20230318 Cycles of criminality (part 1)

One of the frustrating things about being me is that I have an excellent memory, for some things. I don't remember names of faces but I do remember facts and where to look them up. The frustration is that I see patterns, some going back over decades, where almost everyone I come across thinks everything is new.

Like the case of Mark McCabe (reported in World Money Laundering Report this week. It looks like a novel sort of crime.

And there's FTX and the emerging story of iEarn Bot.

So here's the thing: if you know how we got here, there's no reason to be surprised. More importantly, you can be prepared.

And because you can be prepared, there's an argument that you have an obligation to prevent fraud, even before regulators and governments begin to impose one.

Expand your mind as you read this: think about blockchain, cryptocurrencies and the broader question of what has come to be known as the "tokenisation" of crypto-currencies. And as you are doing that, realise how little of what is fashionable today is new in principle.

When I was approving the article about McCabe in World Money Laundering Report, the facts reminded me of a case a decade ago, Liberty Reserve.

Liberty Reserve was an electronic currency issuer ("Liberty Reserves") To set the scene, the idea grew, indirectly, from the "Linden Dollars" that were an electronic currency used in the online environment, Second Life.

It's important to understand that even in 2013, none of this was new.

Actually, it's thousands of years old.

Some historians (e.g. at the Bank of Thailand) tell us that the first use of a medium of exchange was in Lydia, a kingdom in what is now Turkey in the Iron Age (about 1,200 BC - 550BC) but this is inconsistent with the research of Sterling Seagrave who has found evidence of The Chop / Fei Chein was in use at least 2,000 years before Christ.

Also, this was a centralised currency: the use of valuables as a medium of exchange and a store of value predates even that. Throughout that time, right up until today, there are local currencies, even in developed countries.

So, as you can see, the idea of decentralised tokenised method of payment and storing value did not arise with bitcoin and its ilk.

Was the growth of tokenised currencies spurred by reaction to the FATF's R40 and the EU's MLDI?

Actually, in the mid 1990s, there were many electronic coins issued, and a fair slew of them were fraudulent. The idea of an online business issuing its own money and allowing users to make payments in that money was surprisingly popular - or perhaps unsurprisingly: its growth coincided with the coming into effect of the Financial Action Task Force's 40 Recommendations and the EU's First Money Laundering Directive.

This was in the early days of the world-wide web. Many readers will be amazed to learn that while online banking had been available in the UK in the mid 1980s, that was using a direct dial-in service with a dedicated terminal at both ends. The internet was not part of the system. In fact, when a group of Russians did their laundering in New York, they dialled into the accounts from Russia. Today we might consider it primitive. Or we might consider it less likely to be compromised.

The first fully regulated bank to provide online banking over the internet was in Finland.

But those creating their own currencies were outside the regulatory perimeter as it was then defined. And given that banking, in its true sense, is the taking in, holding and paying away deposits of third parties, exercising that function is nothing more than an accounting exercise, the recording of assets and ownership in a ledger. The only complexity is where the physical storage of those deposits is required.

But money, insofar as banks are concerned, has long been dematerialised. The bank does not store e.g. the bank notes that a customer deposits for that customer because the notes represents value but are not, of themselves value. So long as the bank has access to sufficient notes to represent the value of the deposit, there is no problem.

Because banking has been reduced to a simple accounting exercise, a bank can operate with simple software. For a bank, its biggest complications are security and regulation.

In the 1990s, the software to run a bank (as distinct from a lender) could be bought for USD199. "Bank in a Box" was written by Russian coders.

What's been established so far?

Items representing value are ancient and at least 2,000 years ago tokens were in use, both before and later alongside centralised "official" currencies.