The Benefits and Pitfalls of Cryptocurrencies Blockchain and
The Benefits and Pitfalls of Cryptocurrencies Blockchain and AI Conference The Palace Hotel, Sliema Friday 22 nd June 2018 Dr Shaen Corbet Dublin City University (DCU)
Introduction • I work as an Assistant Professor of Finance at Dublin City University (DCU) • I have previously worked as a commodities and equities trader and as an economist with the Financial Stability Department at The Central Bank of Ireland. • Research interests and publication topics to date include financial economics, financial markets, new financial derivatives, crisis and financial stress measurement, crisis management and the effects of crises on financial markets (all perhaps perfect for the cryptocurrency environment). Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 2
The evolution of cryptocurrencies • It started with a “big bang” • The international financial crisis of 2007 created an appetite for alternative investments and a prolonged period of desperation for financial return • Equity markets had collapsed • Bonds offered little return for substantial risk • Commodity markets presented evidence of a “flight to safety” • Currency markets were exceptionally volatile • Few IPOs • Extreme sovereign default risk Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 3
The evolution of cryptocurrencies • Diversified products such as ETFs (Exchange Traded Funds) saw substantial growth as investors sought to mitigate risks • Countries that did not delve into CDS markets actually did quite well (see Australian and Chinese markets…. . initially) • Some countries did not do so well (see the PIIGS and Iceland) • Investors were quite desperate for portfolio gains – all new financial products were of interest, no matter how complex or simplistic • Note that initially, even Facebook was deemed a poor investment in the beginning • Also note that Candy Crush Saga (King. com) was deemed an excellent investment…. until they realised nobody was paying to play • Markets often misprice traded assets Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 4
Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 5
The evolution of cryptocurrencies • Enter Bitcoin, a currency for the digital age • In October 2008, the mysterious Satoshi Nakamoto released a paper on cryptography which described the digital currency of “Bitcoin: A peer-to-peer electronic cash system”. • On the 3 rd January 2009, Nakamoto released version 0. 1 of Bitcoin software, where the network came into existence of the genesis block of BTC (block 0) which had a reward of 50 BTC • Laszlo Hanyecz, a Florida programmer conducted one of the first real-word BTC transactions paying 10, 000 BTC to get two pizzas delivered from Papa Johns. When the price was approximately $27, the value of those BTC was approximately $272, 329. • Hanyecz famously said “I don’t feel bad about it”, “The pizza was really good”. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 6
The evolution of cryptocurrencies • The combination of financial markets desperate for a win and a new cutting edge financial product, that was proving exceptionally difficult to value appeared to generate an environment in which both parties could thrive. • The mystery behind cryptocurrency is derived in trust. • There have been many events that have caused a breakdown of this relationship: hacking, fraud, bad publicity, regulatory bans • However, the blockchain is quite potentially where the value can be derived • As of 2018, BTC now has its own futures market, which is quite liquid when compared to other futures exchanges. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 7
Is BTC simply the first “sectoral” node? Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 8
Our key cryptocurrency research papers to date Published • Corbet, S. , Lucey, B, Yaravaya, L. , 2017. Datestamping the Bitcoin and Ethereum bubbles, Finance Research Letters, IN PRESS. • Corbet, S. , Larkin, C. , Lucey, B, Meegan, A. , Yaravaya, L. , 2018. Exploring the dynamic relationships between cryptocurrencies and other financial assets, Economics Letters, 165, 28 -34. Pipeline (All papers under review in A/A+ Finance Journals) • Corbet, S. , Larkin, C. , Lucey, B, Meegan, A. , Yaravaya, L. , 2018. KODAKCoin: a blockchain revolution or exploiting a potential cryptocurrency bubble? • Corbet, S. , Larkin, C. , Lucey, B, Meegan, A. , Yaravaya, L. , 2018. Cryptocurrency reaction to FOMC announcements : Evidence of heterogeneity based on blockchain stack position. • Corbet, S. , Lucey, B. , Urquhart, A. , Yaravaya, L. , 2018. Cryptocurrencies as a Financial Asset: A systematic analysis. • Corbet, S. , Lucey, B. , Peat, M. , Vigne, S. , 2018. Bitcoin Futures - What Use are They? Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 9
Dynamic relationships • We analyzed the relationships between three popular cryptocurrencies and a variety of other financial assets. • We found evidence of the relative isolation of these assets from the financial and economic assets. • Our results show that cryptocurrencies may offer diversification benefits for investors with short investment horizons. • Time variation in the linkages reflects external economic and financial shocks. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 10
Dynamic relationships • Overall, our research suggested a role for cryptocurrencies in an investor portfolio, they being highly connected to each other and disconnected from mainstream assets, but the cryptocurrency market contains its own idiosyncratic risks that are difficult to hedge against. • Our results also support the position that cryptocurrency markets is a new investment asset class, since they are interconnected with each other and have similar patterns of connectedness with other asset classes. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 11
