis, co-chair of the Congressional Blockchain Caucus, gave remarks after the panel highlighting the importance of government approaching this technology smartly to preserve innovation in this space.

Also, yesterday our executive director Jerry Brito was on stage during the Blockchain@State event held by the State Department. He was there to explain what blockchains are, what they can do, and perhaps most importantly, what they can’t do. Watch the event here (Jerry’s portion begins at around 50 minutes in).

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Based in Washington, D.C., Coin Center is the leading non-profit research and advocacy center focused on the public policy issues facing cryptocurrency and decentralized computing technologies like Bitcoin and Ethereum. Our mission is to build a better understanding of these technologies and to promote a regulatory climate that preserves the freedom to innovate using permissionless blockchain technologies.