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Author Topic: Remote audit for a secret exchange  (Read 2832 times)
Nefario (OP)
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January 19, 2011, 07:37:20 AM
 #1

I'm not sure if this is the best place to put this.

How would you conduct an audit ( so that customers can be sure of the existence of stored goods) for an exchange where the identity, and location of said exchange must remain secret?

As I have mentioned before I am exchanging yuan for bitcoin, I also will hold yuan for all who wish ( those who wish to hold yuan but not take physical posetion for what ever reason , while also keeping yuan reserves liquid). Any ideas on how I may conduct an audit to prove I  have said reserves to my customers without revealing my identity or location?

All I can think of is a live audit with a webcam wearing a mask while having voices muted.

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January 19, 2011, 10:09:31 AM
 #2

An audit conducted by a trusted third party might be the way to go. The third party would announce the results of the audit. Only the auditor would know the location of the exchange.
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January 19, 2011, 10:50:59 AM
 #3

An audit conducted by a trusted third party might be the way to go. The third party would announce the results of the audit. Only the auditor would know the location of the exchange.

A third party just moves the trust from one place to an other.  It doesn't solve anything.

PS.  I'm wrong.  It actually improves the situation a bit.  But it's far from perfect.  And it adds costs : you have to pay the auditor.  I'm not sure it always worth it.

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January 19, 2011, 10:58:34 AM
 #4

You want to demonstrate that you have paper money, is that all an audit would do? Seems like a picture with a custom message should suffice.

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January 19, 2011, 11:02:55 AM
 #5

Digitally signing a picture that shows the serial numbers of the bills AND the fingerprint of your public key would be a relatively solid evidence that you have the money.
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January 19, 2011, 11:04:09 AM
 #6

Digitally signing a picture that shows the serial numbers of the bills AND the fingerprint of your public key would be a relatively solid evidence that you have the money.

You're kidding, right ?

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January 19, 2011, 11:08:38 AM
 #7

I'm not kidding, but maybe I wasn't clear: I mean a photograph of the bills, not a picture drawn in Paint.

The picture shows the bills and the serial numbers, so it proves these bills exist.
The picture is digitally signed, and the fingerprint of the key is in the picture, so it proves that the owner of the key has the bills.
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January 19, 2011, 11:14:29 AM
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so it proves that the owner of the key has the bills.
had them, when he shot the pics.

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January 19, 2011, 11:16:00 AM
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I don't see how you could do better, with physical goods, without having a trusted third party to hold the goods.
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January 19, 2011, 11:16:53 AM
 #10

so it proves that the owner of the key has the bills.
had them, when he shot the pics.

Could any audit do better? Audits don't tell the future afaik.

The take-a-picture-audit is cheap enough it could be done daily, or after every cash transaction.

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January 19, 2011, 11:29:27 AM
 #11

See what they do with gold.  An ETF manager receives a phone call from an auditor :

"
- Hi, I want to make an appointement for an audit.  I will come with my team tomorow morning.
- Ok, no problem.
"

Then the ETF manager calls his buddy and says that he ugently need to borrow one ton of gold for one day.  If it's too soon, the guy calls the auditor and says :

"
- Oh I'm sorry, we actually have some difficulties right now, can we schedule this for next week instead ?
- Well, yes I guess we can.  But that's the last time you delay this, ok ?
- sure.  I promess.
"

As long as an auditor doesn't have the keys of the companies he's supposed to audit, I'll consider he's useless.

Nefario (OP)
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January 19, 2011, 01:48:50 PM
 #12

Yes the idea is to prove that you have possetion of the physical goods (cash,gold,chocolate etc.) in the amounts that you are supposed to(or that you have said you have).

Bringing in an outside auditer does help a little but it also shifts the required trust, and raises the possibility of the secret location being discovered. It is also not cheap, I am not paying to fly someone here to audit 500yuan.

As was mentioned by grondilu, any audit seems to be only a snapshot, that at that time the goods were there( but no guarantee of before or after ), and as was also mentioned by FreeMoney that an audit of any other company cannot do any better.

The signed photo ( maybe video for more detail and information ) has merit, but as was mentioned there must be surprise audits otherwise the one being audited can prepare for them.

Audits on demand, such that once certain conditions are met ( the person being audited is in the location with the goods and is online ) then once an audit notice is given it must be fulfilled within say 30 minutes. Actually on demand audits ( there must be limits, it would not be usefull for anyone to initiate an audit demand or as often as they want) are a usefull way to prove the possetion of said goods at any time.

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January 19, 2011, 01:55:39 PM
 #13

Funny thing is :  Isn't that possible, with modern technology, to give a proof of the presence of some asset in real time ?

I mean for instance with the storage of gold, isn't it possible to have some kind of a web cam, continuously filming the gold stock?  I know there should be a way to prove that the shooting is real (not recorded or something), but come on, there is certainly some technical way to prove that the shooting is actually the real stuff.

I'm pretty sure that, with a little bit of ingenuosity, one can find something similar for other kinds of assets, even non material ones.


