The document discusses Bitcoin, blockchains, and their applications and implications for financial crime. It begins by debunking myths that Bitcoin is anonymous, untraceable, and invisible to law enforcement. It then provides an overview of digital assets and blockchains, how Bitcoin and its blockchain work, and the opportunities and challenges they present for detecting and preventing financial crimes like illicit purchases, theft, and ransom payments. The document also examines private vs open blockchains and applications of blockchain technology beyond payments in different industries.

1. Bitcoin,
Blockchains &
Financial Crime
Juan Llanos
@JuanLlanos
info@juanllanos.com
ContrarianCompliance.com

2. BITCOIN MYTHS
“anonymous”
“untraceable”
“invisible to law enforcement & the taxman”
©2016 Juan Llanos

3. ©2016 Juan Llanos

4. Digital Assets tend to be global, open, nodal and
evolutionary. They live on the Internet and vary
widely in scope and use.
browser
tokens
rewards
Bitcoin
Protocol
Ven
Ripple XRP
Litecoin
Linden Dollars
Entropia Universe
QQ
Online
Exchanges
Altcoin Explosion
Regulated Exchanges
Beenz
Flooz
Colored Coin
Smart Contracts
Ethereum
Square Cash
Amazon Coin
Sovereign Coin
Real Estate
Equities
Derivatives
Bitcoin Open Source Protocol Solves
Double Spend Problem via Open Ledger
e-Gold
WOW
Ripple Protocol
R3 Corda
Monero
Dash
Zcash
Source: Hub Culture
©2016 Juan Llanos

5. an accounting system
software / program
database → blockchain
©2016 Juan Llanos

6. “A Peer-to-Peer Electronic Cash System”
Satoshi Nakamoto
“A peer-to-peer network that allows for the
proof and transfer of ownership without the
need of a trusted third party.”
Goldman Sachs
“An open platform for value exchange.”
Richard Brown (R3)
©2016 Juan Llanos

7. DOUBLE-SPEND: SOLVED
DISTRIBUTED CONSENSUS
TRANSPARENT LEDGER
TRANSFER & IDENTITY: SEPARATED
PROGRAMMABLE
©2016 Juan Llanos

8. HOW BITCOIN &
ITS BLOCKCHAIN WORK
Less technical video [5 minutes]
https://youtu.be/l9jOJk30eQs
More technical video [22 minu tes]
https://youtu.be/Lx9zgZCMqXE
Public-Key Cryptography Explainer [5 minutes]
https://www.youtube.com/watch?v=3QnD2c4Xovk
©2016 Juan Llanos

9. Digital Payments Network (B)
Digital token (b)
Open Protocol (B)
©2016 Juan Llanos

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Digital Payments Network (B)
fast, secure
low cost, global
transfer of value

11. ©2016 Juan Llanos
Digital Token (b)
counterfeit-proof “online cash”
unit of transaction → bitcoin
dollar value → open market
Inflation-proof → total capped

12. ©2016 Juan Llanos
Open Protocol (B)
applications beyond payments →
, escrow, tamper-proof voting, notary
services, etc.
PLATFORM FOR INNOVATION

13. ©2016 Juan Llanos
freedom to own
freedom to transfer
freedom to innovate
censorship-resistance
permission-less innovation

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18. “Virtual currencies promise to benefit commerce
on many levels, from serving the unbanked to new
financial products. I challenge our innovators:
devise creative solutions to prevent virtual
currency abuse.”
2013, Jennifer Shasky Calvery, former FinCEN Director
©2016 Juan Llanos

19. ©2016 Juan Llanos

20. …whoever as a business:
● Exchanges virtual currency for government
currency, and one virtual currencies for
another (e.g., exchanges)
● Mines and makes a payment to a third party
on behalf of a customer (e.g., for-profit
miners)
● Accepts value from A and delivers it to B
(e.g., some wallets)
● Accepts value from A and delivers it to A at a
different time or place (e.g., vaults)
…whoever
● Mines, uses or invests virtual currency for own
benefit
● Provides network access services to money
transmitters
● Acts as a payment processor by agreement
with a seller or creditor
● Acts as intermediary between BSA-regulated
institutions
©2016 Juan Llanos

