History of United States Anti-Money Laundering Laws

[BCB]

The unseen hand of the US government has plenty of tactics against an advisary as is evidenced in the recent announcement by DWOLLA to suspend services to bitcoin businesses and the continued closure of bitcoin business bank accounts.

The banks and dwolla are not closing these accounts because they don't want the businesses.

They are closing these accounts because of increased pressure and scrutiny by their regulators as well at the "reputational risk" of banking a bitcoin business.

see:

Treasury's War: The Unleashing of a New Era of Financial Warfare by Juan Zarate
http://www.amazon.com/Treasurys-War-Unleashing-Financial-Warfare/dp/1610391152

For more than a decade, America has been waging a new kind of war against the financial networks of rogue regimes, proliferators, terrorist groups, and criminal syndicates. Juan Zarate, a chief architect of modern financial warfare and a former senior Treasury and White House official, pulls back the curtain on this shadowy world. In this gripping story, he explains in unprecedented detail how a small, dedicated group of officials redefined the Treasury’s role and used its unique powers, relationships, and reputation to apply financial pressure against America’s enemies.
 

[tvbcof]

The unseen hand of the US government has plenty of tactics against an advisary as is evidenced in the recent announcement by DWOLLA to suspend services to bitcoin businesses and the continued closure of bitcoin business bank accounts.

The banks and dwolla are not closing these accounts because they don't want the businesses.

They are closing these accounts because of increased pressure and scrutiny by their regulators as well at the "reputational risk" of banking a bitcoin business.

see:

Treasury's War: The Unleashing of a New Era of Financial Warfare by Juan Zarate
http://www.amazon.com/Treasurys-War-Unleashing-Financial-Warfare/dp/1610391152

For more than a decade, America has been waging a new kind of war against the financial networks of rogue regimes, proliferators, terrorist groups, and criminal syndicates. Juan Zarate, a chief architect of modern financial warfare and a former senior Treasury and White House official, pulls back the curtain on this shadowy world. In this gripping story, he explains in unprecedented detail how a small, dedicated group of officials redefined the Treasury’s role and used its unique powers, relationships, and reputation to apply financial pressure against America’s enemies.
 

Ah, but now we are talking about a 'conspiracy'.  The most critical segment of society (the 'outer party' to use Orwell's shorthand) has been conditioned to reject anything like that at the hypothesis phase.  This effectively short circuits any analysis of a 'conspiracy' before it progresses to a theory or fact phases.

It is undeniable that there is such a thing as a 'conspiracy', but it is only possible when it has been established as a fact through historical analysis.  It is exceedingly uncomfortable for most people to entertain the notion of a 'conspiracy' occurring in the present or near past because believing considering such a thing casts one into a zone of being of either unsound mind or in a despised class of people or both.

 edit: fix

[BCB]

Conspiracy implies something unlawful.

The regulations currently being imposed on bitcoin business and their banking partners is lawful.

[jbreher]

Conspiracy implies something unlawful.

The regulations currently being imposed on bitcoin business and their banking partners is lawful.

So was gassing the Jews and Gypsies at one time and place. What's your point?

[tvbcof]

Conspiracy implies something unlawful.

To you it may, but I've never considered that to be a requirement.  Taken from Google's 'define: conspiracy':

   noun
  1. a secret plan by a group to do something unlawful or harmful.

The operative elements are 'secret' and 'group'.  'harmful' is sufficient to characterize the 'plan'.

The regulations currently being imposed on bitcoin business and their banking partners is lawful.

That is probably unknown until it is adjudicated.  It seems arguable to me that if a 'conspiracy' were to have occurred with a goal of harming a vendor or system which was itself perfectly legal, then the conspiracy might be considered unlawful.  It is (currently) possible for parties up to and including government bodies to break the law in the US.  In other political systems the latter may be impossible by definition.

[Carlton Banks]

Conspiracy implies something unlawful.

The regulations currently being imposed on bitcoin business and their banking partners is lawful.

So was gassing the Jews and Gypsies at one time and place. What's your point?

+ 100,000,000 native Americans

[BCB]

Conspiracy implies something unlawful.

The regulations currently being imposed on bitcoin business and their banking partners is lawful.

So was gassing the Jews and Gypsies at one time and place. What's your point?

I'm not talking about Jews or Gypsies.  I merely point out the the pressure currently being place on virtual currencies are not the product of any conspiracy but of the interpretation of existing regulation and legislation. 