Is Bitcoin a pricing-bubble? • Using Phillips et al. (2011) recursive ex-ante methodology, we sought periods of exuberance in the asset price series during inflationary periods (see the authors work on 1990 s Nasdaq explosive behaviour in prices) • This is found to be quite capable as an early warning system • Phillips, Shi and Yu (2015) further developed the test through the use of a generalised version of the sup augmented Dickey-Fuller (sup-ADF) test on the S&P 500 • Corbet, Lucey and Yaravaya (2017) applied the same model to Bitcoin and Ethereum – the results made for interesting reading Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 12
Is Bitcoin in a pricing-bubble? This graphic shows the evolution of the Bitcoin price, overlaid on a series of dummy variables. These take the value of 1 when the ratio of [calculated BSDAF statistic / simulated critical value − 1] exceeds zero. The dummy variables are calculated on the tests for the price alone, Price_Normalized; blocksize, Blocksize_Normalized; Volume, Volume_Normalized and Hashrate, Hashrate_Normalized. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 13
Is Ethereum in a pricing-bubble? Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta This graphic shows the evolution of the Ethereum price, overlaid on a series of dummy variables. These take the value of 1 when the ratio of [calculated BSDAF statistic / simulated critical value -1] exceeds zero. The dummy variables are calculated on the tests for the price alone, Price_Normalized; blocksize, Blocksize_Normalized; Volume, Volume_Normalized and Hashrate, Hashrate_Normalized. 14
Is Bitcoin in a pricing-bubble? • We provide this information based on the caveat the analysis was conducted prior to Bitcoin breaching $10, 000 • There is no clear evidence of a persistent bubble throughout the life of both investigated cryptocurrencies • This did not imply that the price was “correct” – merely that there was an absence of a statistical indicator • Important to note that there were distinct short-term time periods where there appears to be a fundamental influence on price dynamics (for example: blockchain, market liquidity or hashrate acted as an influence) • These effects are found to dissipate quickly Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 15
Is Bitcoin in a pricing-bubble? Since Bitcoin breached $1, 000 it appears to have been in a consistent pricing bubble Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 16
What have we found so far? • Cryptocurrency reaction to FOMC Announcements: Evidence of Heterogeneity Based on Blockchain Stack Position • We examine the reaction of a broad set of digital assets to US Federal Fund interest rate and quantitative easing announcements and the volatility spillover and feedback effects generated as a result. • We classify each digital asset into one of three categories: Currencies; Protocols; and Decentralised Applications (d. Apps). • Currency-based digital assets experience idiosyncratic spillovers in the period immediately after US monetary policy announcements, while application or protocol based digital assets are largely immune to policy volatility spillover and feedback. • Mineable digital assets are found to be more susceptible to monetary policy volatility spillovers and feedback than non-mineable. • Responses indicate a diverse market in which all assets are not comparable to Bitcoin. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 17
What have we found so far? 96 Cryptocurrencies were analysed for varying starting points between mid-2013 and March 2018 – our analysis develops on the FOMC announcements in Table 3 Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 18
What have we found so far? Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 19
What have we found so far? Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 20
What have we found so far? Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 21
Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 22
What have we found so far? Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 23
What have we found so far? Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 24
What have we found so far? • Yermack [2015] asserted that bitcoin was not a currency as it ‘performs poorly as a unit of account and as a store of value’. • The high volatility of bitcoin prices and the range of prices quoted on various bitcoin exchanges were seen to damage bitcoin’s usefulness as a unit of account. • If the introduction of trading in bitcoin futures resulted in a reduction in the variance of bitcoin prices, or facilitated hedging strategies that could mitigate pricing risk in the spot market it is possible that bitcoin could act as a unit of account, moving it closer to being a currency. • The analysis conducted shows that volatility increased around the announcement of trading in bitcoin futures. • In the period covered by this study hedge portfolios constructed with the futures cannot mitigate the risk inherent in the underlying spot market, both of the hedging strategies considered resulted in an increase in volatility. • The price discovery analysis indicated that price discovery is focused on the spot market, which is in keeping with the argument that the traders in the futures market are uninformed noise traders. • Together these results support Yermak’s conclusion that bitcoin should be seen as a speculative asset rather than a currency. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 25