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January 19, 2011, 06:49:07 PM
 #14

One could have a webcam aimed at the stock, on top of a scale with a visible display, next to a TV set to a 24 hour news channel. A surprise audit would consist of withdrawing or depositing some stock and watching the value on the scale change. Of course, such a scheme would only work if we only counted the mass of the stock. We obviously don't for paper money.

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Nefario (OP)
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January 20, 2011, 07:50:04 AM
 #15


Sorry to be a bearer of bad news but this idea is a non starter.

Why would anyone trust someone in china to hold their money? I do not trust my local UK bank much for that matter. Where are the guarantees that even if you are an upstanding gentleman and a paragon of virtue, someone simply does not break in and takes the money? Where are the guarantees that some government stoodge does not show up at your place and say "I am from government, I am here to help."? I can list hundreds of hypothetical adverse scenarios all which would have some fairly significant probability.

Moreover, in a purely hypothetical case that you at one point disappear with all the money, particularly being all that anonymous and in unknown location. What recourse your depositors would have? Who would they sue and in which court of law? Or where should they show up to shoot some kneecaps?

One surety I have is that when my BTC's are in my wallet.dat heavily encrypted and distributed for storage in multiply places they are more or less safe and even then there are some risks. But why any reasonable person would swap it on some yuans held by some guy in china?

As an Information Security professional I will tell you now that there is no need to do sophisticated risk analysis, the answer is obvious: no way any sane person would prefer "yuans held for him/her by some guy in china" to heavily encrypted and backuped wallet.dat in own pocket. As simple as that.

I suggest you to think about another business plan. Sorry again, But it would be a disservice to tell you anything else.

P.S. Amnesia might be a very expensive illness in bitcoin world ;-)


I do not understand what you mean by "Amnesia might be a very expensive illness in bitcoin world", could you explain, I am  sorry I missed the joke.

But for your post, I agree with almost everything you say, except....

To prevent government people (or anyone else) from just coming and taking everything the exchange itself is a secret. No one except me knows where it is, and no one knows who I am except for my online persona (which, if bitcoin becomes successful will probably be worth more than my real identity). This is the whole point of it being in a secret location.

For bitcoin to succeed people must be able to enter and exit the bitcoin economy by being able to exchange currency. This means that there must be reserves of these currencies that someone doing the exchange must have in order to keep liquidity. So exchangers must have reserves, enough to cover the needed exchanges.

If bitcoin becomes successful it will quickly be banned by governments around the world, in the EU and US money laundering and terrorism laws will be used to take all assets(in other countries they don't even need that excuse). Anyone doing exchange openly will be put in prison and have everything taken from them. This is more obvious for someone like me, where I am; but it also applies to you where you are, you just don't realise it yet (some do).

And you are also right about what is to stop me from just taking these reserves  and leaving. I don't want to hold a lot of cash, or btc for other people, this is a huge responsibility. But until there are enough people buying and selling btc for yuan I need to provide some liquidity so new people can start using bitcoins. The more people that use bitcoins the more my bitcoins are worth.

What is to stop me? Incentive to make more btc, I will make much more operating an exchange and keeping the spread than a once off theft.

What would happen if I left with all the money and btc? Those who have saved or invested would lose it, very simple. Buyer beware. However this is not all that different from what happens in the real world, how many people have lost money from big companies defrauding them? And how many of those responsible have been put in prison or even fined.

The answer is simple, but more obvious, buyer beware, the only difference is there is no illusion of security or protection here.

Yes you can be sure of btc when they are in your wallet.dat, so keep them there, it is a bad idea to put all your money into only one thing. I have only been able to accept small amounts, and have had all my reserves bought for the next month or two (that is, new reserves that I introduce, a kind of futures contract). Keep things small so if something bad does happen you don't lose a lot.

Currently I have enough reserves.


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grondilu
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January 20, 2011, 12:37:10 PM
 #16

I was referring to having wallet encrypted, with obviously some long passphrase, while amnesia is an illness where a person loses his memory, thus probably forgetting the passwords to his encrypted fat wallet, hence it is an expensive illness.

There has to be a solution to that.  I have one in mind, but I'm not sure you want to hear it.

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January 20, 2011, 02:18:45 PM
 #17

I could understand why you would want to run a secretive exchange especially in a country like China.

If I were in a bad situation I would see the risk of an anonymous internet personality as far lower than a blatantly oppressive government. I would probably test the individual first, by giving them small amounts and seeing what happens. Also if wanted to trade large amounts I would not trust only one broker.

From my side is anonymity was required I would also do everything within my power to ensure that my identity was not known to the trader.

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January 20, 2011, 06:21:12 PM
 #18

I think the secret exchange might send out password tokens to its clients that generate unique passwords each time.
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January 20, 2011, 07:17:39 PM
 #19

I think what you really want is trust, and trust is something you build over time.  Any audit can be faked, and any auditor corrupted.  You need time to prove you won't disappear and you're accounting is valid.  It's a continuous process that never ends.

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January 21, 2011, 01:30:57 AM
 #20

I think the secret exchange might send out password tokens to its clients that generate unique passwords each time.

No need for passwords, use keys for authentication and authorisation.

dwdollar: Yes it's trust, but I think that having some kind of audit can build trust, for good reasons.

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