[User705]

Exactly and going a step further it seems that a decentralized currency concept is incompatible with many current laws on property and money.  Some other examples to think about is laws on possession of stolen property and how that relates to the concept of tainted coins.

[tvbcof]

Exactly and going a step further it seems that a decentralized currency concept is incompatible with many current laws on property and money.  Some other examples to think about is laws on possession of stolen property and how that relates to the concept of tainted coins.

One of the more interesting takeaways I found at the 2013 San Jose conference was the discussion of taint at the security round-table.  At least three of the participants seemed to treat it as a no-brainer and the obvious way to address unlawful behaviour in the ecosystem.  Only ~etotheipi seemed to have some reservations which attempted to voice.  I suspect that as if/when the circulation grows to the point when only well connected operators run full nodes then taint will appear.

Further, I suspect that 'theft' in the standard sense would be only a minor reason why coins get tainted.  It's boring and hard to investigate.  Probably a more useful role of taint would be to assert punitive measures against people who don't comply with other 'lawful' dictates.  Taxes, dues, declarations, etc.  At the aformentioned round-table, ~vess warned specifically about using mixing services so it is a fair bet that if/when taint makes it's appearance it will be applied broadly and retroactively.

[User705]

Is there anywhere transcripts I can look at?  In the matter of taint I think it's an either or issue.  Either taint is something to be handled or nothing is to be done at all.  If it is going to be addressed it will likely fracture bitcoins into some sort of two tiered legal and illegal bitcoins.  It should come to the forefront fairly quickly though in Mr Trendon Shavers case.

[gmaxwell]

At least three of the participants seemed to treat it as a no-brainer and the obvious way to address unlawful behaviour in the ecosystem.

I've heard that after the panel some of the panelists got clue sticked with "FUNGIBLITY! DO YOU SPEAK IT?" and have since reconsidered their positions somewhat.

[tvbcof]

At least three of the participants seemed to treat it as a no-brainer and the obvious way to address unlawful behaviour in the ecosystem.

I've heard that after the panel some of the panelists got clue sticked with "FUNGIBLITY! DO YOU SPEAK IT?" and have since reconsidered their positions somewhat.

Praise Jesus!  That's one of the more heartening things I've heard for a while.

To answer the the previous guys question, someone seems to have put the link up here:

  https://www.youtube.com/watch?v=si-2niFDgtI&list=PLUOP0P68GJ3BGjfqoLLnzAefk3ZzXQtJ7

They were into the taint discussion by the time the film started rolling, and the topic re-appeared throughout the discussion.

[jbreher]

Conspiracy implies something unlawful.

The regulations currently being imposed on bitcoin business and their banking partners is lawful.

So was gassing the Jews and Gypsies at one time and place. What's your point?

I'm not talking about Jews or Gypsies.  I merely point out the the pressure currently being place on virtual currencies are not the product of any conspiracy but of the interpretation of existing regulation and legislation. 

Sorry for the shrill tone - caught me at a weak moment.

I guess _my_ point would be that government does all sorts of legalistic things that are fundamentally immoral. As an example, almost until the instant Federal Reserve Act was passed on Dec 23 1910, all the planning was conspiracy of incredible proportion. If the insidious legislation that passed this abomination from unlawful to the law of the land passed the planning from definitively conspiracy to definitively not conspiracy, then the definition of conspiracy is a poor one.

[tvbcof]

Is there anywhere transcripts I can look at?  In the matter of taint I think it's an either or issue.  Either taint is something to be handled or nothing is to be done at all.  If it is going to be addressed it will likely fracture bitcoins into some sort of two tiered legal and illegal bitcoins.  It should come to the forefront fairly quickly though in Mr Trendon Shavers case.

See my other entry for a youtube link.  I cannot help but comment again on this as it interests me.

But for the moderator who struck me as a bit of a goob, the other participants are sharp people who don't suck at analysis.  I suspect that taint would work extremely well to solve the 'unlawful' behavior that appears in the Bitcoin ecosystem just as they predict.  In fact, I suspect it would work even better than some of them might guess.  This because if even a distinct minority of the userbase started to honor a taint system it would result in a modest devaluation which would bring more participants on-board resulting in more devaluation, etc.  I predict that the snowball effect would completely devalue tainted coins within weeks.  I don't believe that we'd ever see a 'two tiered' system even briefly (but I'm certainly capable of being wrong about this.)