Cryptocurrency meta-analysis • Cryptocurrencies as a Financial Asset: A systematic analysis • This paper provides a systematic review of the empirical literature on the major topics that have been associated with the market for cryptocurrencies since their development as a financial asset in 2009. • Despite astonishing price appreciation in recent years, cryptocurrencies have been subjected to accusations of pricing bubbles central to the trilemma that exists between regulatory oversight, the potential for illicit use through it’s anonymity within a young under-developed exchange system, and infrastructural breaches influenced by the growth of cybercriminality. • Each influence the perception of the role of cryptocurrencies as a trustworthy credible investment asset class and legitimate of value. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 26
Cryptocurrency meta-analysis • Regulation is one of the key factors affecting the price of cryptocurrencies, with a singular, sharp reduction in the price of Bitcoin by almost 50% in early 2018 being widely attributed to government actions in South Korea and China. • Within their own structure, cryptocurrencies are not domiciled in any single country’s borders, which inherently is one of the key problems when attempting to define regulatory alignment. • For example, in the United States the CFTC treats Bitcoin as a commodity while the IRS treats the same product as property. • There is further evidence of broad disparity of regulation when investigating Initial Coin Offerings (ICOs) and the underlying tokens being traded on exchanges, with some tokens, escaping SEC disclosure regulations as they do not explicitly represent equity or a share in a company. • Should regulation be introduced in one jurisdiction, cryptocurrency’s inherent international features enable an ICO to simply take place in a state where regulatory alignment takes place. • In March 2018, the SEC issued dozens of subpoenas information requests to companies and advisor’s centred on ICOs and the structure of the sales. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 27
• Eighty-seven separate research papers are included in this cryptocurrency analysis. • Only two included papers were available before 2013, with only seven more being published in 2014. • In 2015, eleven papers were published on the topic of cryptocurrencies, with thirteen in 2016 and thirty in 2017. • These statistics present evidence of the strong evolution of cryptocurrency research in recent years. • We have divided the research arguments into five distinct areas: 1) Bubble dynamics; 2) Regulation; 3) Cybercriminality; 4) Diversification; and 5) Efficiency. • The figure to the right presents the varying time-horizons of investigation within the papers that we have analysed. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 28
Cryptocurrency meta-analysis Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 29
The key benefits of cryptocurrency? • User anonymity • Unless a user publishes their transaction, the purchase is never associated with personal identity and cannot be traced back. The anonymous address generated for user-purchases changes with each transaction • No third-party interruptions • Governments, banks and other financial institutions have no way to interrupt user transactions or place freezes on Bitcoin accounts. The system is peer-to-peer with users experiencing a greater degree of freedom than when using traditional currency • Purchases are not taxed (though this is changing) • Since there are no way for third parties to identify, track or intercept transactions in Bitcoin, one of the major advantages of Bitcoin is that sales tax are not added to any purchases Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 30
The key benefits of cryptocurrency? • Very low transaction costs • Standard transfers typically involve fees and exchange costs. As there is no intermediary or government involvement the transaction costs are kept very low. This is a major advantage when travelling. Also, it eliminates the inconvenience of typical authorisation requirements and waiting periods. • Mobile payments • Bitcoin users can pay for their transactions anywhere that they have internet access. They therefore never have to travel to a bank or a store to buy a product. Personal information is not needed to complete any transaction. • It minimises fraud through tighter security (but not at the exchange level) • Everyone/anyone can access it • Fast settlements Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 31
The IMF have recently offered support • Christine Lagarde stated: “the underlying technology of crypto-assets—distributed ledger technology, or DLT—could help financial markets function more efficiently. Selfexecuting and self-enforcing ‘smart contracts’ could eliminate the need for some intermediaries. ” • Additional benefits included: • Crypto-assets enable fast and inexpensive financial transactions while offering some of the convenience of cash. • Secure storage of important and sensitive records is a promising use of cryptocurrencies • In developing economies, such advances can help secure property rights, increase market confidence and promote investment. • The IMF have also identified the potential use of blockchain as a regulatory weapon: • "Those who have a shared interest in maintaining safe online transactions need to be able to communicate seamlessly. The technology that enables instant global transactions could be used to create registries of standard, verified, customer information along with digital signatures. Better use of data by governments can also help free up resources for priority needs and reduce tax evasion, including evasion related to cross-border transactions. " Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 32
