Honey pot--or not? Patricia Sexton explores the link between trans-national crime in the Pacific and crypto-currency.

• Author: Sexton, Patricia

Ever since the 2009 launch of the world's first crypto-currency, supporters and detractors have been at odds over the implications of this new digital asset class. While supporters hail crypto and the blockchain technology on which it is built as a necessary revolution in financial security and privacy, detractors claim the opposite, arguing that privacy itself creates a threat to national security. Governments are wary. With the advent of crypto-currencies, the creation and management of money supply--one of the chief functions of any government--is decentralised. Governments are sidestepped, as are third-party regulatory intermediaries. In their stead, anonymous peer-to-peer transfers of capital are taking place worldwide. With global monthly transacting volume in excess of a trillion dollars, (1) crypto-currency may or may not bode ill as a disruptive technology. But few disagree that it is here to stay.

Although crypto-currencies have wide geographic reach--transactions take place in 154 countries--New Zealand lags the market, ranking 63rd in depth of adoption and integration. While data for Oceania is bundled with other Asian regions, muddying the analytical waters, the collective region makes up more than a tenth of global market capitalisation. It is expected that some of this transacting will be taking place in the Pacific, where internet penetration rates are rising. The Pacific region is highlighted by multilateral bodies as a medium for trans-national organised crime with a specific risk profile for the emerging threat of cyber-crime. Crypto-currency crime falls under the auspices of cyber-crime, providing the cryptographic transactional layering to conceal illicit activity. Without global regulatory oversight, crypto-currency provides a potential vehicle for trans-national crime in the form of a semi-anonymous payment mechanism between bad actors.

Developed just six weeks after Lehman Brothers declared bankruptcy in 2008, Bitcoin was, in part, a response to the global financial crisis. Banks, it was said at the time, could not be trusted to maintain sufficient reserve ratios to preserve stability in the global financial ecosystem. Taking central banks, the government and third-party intermediaries out of facilitating the process of transacting money, Bitcoin was lauded by some as the overhaul the financial sector needed. (2) Though Bitcoin was the first, and is still the most widely known, it is merely one of thousands of crypto-currencies in virtual circulation globally.

Crypto-currency is simply a digital store of value. The technology on which cryptos rest provides a publicly viewable ledger that records each transaction. This record, based on the way the technology is built, is effectively inalterable, a valuable feature for law enforcement. (3) The ledger is called the blockchain, which is a digital data-sharing mechanism that is both open-source and decentralised. The ledger is distributed among all users worldwide, and it functions as a peer-to-peer network, similar to email. Each block in the chain--in the publicly viewable ledger--is a segment of digitised data. In the case of crypto-currencies, these data blocks are the records of transfers of value between parties. (4)

'Mining' of crypto-currency 'coins', such as Bitcoin, is a complex and resource-intensive algorithmic process that uses computing power to hunt for a matching formula. Mining expands money supply in a drip-feed; as more coins are discovered, the formula to find them becomes ever more complex. This also has the effect of capping money supply. The coin mining process is likened to the mining of gold: at a certain point in a mining operation, the resources required to find the next incremental ounce of gold is no longer worthwhile. This auto-regulation by market forces may serve to allay government concerns around crypto-currency supply that is mathematically incapable of running rampant.

Crypto-currencies are transacted as peer-to-peer exchanges or on trading platforms and stored in digital wallets. The platforms and wallets are not unlike fiat (government-backed currency) exchange platforms and wallets; value is transferred between parties and stored by the end-user. But, unlike fiat transactions that take place via bank trading floors or online payments systems such as PayPal, peer-to-peer crypto-currency trading can take place with varying levels of anonymity. (5) This anonymity feature, along with the decentralised nature of unregulated and geographically dispersed users of crypto, are key points in governments' reluctance to adopt and integrate this technology. And yet the ultimate level of anonymity in currency transacting is with cash. Cash has no public ledger of global transactions and is nearly impossible to trace, yet it is backed as legal tender by governments.

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