In actual fact what would probably happen is that at the end of my 'weeks' prediction is that enough grief would be experienced and enough danger would be recognized that Bitcoin would become effectively a historic foot-note.  This because it is not a challenge at all to build on Bitcoin's shoulders and lose some of it's deficiencies and baggage along the way.  If this happens for any reason, there seems to me a pretty good chance that Bitcoin's blockchain would form the value core of what emerges.

[ProfMac]

Is there anywhere transcripts I can look at?  In the matter of taint I think it's an either or issue.  Either taint is something to be handled or nothing is to be done at all.  If it is going to be addressed it will likely fracture bitcoins into some sort of two tiered legal and illegal bitcoins.  It should come to the forefront fairly quickly though in Mr Trendon Shavers case.

Developer Maxwell is a strong proponent of mixing to preserve privacy, and of the necessity of fungibility to preserve the health of bitcoin.  He also has a thread titled "I taint rich" that gives some deeper insight into transactions and the current ideas of taint.

I find his arguments persuasive, but I also find myself deeply unhappy about the theft issue.  Before I studied his arguments, I developed the following scenario.  This is a broad brush concept, the devil & his details have not yet been subjugated.

I have tried to find a scenario where miner's make clean coins, theft is reported to the block chain, the original victim gets restitution, bad guys can't benefit from false theft reports, and most coins are clean.

A claim of stolen coins could be made by sending a payment from the stolen address to a well known address 1Stolenwhatever, another payment to the theft receipt address, and change to an address <new good address> with a public comment giving the TXid of the theft.  The payment to the theft receipt address is important so that they have (legal) notice of the theft claim.  A simultaneous transaction would deposit coins into the stolen address.
In the case of coins that are stolen, I would assign (a user defined) value to the stolen inputs to the theft transaction, e.g., "0"
I would then trace all the inputs to the transaction being considered starting from freshly generated bitcoins.  That transaction would have a face value input, and a "tainted value" input.  All outputs from that transaction would carry the weighted value of output.
Please notice that inputs from the compromised address before the theft transaction carry their full value.  
Any transactions in the block with the notice are still "clean."
By choosing coins that have a large number of confirms (a possible wallet source change), it is very unlikely that stolen coins will be propagated quickly, so exposure of innocent bystanders is minimized.

Now, there is a policy decision.

I would force a miner's fee to a tainted transaction.  
Inputs that are 1 transaction after the notice forfeit 10% of the taint value to the miner's fee.  Thus miners have incentive to adopt this policy.
The new address receives half of this miners fee as new coins, so the miner and the victim split this insurance payment.
The taint of the outputs is re-calculated to account for the amount of restitution (not including the miner's fee).

So, in time, the victim gets restitution, miner's are paid for protecting bitcoins, the theft victim gets to report coins as stolen, and old coins are presumably clean and can be spent with confidence.

It might be necessary to reduce the amount of restitution if the victim does not make a prompt report.  For example, we don't want coins reported as stolen 5 years after the theft.


This is not a polished solution, and the numerical amounts need to be adjusted.  I do think it is a good starting point.

[Luckybit]

Is there anywhere transcripts I can look at?  In the matter of taint I think it's an either or issue.  Either taint is something to be handled or nothing is to be done at all.  If it is going to be addressed it will likely fracture bitcoins into some sort of two tiered legal and illegal bitcoins.  It should come to the forefront fairly quickly though in Mr Trendon Shavers case.

Developer Maxwell is a strong proponent of mixing to preserve privacy, and of the necessity of fungibility to preserve the health of bitcoin.  He also has a thread titled "I taint rich" that gives some deeper insight into transactions and the current ideas of taint.

I find his arguments persuasive, but I also find myself deeply unhappy about the theft issue.  Before I studied his arguments, I developed the following scenario.  This is a broad brush concept, the devil & his details have not yet been subjugated.

I have tried to find a scenario where miner's make clean coins, theft is reported to the block chain, the original victim gets restitution, bad guys can't benefit from false theft reports, and most coins are clean.

A claim of stolen coins could be made by sending a payment from the stolen address to a well known address 1Stolenwhatever, another payment to the theft receipt address, and change to an address <new good address> with a public comment giving the TXid of the theft.  The payment to the theft receipt address is important so that they have (legal) notice of the theft claim.  A simultaneous transaction would deposit coins into the stolen address.
In the case of coins that are stolen, I would assign (a user defined) value to the stolen inputs to the theft transaction, e.g., "0"
I would then trace all the inputs to the transaction being considered starting from freshly generated bitcoins.  That transaction would have a face value input, and a "tainted value" input.  All outputs from that transaction would carry the weighted value of output.
Please notice that inputs from the compromised address before the theft transaction carry their full value.  
Any transactions in the block with the notice are still "clean."
By choosing coins that have a large number of confirms (a possible wallet source change), it is very unlikely that stolen coins will be propagated quickly, so exposure of innocent bystanders is minimized.