An end to ticket touting? • The Aventus Protocol is based on blockchain technology – used in cryptocurrencies such as bitcoin – which would allow event organisers to give each ticket a unique identity that is tied to its owner. Because the tickets are based on blockchain – a linked list of records where each new one contains an encrypted version of the previous one – they cannot be faked. The software also allows event promoters to keep an easy record of who owns the ticket, which means they can control the prices. • Annika Monari, 25, and Alan Vey, 24, face the first test of their invention this summer, at the 2018 World Cup in Russia, when the software will be used for more than 10, 000 tickets to fan events around Europe and the US. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 33
An end to ticket touting? • They say that it will “virtually eliminate ticketing fraud and the scourge of unregulated touting”. For the World Cup they have joined forces with another company, Blocside, and expect to work with football clubs next year on season tickets. • The two graduates founded their company Artos after completing their studies last year and now employ 15 people. • They funded the project by selling “tokens” – a limited supply of cryptocurrency, which can be sold like shares. Aventus’s initial offering sold out in seven minutes for about £ 26 m. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 34
Some of the potential benefits of cryptocurrencies • While investors attempt to allocate perceptions of fundamental values on cryptocurrency assets to which there are little or no comparative metrics, perhaps one major question has been overlooked: is there an inherent value or alternative use for the cryptocurrencies underlying blockchain? • It can allow: • Asset Tokenization in ever smaller increments • Asset Ownership that is clear and indisputable • Asset Programmability that can reduce transaction times • Other examples of benefits use may be observed in the obscure cryptocurrency named Dentacoin. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 35
Dentacoin – whitepaper here Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 36
Why blockchain? Are there other values? • A patient’s medical records are often scattered between GPs, clinics and labs. A blockchain-based health record could be read and updated from multiple locations or services and would contain a note of who made each addition to the record. The patient can opt to take charge of the data and choose whom to share it with. • One of these upcoming launches, called Block. Med. X, aims to address the rampant opioid crisis in the U. S. The service is designed to be used by physicians and pharmacies to help increase security and accountability in the prescription drug industry. Block. Med. X analyzes millions of prescriptions to find concerns, helping to protect patients in the process. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 37
Why blockchain? Are there other values? • Medicalchain, on the other hand, uses blockchain technology to store and share health records securely, allowing for easy and safe transfer of information between providers and patients. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 38
Why blockchain? Are there other values? • In the simplest terms, the blockchain transfers value from one party to another over the Internet. That could be money, a share of stock, a property deed, a digital royalty, even a vote cast in an election. • A blockchain allows the authentication of transactions without them needing to be administered or guaranteed by a central authority. Ballot boxes and current online voting platforms are vulnerable to manipulation; now a startup called Follow My Vote is developing a blockchain-based system to ensure security, transparency and mathematically accurate election results. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 39
Why blockchain? Are there other values? • Applied to power generation, blockchain enables homeowners to sell back energy to the grid without going via an energy provider or manage their own microgrids that are independent from the established system. • Lo 3 Energy runs a project in Brooklyn, New York, where homeowners can buy and sell energy they have generated with rooftop solar panels. • The blockchain allows them to set their own price – and to do so without a price-setting, commission-taking intermediary. Also see Bloomberg’s recent video on potential major changes in the oil industry: https: //www. bloomberg. com/news/videos/2018 -05 -17/howblockchain-could-revolutionize-the-energy-industry-video Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 40
Why blockchain? Are there other values? • A blockchain system called Voise is enabling artists to set a price of which they receive 100% when a user streams their music. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 41
Why blockchain? Are there other values? • In 2012, then secretary-general of the UN, Ban Ki-moon, estimated that 30% of development aid was lost to corruption. The UN has a number of blockchain-based projects looking to solve issues in delivering aid. • Last year, in a UN world food programme pilot project, Syrian refugees in a Jordan camp were given an allowance in cryptocurrency. • When making purchases at the camp supermarket, their identities were authenticated by iris scans and their spending deducted from their allowance. • This cuts down on transaction fees for the UN and reduces the frequency of fraud and theft. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 42
