Security Notes: Shadow Transactions Revisited

Gideon Samid • Gideon@AGSgo.com

It looked strange some years ago when a known underworld figure became conspicuously inactive transaction-wise, offering the FBI very little to investigate. This oddity, along with several others, continued for some time until the mystery was solved. It turned out that his trade was going on vigorously but via “undercurrency”—that is, “club coupons” that replaced U.S. dollars at a known exchange value. The volume of this shadow business world was unknown at the time, but it was believed that the tedium of bookkeeping, along with the hassle of managing and trusting those private vouchers, would limit the extent of the phenomenon.

This is reminiscent of the worries of the music industry when consumers tape-recorded songs from the radio instead of buying the tapes. Music executives argued this was too tedious and the quality below par, so the scope of the practice would always be negligible. Until technology sneaked up on them like a thief in the night: Napster and P2P file sharing exploded so fast that the economics of the entire industry became shaky.

It’s the same here: Digital-currency protocols are publicly exposed. Anyone, for example, can build a shadow Bitcoin platform. Our recently awarded digital-currency patent (USPTO No. 8,229,859) attracts consideration from serious bankers, but it’s also studied by what may be called “untoward” interests. Until now criminals, terrorists, and money launderers of all kinds used cryptography to hide their financial crimes and present false accounting sheets, but they had to resort to the national transactional framework (checks, wires, cards) to move money. But now the emerging digital-money technology allows them not just to hide their books, but also to conceal their safes and their cash-registers and similarly cloak their money flow. The new technologies offer seamless growth, well-lubricated and secure operations, and effective solutions to multifaceted international and local value transfer.

Currency is a matter of trust. The one-phrase job description for the Federal Reserve is: “Safeguard the trust in the US dollar!” To do that, the central bank must ensure that the dollar surfs on the waves of fast-paced, modern technology.

“The new hundred-dollar bill is packed with technology,” I was told by a minting specialist, “All sorts of hidden fibers tucked in!” It sounded to me like a candlestick specialist bragging about an innovative candle wax while Edison’s light bulb was already on the patent books.

Digital money opens a new world for the paying public. Carry all your wealth on your phone, secured by a mechanism called “digital travelers’ checks.” Send payment as an e-mail attachment or as an SMS message. Pay cash-like micropayments. And the list goes on. Even an “above-ground” mint located outside the reach of U.S. law enforcement will grow virally if the dollar per se doesn’t keep up with technology.

In my estimation, the publicly exposed digital-money technologies are being implemented for ill purposes, effectively serving the people we should be very eager to stop. In recent years, the U.S. government applied unprecedented pressure on world banks to comply with harsh dictates designed to weed out ugly money. It was effective. Even historic hideouts like Switzerland have yielded to the U.S. Treasury. But before we gloat, we better be mindful that the powerful forces that we banished from ordinary banking have regrouped and now exploit new technology to carry out asset management and exercise the enormous power that wealth offers.

More and more registered assets (e.g., real estate) are owned by artificial entities (e.g., LLCs), allowing for a silent shift of equity within the owner entity and reflecting payments that take place with no trace in our banking system. Complicated deals even with only a single international component and hinged on a non-complying regime effectively hide the reality of massive wealth distribution. In prior years, it was expensive artwork and swallowed diamonds that were needed to hide money movement, and hence the extent of the subterfuge was limited. But today, technology makes it easy, fast, and “safe” to move wealth in a cryptographic dialogue.

It was the pornographic industry that was the first to recognize the promise of IP video technology. It funded startups that were shunned elsewhere. The story repeats itself with financial technology. Will we ever learn?

The captains of our economic and monetary ship too often have to be dragged into fast-paced technology. Let this short piece be a tiny part of this dragging.