Now, there is a policy decision.

I would force a miner's fee to a tainted transaction.  
Inputs that are 1 transaction after the notice forfeit 10% of the taint value to the miner's fee.  Thus miners have incentive to adopt this policy.
The new address receives half of this miners fee as new coins, so the miner and the victim split this insurance payment.
The taint of the outputs is re-calculated to account for the amount of restitution (not including the miner's fee).

So, in time, the victim gets restitution, miner's are paid for protecting bitcoins, the theft victim gets to report coins as stolen, and old coins are presumably clean and can be spent with confidence.

It might be necessary to reduce the amount of restitution if the victim does not make a prompt report.  For example, we don't want coins reported as stolen 5 years after the theft.


This is not a polished solution, and the numerical amounts need to be adjusted.  I do think it is a good starting point.

Your ideas are good.

If we have taint capabilities does the community get to vote and decide which coins are and aren't tainted? What if there is a dispute about whether the coins are stolen or not? How can we maintain the decentralized and democratic mechanism of Bitcoin and avoid situations where the political atmosphere in a specific nation results in coins being tainted for political reasons because a prosecutor says so (like in the case of Wikileaks and Paypal).

Additionally what is your opinion on the use of time lock encryption to reduce the possibility of unjustly confiscating coins? If the coins are locked in time then they cannot be confiscated by the government until the time limit is up even if the government were to torture the individual and retrieve the password. This could allow an individual dissident under a certain political environment to lock their coins up and wait for the laws to change in their favor as society becomes more enlightened.

The coins would essentially be locked up in the blockchain itself. Another feature could be setting coins so that out of a wallet the coins can only be spent at a certain rate over a certain period of time. It may even be possible to configure a wallet with features to lock down or do a dead mans switch if certain recurring transactions are not made in a certain sequence.

If the wallet is completely emptied within an hour then the coins are considered stolen if the user defines this scenario as something they would never do. Allow the user to set different parameters for their wallet through scripting and you can make theft more difficult. Additionally the time release functionality could make scams more difficult because the coins cannot be spent until a certain period of time passes or can only be spit at a certain user defined rate. This would not completely prevent scams but it would make the scams more time consuming to pull off and give people more time to uncover the scam.

I still don't see any viable technical solution to dealing with money laundering and terrorist finance possibilities. If Bitcoin is going the anonymous transactions route then an alt coin can experiment with taint and blacklist procedures to find out if it can work or not. A simulation can be conducted where a contest can be held to see if anyone can trace a transaction which has been mixed or to role play a scenario where a team of terrorists are trying to finance something and then let another team roleplay trying to stop them. The result of this role play could be used in an academic research paper to determine whether or not the threat of terrorist finance is a realistic possibility.

If it's a real threat then my opinion is we have to create the tools to mitigate the risks. If it turns out it's not a real threat then it's not a problem. But I don't think we can avoid doing the simulations and research because we have to know what the risks are if we want to regulate cryptocurrencies ourselves through technical means.

[User705]

I'm not sure there should be solutions to taint.  Privacy and irreversibility are major bitcoin points and taint effectively destroyes that.  Also theft is for a lack of a better word a fungible concept.  How far do you take it and who will be the arbiter?  Obviously if I break into your house and torture you until you transfer your BTC that's theft but after it's a slippery slope.  What if I just blackmailed you?  What if the blackmail involves you committing another serious crime or I'm trying to recover something you stole?  What if you give me BTC of your own free will but I don't want to pay back?  What if we have some sort of agreement and I don't do a good enough job? What if that agreement was poorly worded?  Who decides if that's theft or not?

[tvbcof]

I'm not sure there should be solutions to taint.  Privacy and irreversibility are major bitcoin points and taint effectively destroyes that.  Also theft is for a lack of a better word a fungible concept.  How far do you take it and who will be the arbiter?  Obviously if I break into your house and torture you until you transfer your BTC that's theft but after it's a slippery slope.  What if I just blackmailed you?  What if the blackmail involves you committing another serious crime or I'm trying to recover something you stole?  What if you give me BTC of your own free will but I don't want to pay back?  What if we have some sort of agreement and I don't do a good enough job? What if that agreement was poorly worded?  Who decides if that's theft or not?