What are the pitfalls of cryptocurrencies? • Numerous issues with cryptocurrencies • We are currently trying to identify as to whether some these issues are simply teething problems or are they signals or broader inherent issues that may not be possible to surmount • Key issue is fraud – across multiple levels • Maintaining trust is a key challenge, despite technological benefits inherent within the structure of the currency • Electricity? https: //www. bloomberg. com/news/articles/2018 -06 -19/quebec-hikes-power-pricesfor-crypto-miners-to-halt-new-requests? srnd=cryptocurriences • “Big things have small beginnings” • We need to figure out as to whether the “big thing” is one of the biggest developments since the beginning of the internet OR one of the biggest frauds of all time Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 43
The new € 500? • € 500 were also nicknamed “Bin Ladens” • In May 2016, it was announced that the ECB was to withdraw the € 500 note because of concerns with illegal activities • The decision was primarily made in response to the way the notes were being used – UK banks had in fact stopped handling the notes in 2010 in the aftermath of a report on criminality • The note is to be phased out towards the end of 2018 • The Harvard Kennedy School in 2016 urged the world’s largest economies to stop issues £ 50, $100 and € 500 in an attempt to tackle crime Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 44
The new € 500? • Why are € 500’s so valuable? • To the right person, € 500 is often worth more than its face value – why? • € 10, 000 = 20 x € 500 notes • € 10, 000 = 200 x € 50 notes • € 10, 000 = 2, 000 x € 5 notes • € 10, 000 in BTC = 0 X €Z notes Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 45
The new € 500? • However, have cryptocurrencies just made cross-border transactions and other elements of criminality even easier? • We can see the blockchain for Bitcoin and other cryptocurrencies • What about Dash – ex-Darkcoin? • Dash was originally released as Xcoin in January 2014 with proposed improvements on BTC: • Two-tier incentivisation network for master-nodes and miners • An improved hashing algorithm • Instant transaction confirmations • A system for increasing anonymity of users • It was renamed Darkcoin on January 28 th 2014 • In March 2015 it was renamed Dash (portmanteau: Digital-Cash) Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 46
Darknet fame? • Talis Putnins and Jonathan Karlsen, Professors at the University of Technology Business School in Sydney, together with Dr. Sean Foley from Sydney University, have been jointly working on a research whose results are shocking. • In their yet to be published document ”Sex, Drugs, Darknet and Bitcoins, ” the nearly half of all bitcoin transactions involve illegal trading either directly or indirectly on the dark web, a section of the internet that cannot be accessed using the a standard search engine. • Putnins has stated: “The main reason for our research is to aide law enforcers and regulators to at least have an idea of what is expected of them and how to control, monitor and regulate bitcoins used globally and how to do it as it becomes mainstream, ”. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 47
Darknet fame? • In January 2018, it was widely reported that Darknet users were starting to abandon the use of BTC (as it had become increasingly monitored) and were starting to use digital currencies such as Ethereum and Monero • It appears as when one cryptocurrency becomes “too mainstream”, those using for illegality simply move to another cryptocurrency • Similar to the problem with illegal tv steaming on smartphones/online • The problem has led Interpol to hold its first ever Darknet and Cryptocurrency working group in April 2018 Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 48
Darknet fame? • The most popular reported darknet sites include (A FRIEND TOLD ME): • DREAM MARKET: Oldest marketplace, existing since 2013. It accepts bitcoin core, bitcoin cash, and monero and boasts 50, 000 digital goods and 63, 000 drugs listings. There’s also a “Services” section where you can purchase fake IDs or order You. Tube dislikes on a video you particularly hate. For 0. 8 BTC you can disappear completely before emerging with an entirely new identity. • WALL STREET: The site claims to have almost 3, 000 vendors and 400, 000 customers and accepts BTC and XMR. • POINT MARKETPLACE: a Russian DNM that’s been running since 2015 and has features such as dead drops, which enable vendors to leave goods at a location where the buyer can later collect it. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 49
It all started with Silk Road • Silk Road was an online black market and the first modern darknet market, best known as a platform for selling illegal drugs. As part of the dark web, it was operated as a Tor hidden service, such that online users were able to browse it anonymously and securely without potential traffic monitoring. The website was launched in February 2011 • In October 2013, the Federal Bureau of Investigation (FBI) shut down the website and arrested Ross William Ulbricht • On 6 November 2013, Silk Road 2. 0 came online, run by former administrators of Silk Road. It too was shut down, and the alleged operator was arrested on 6 November 2014 • It is estimated that between $30 -45 million in transactions were made annually on Silk Road. Buyers and sellers conducted all transactions with BTC. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 50