21. ©2016 Juan Llanos
Exchanges Wallets
TPPPs MTs + Other

22. • Risky “product”(no value limits, global, etc.)
• No identity & location of either S or R (FT+T rules, Sanctions)
• Limited monitoring: blockchain data insufficient
(no transaction metadata + dark web)
• “Evil” smart contracts
• Regulations designed for intermediaries, not P2P
• Clash with privacy/confidentiality
FINANCIAL CRIME CHALLENGES
©2016 Juan Llanos

23. BITCOIN MYTHS
“anonymous”
“untraceable”
“invisible to law enforcement & the taxman”
Reid-Harrigan (2011), Meiklejohn et al (2013)
©2016 Juan Llanos

24. • Direct (“self-help”) detection & investigation (vs. deputized)
• Global monitoring (vs. intra-company)
• Digital, global, real-time information sharing
(vs. analog & after-the-fact)
• Traceability + attribution+ immutability
• Third-party doctrine
(privacy forfeited voluntarily; no warrants/subpoenas/MLATs)
• New layers - Algorithmic/programmatic enforcement
FINANCIAL CRIME OPPORTUNITIES
©2016 Juan Llanos

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26. CURRENT ISSUES
illicit purchases
theft
ransoms
©2016 Juan Llanos

27. Source: Mastering Bitcoin
©2016 Juan Llanos

28. Source: Coinalytics (Skry)
©2016 Juan Llanos

29. Source: Mastering Bitcoin
©2016 Juan Llanos

30. THIEVING TECHNIQUES
- AGGREGATIONS → bitcoins were moved from several addresses into a
single one
- FOLDING → addresses not associated with the theft, used to “clean” the
stolen money
- SPLITS → a large amount of bitcoins was split among two or more
addresses
- PEELING CHAINS → small amounts were peeled off from a succession of
one-time change addresses
Source: A Fistful of Bitcoins
©2016 Juan Llanos

31. BEHAVIORAL INDICATORS
- TRANSACTION VOLUME: observe transaction volumes and pay close attention to outliers from an expected
distribution as they may stem from a major theft.
- OBFUSCATION PATTERN: aggregations, foldings (i.e., combining blacklisted transactions with clear
transactions), splits and peeling chains
- FREQUENCY OF USAGE: the thief must construct his fake transactions fast, resulting in a short time span
between transactions involving these coins. This motivates measuring transaction frequency to use it is an
indicator of risk. Whenever frequency increases above average values, there are reasons for suspicion.
- CHANGE ADDRESSES & MULTI-INPUT TRANSACTIONS: heuristics such as the detection of change
addresses or the combination of addresses from multi-input transactions, which are likely to belong to the
same user, can detect connections between apparently unrelated transactions.
- COINBASE TRANSACTIONS: these transactions do not have inputs, i.e., they create new bitcoins without
using up the bitcoins from other transactions.
Source: Towards Risk Scoring of Bitcoin Transactions
©2016 Juan Llanos

32. ©2016 Juan Llanos
Source: Skry

33. ©2016 Juan Llanos
Source: Novetta

34. ©2016 Juan Llanos
Source: Skry
Law Enforcement

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36. PRIVATE vs OPEN
BLOCKCHAINS

37. Source: Coindesk
©2016 Juan Llanos

38. ©2016 Juan Llanos
Source: Antony Lewis

39. ©2016 Juan Llanos
Source: Skry

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41. ETHEREUM
Sidechains
BTC
Corda
©2016 Juan Llanos
O O
O
C
C
C
O
O

42. “The Real Value of Blockchain Technology” [6 minutes]
https://youtu.be/YIVAluSL9SU
©2016 Juan Llanos

43. Clearing & Settlement
Smart Contracts
Inheritance
Employees
Logistics
Legal
Asset Legitimacy
Wines
Jewelry/Art
Land
Electronics
Generics
Internet of Things
APPLICATIONS IN DIFFERENT INDUSTRIES
Source: Globant

44. Credential Certification
Energy Identity
Gaming
APPLICATIONS IN DIFFERENT INDUSTRIES
Source: Globant

45. Source: Bloq
©2016 Juan Llanos

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49. Thank You!
Juan Llanos
@JuanLlanos
info@juanllanos.com
ContrarianCompliance.com