It ought to be abundantly clear to anyone with modest intellectual ability the intractability of the problem of assessing thefts, frauds, and what-not.  Especially in light of the fact that every highschooler and his little brother will be trying to game the shit out of whatever system is constructed.

This leads me to my statement that 'taint' or 'tarnish' are really not all that much about theft/fraud but more about control and management of the ecosystem.  Bitcoin as currently implemented is cumbersome to harness using the tools of traditional justice systems.  An 'extension' like a tainting system could solve this problem nicely and open up a lot of other interesting opportunities that would make the managers of our current fiat systems green with envy.

[Luckybit]

I'm not sure there should be solutions to taint.  Privacy and irreversibility are major bitcoin points and taint effectively destroyes that.  Also theft is for a lack of a better word a fungible concept.  How far do you take it and who will be the arbiter?  Obviously if I break into your house and torture you until you transfer your BTC that's theft but after it's a slippery slope.  What if I just blackmailed you?  What if the blackmail involves you committing another serious crime or I'm trying to recover something you stole?  What if you give me BTC of your own free will but I don't want to pay back?  What if we have some sort of agreement and I don't do a good enough job? What if that agreement was poorly worded?  Who decides if that's theft or not?

These are difficult problems which will require the best minds of the cryptocurrency community and Bitcointalk to come together.

Coercion resistant blockciain code voting for example is an important idea I propose. If we could figure out how to do that then we could as a community reach consensus and solve all sorts of problems. Bitcoin is nice but it's not resistant to coercion as it is now and it needs to be in order for voting to work. I haven't figured out a way to do it right but I think code voting could be one way provided there is a secure channel to voters to send code sheets. This secure mechanism probably could be their smart phones, where you send a code sheet to each individual smart phone with the KASUMI encryption of the smart phone acting as the secure channel.

Now lets say you want to create a virtual jury? You could randomly select users to create a virtual jury to arbitrate certain situations. The jury could swing on the side of the buyer or the seller. Everyone who participants in the jury could be compensated (perhaps by taking a portion of the coins for that or some other means?). In addition you could set the jury up so that only specific trusted individuals from the community can take part on the jury and it could be pseudo-anonymous. Perhaps let them choose individuals to serve on their jury or just randomly select addreses from the blockchain and treat it as a way to earn Bitcoins.

If we have voting, and juries, then the community can start to regulate and govern itself.  

http://people.eng.unimelb.edu.au/vjteague/PGD.pdf

The solution in that paper relies on a Bulletin Board to act as an authenticated broadcast channel. Maybe we could have the Bulletin Board be the Blockchain?  Perhaps miners could act as the trustees? Theoretically is it possible to have coercion resistant verifiable code voting as a protocol built on top of the blockchain? Yes. I think this is easily possible. The hardest part is making it coercion resistant but the way to do that would probably be to have someone else or something else vote on your behalf but that is the area I don't know what to do about.

Ultimately the Bitcoin community has to figure out how to govern itself or an altcoin is going to come along with this voting and other self governing functionality and have a competitive advantage.  The Bitcoin community cannot accept money laundering if it's supposed to last in the long term, which means the community will have to develop a way to make decisions using the blockchain itself. If that means coin taint or if it means voting, it has to happen sooner or later unless Bitcoin goes anonymous in which case it will potentially lose its competitive advantage or gain one depending on how regulators respond. If regulators don't accept anonymous transactions due to money laundering then Bitcoin loses legitimacy.

[Severian]

"... offering virtual currencies must comply with ... regulatory requirements, and if they do so, they have nothing to fear from Treasury. "
JENNIFER SHASKY CALVERY, DIRECTOR , FINANCIAL CRIMES ENFORCEMENT NETWORK
http://www.fincen.gov/news_room/speech/pdf/20130613.pdf

"Comply or suffer our wrath!" is a form of government, I suppose.

Through all of human history, dictatorship has worked up until now because of centralized economic control of societies. Along with P2P networks and strong encryption in general, I have hopes that Bitcoin is another meaningful obstacle to those personalities attracted to State offices that appear unable to get their jollies unless they're controlling other peoples' activities and fates.

Hell, Bitcoin has already changed the world. I don't see that stopping anytime soon no matter what arbitrary rules are put in place by our various officials. I just wish Chuck Schumer would get on TV and scream about Bitcoin again. That helped drive the price up back then.