BTC and ransom attacks • Before BTC, hackers used Ukash and Paysafecard • “More than £ 108, 000 in bitcoin paid by victims of the Wanna. Cry ransomware attack, which crippled parts of the NHS as well as businesses in 150 countries worldwide, has been withdrawn from the digital wallets the funds were being held in. ” Guardian, August 2017 • As BTC becomes more popular, hackers are now looking at Monero as a viable alt-coin. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 51
BTC and ransom attacks Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 52
BTC and ransom attacks • After a ransomware infection, the cyber extortion begins. • Now, the victim is left in the unenviable position of deciding whether or not to pay up in the hopes they’ll be granted the decryption key. • Usually, the ransom demand is in the form of untraceable Bitcoin. The attackers goal, of course, is to get their ransom quickly and easily with very little risk of trace. While wire transfers, high-rate text message, voucher services, and even Amazon and i. Tunes gift cards have been requested, Bitcoin has become the payment of choice. • Because Bitcoin is a public transaction system—without government or bank regulation—the account holder may remain anonymous. As a result, it’s become popular among illicit drugs and arms dealers and, you guessed it, ransomware attackers. It’s become so popular that larger businesses were holding Bitcoin as part of their contingency plans. • REPORT: Ransomware risk could cripple British businesses with many not ready, while others stockpiling bitcoins to pay up Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 53
Hacking events • • • In February 2014, Mt. Gox suspended trading, closed its website and exchange service, and filed for bankruptcy protection from creditors. In April 2014, the company began liquidation proceedings. Mt. Gox announced that approximately 850, 000 bitcoins belonging to customers and the company were missing and likely stolen, an amount valued at more than $450 million at the time. Although 200, 000 bitcoins have since been "found", the reason(s) for the disappearance—theft, fraud, mismanagement, or a combination of these—were initially unclear. New evidence presented in April 2015 by Tokyo security company Wiz. Sec led them to conclude that "most or all of the missing bitcoins were stolen straight out of the Mt. Gox hot wallet over time, beginning in late 2011. Source: Fortune Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 54
Hacking events • Kim Nilsson, a Swedish software engineer teamed up with some other Mt. Gox customers to launch Wiz. Sec, a blockchain security firm dedicated to cracking the case. • As he tracked the stolen funds, he saw that, of the 650, 000 Bitcoins reported stolen from Mt. Gox, 630, 000 had gone straight into wallets controlled by the same person. • That person also had an account at Mt. Gox, associated with the username WME. • Then Nilsson stumbled across an old post in an online Bitcoin forum in which someone with the handle WME had thrown a tantrum, complaining that another cryptocurrency exchange had frozen his funds. “Give [me] my CLEAN MONEY!” read the post. • In the process, WME dropped clues that he owned some of the Bitcoin wallets in question. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 55
Hacking events • Then U. S. federal prosecutors charged Alexander Vinnik, a 38 year-old IT specialist, with laundering 530, 000 of the stolen Mt. Gox Bitcoins through his WME wallets and other accounts. • They also accused him of helping to run the exchange BTC-e, whose primary purpose was allegedly to launder money. • It is plausible, investigators say, that BTC-e was founded specifically to launder funds stolen from Mt. Gox. • Blockchain analysis shows that the hack that devastated Mt. Gox began in autumn 2011, around the time BTC-e started up. • Keys to Mt. Gox’s “hot wallet”—its online Bitcoin repository— were stolen and copied, compromising the exchange’s deposit addresses. • So for the next two years, in nine out of 10 instances, coins were being stolen as soon as they came in, says Chainalysis’ Gronager, who is also a creditor: “It meant that you had a hole in the bottom of the well, and someone was just draining money. ” Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 56
Hacking events • In January 2018, confidence in broad cryptocurrency exchanges was dealt a significant blow due to hacking of $530 million from Coincheck, eclipsing the prior record of $400 million reported to have been stolen from the Mt. Gox hacking event in 2014. • The hackers had stolen customer deposits of NEM, which then fell approximately 20% as news broke to the public about the hack. • This followed the closure of South Korean Bitcoin exchange Youbit who recently filed for bankruptcy after being the target of two significant hacking events in quick succession. • In December 2017, hackers stole approximately $70 million worth of Bitcoin from Nice. Hash which is a digital currency trading platform based in Slovenia. • Such events have created further focus and desire for the regulation of the entire industry, but this has simultaneously been associated with widespread price volatility. • There has been further cybercriminality detected with regards to the hacking of internetconnected devices in an attempt to utilise computing power to mine digital coins such as Monero Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 57
Hacking events (this week…. ) • Cryptocurrencies dropped after the second South Korean exchange in as many weeks said it was hacked, renewing concerns about the safety of digital-asset trading venues. • Bithumb, ranked by Coinmarketcap. com as the world’s seventh-largest crypto exchange by traded value, said on Wednesday that hackers stole about 35 billion won ($32 million) and that Ripple was among the coins taken. • The exchange halted cryptocurrency deposits and withdrawals, said it will compensate victims and moved investor assets to a so-called cold wallet, which is disconnected from the Internet and less vulnerable to theft. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 58
The curious case of KODAKCoin • Eastman Kodak is an American technology company that produces imaging products. • In 2018, it announced its intentions to enter the crytpocurrency market, raising concerns that it could be taking advantage of a potential cryptocurrency bubble for short-term gains. • We analyse the relationships between Kodak, crytocurrency and stock market index returns. • We find evidence of a significant, sustained increase in both the share price and price volatility of Kodak after the KODAKCoin announcement, with an increased correlation between the price of Kodak shares and Bitcoin. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 59
The curious case of KODAKCoin • In January 2018, camera manufacturer Eastman Kodak announced that it was entering the cryptocurrency market through the creation of KODAKOne, described as a revolutionary new image rights management and protection platform secured in the blockchain. • At 5. 00 pm (GMT) on 9 January, Kodak shares were worth $3. 10. At 2. 40 pm (GMT) on 10 January, shares were trading at $12. 75. Kodak, a company who had witnessed in excess of a 90% fall in their share price between 2014 and 2018 became the centre of attention: • We have to figure out whether: • 1) had Kodak just unveiled a novel and genius evolutionary use for blockchain; or • 2) had Kodak just attempted to ride the wave of a potential cryptocurrency bubble? Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 60
The curious case of KODAKCoin • Bitcoin share price, daily volatility and online information searches (Nov 2017 through Feb 2018) Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 61
The curious case of KODAKCoin • Our results indicate a substantial and sustained increase in return volatility in the period after the announcement of Kodak’s intention to create a cryptocurrency. • Further, there is strong evidence that Kodak returns became substantially more correlated with the high-risk, speculative asset class of cryptocurrencies. • Without considering the long-run feasibility of the proposed plans of KODAKCoin, our results point towards the existence of a new form of asymmetric information as share value is found to increase dramatically through the simple announcement of any plan relating to a cryptocurrency based on blockchain technology. • Such announcements can potentially take advantage of the euphoric and speculative investment motives that have been inflating what some consider to be a significant bubble in cryptocurrency markets. • Announcements without strong supporting evidence can present an channel through which speculative contagion can flow from cryptocurrency markets to equity markets. • Was this an attempted pump-and-dump? Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 62
The curious case of KODAKCoin • However, Kodak’s idea may in fact have some merit • It could have been used to track and identify the spread of infamous tweets during election campaigns comedian Aziz Ansari did not hold this sign Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 63
Venezuela and the Petro – whitepaper here • The petro was launched in February 2018, is a cryptocurrency developed by the government of Venezuela. • Announced in December 2017, it is claimed to be backed by the country's oil and mineral reserves, and it is intended to supplement Venezuela's plummeting bolívar fuerte currency, purportedly as a means of circumventing U. S. sanctions and accessing international financing Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 64
Other strange cryptocurrencies…… • Potcoin - Pot. Coin is an ultra-secure digital cryptocurrency, network and banking solution for the $100 billion global legal marijuana industry. Pot. Coin is the first digital currency created to facilitate transactions within the legalized cannabis industry. Pot. Coin is a community based effort. Pot. Coins are digital coins you can send via the internet, which allow cannabis enthusiasts to interact, transact, communicate and grow together. • Trumpcoin - By supporting the Trump. Coin digital currency movement you are supporting the "Trump Patriots". People like you who are determined and motivated to expose corruption and evil, uncover truths and lies and allow all people a chance to live in a free, peaceful and prosperous world. Trump. Coin is a digital currency that is based on Bitcoin. It was created on February 20, 2016, in order to honor Donald J. Trump and to help him secure the Presidency of the United States. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 65
Other strange cryptocurrencies…… • Fuzzballs is a coin initially intended for gifting and parties, . You mine this to gift people, in IRC rooms or Chat rooms. • Small items for gifting will be added to the FUZZ shop over time such as keychains, bottle openers and will be available for purchasing with FUZZ or equal BTC Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 66
Other strange cryptocurrencies…… • Unobtanium - Unobtanium’s claim to fame is that it was designed to be the rarest cryptocurrency in the world, inspired by the fictional mineral that was the basis of the movie “Avatar. ” • My favourite example……. Useless. Ethereum. Token (UET) Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 67
Useless. Ethereum. Token (UET) honesty…. . Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 68
Where is the cryptocurrency market going? • After all the turmoil, it is still an exceptionally valuable product • However, it is still one of the most risky investments around • Signals that it is strongly sentiment driven • However, the BTC market in particular continues to develop at pace Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 69
However, this is not a “normal” product Screenshots taken from coinmarketcap. com • I am not sure if anyone has ever asked: Can I have £ 10, 000 in Rabbit. Coin and £ 5, 000 in Fuzzballs please? Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 70
More research is pointing at major issues • Valuation, liquidity price, and stability of cryptocurrencies, Carey Caginalp and Gunduz Caginalp • Both strongly suggest that stability will be lacking, so the cryptocurrencies may be simply a mechanism for a transfer of wealth from the late-comers to the early entrants and nimble traders. ” • Bloomberg clearly described the article: • “Using mathematical modeling and experimental economics, two University of Pittsburgh researchers tried to determine Bitcoin’s value, and concluded that it’s "an asset which has no value by traditional measures" and may be in a bubble. Its price is largely driven by the opinion of fringe buyers, often holding erroneous views. • As these fringe buyers run for cover, worried that their investment is not as secure as they thought, the price plummets. • It goes up when the fringe buyers feel safe enough to step back in, they wrote. ” Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 71
The SEC are identifying issues…. SEC Chair Jay Clayton & Brett Redfearn, SEC director of division and trading both on the record discussing potential market manipulation Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 72
Market Manipulation Key Points • Suspicious trades on a Bitcoin currency exchange are linked to rises in the exchange rate. • A single actor likely drove the USD/BTC exchange rate from $150 to $1000 in 2 months. • Trading volume on all exchanges increased greatly on days with suspicious activity. • Unregulated cryptocurrency markets remain vulnerable to manipulation today. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 73
Market Manipulation From an interview this week: Griffin said: “There were obviously tremendous price increases last year, and this paper indicates that manipulation played a large part in those price increases. ” He added that Tether seems to be used both to “stabilise and manipulate bitcoin prices”. According to Griffin, Tether coins are created in large quantities, such as 100 m. Almost all of these coins then move to Bitfinex. When bitcoin prices dip after the Tether is issued, Tether at Bitfinex and other exchanges is used “in a coordinated way”, causing the price of bitcoin to shoot up. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 74
Can technology handle crypto growth? BIS Annual Economic Report 2018 Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 75
Can technology handle crypto growth? BIS Annual Economic Report 2018 Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 76
Potential future research areas • Based on our research to date, we have identified gaps in the following areas: 1. The literature to date is narrowly focused on one single cryptocurrency, namely Bitcoin. We need to expand our research to include other cryptos (geographical locations, liquidity and other key market metrics) 2. It is important that future cryptocurrency research collaborates across industries and sectors to investigate the wide array of legal, economic and regulatory issues that exist (sandbox or ban? ) 3. There are potential new asymmetrical information issues that exist in the use of blockchain and cryptocurrencies by companies not directly associated with such use (eg KODAKCoin). This is a matter that should be monitored by policy-makers and regulators while been addressed by broader academic research. 4. Although there a number of empirical papers that have analysed the characteristics of cryptocurrency markets using existing finance theories, concepts and models, there is a lack of theory development in this field. Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 77
Potential future research areas 5. There is a strong need of research addressing the environmental challenges associated with the rapid growth of cryptocurrency markets, with particular emphasis on the extremely large energy levels that are necessary for their use and continued development. 6. What benefit are cryptocurrencies to investors? What are the diversification and hedging benefits of cryptocurrencies and should they be included as an asset class within an investors portfolio? • However it has been shown that many cryptocurrency traders buy and sell intra-day an therefore more studies need to examine the intra-day dynamics of cryptocurrencies. 7. While the literature has been broadly focused on the financial and economic properties of cryptocurrencies, the opportunities of cryptocurrencies and blockchain technologies and their use for economic development requires further attention. • Apart from their financial an economic properties, what other benefits can cryptocurrencies and blockchain have to society? If this area can be expanded, cryptocurrencies may improve reputationally Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 78
Overall…. . caveat emptor…. . Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 79
Overall…. . caveat emptor…. . • We need to decide whether: Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 80
Thank you for your time Please feel free to contact and connect Email: shaen. corbet@dcu. ie Linked. In: here Dr Shaen Corbet (DCU), Blockchain and AI Conference, Sliema, Malta 81
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