Court in China approves Blockchain as a source of evidence

By Christine Duhaime | July 1st, 2018

A Court in China has ruled that Blockchain technology can be used to provide evidence in litigation in a first-of-its-kind decision. The litigation involved the ownership of intellectual property, where a claim of IP was recorded on the Blockchain.

The Hangzhou Court of the Internet in China’s Zhejiang Province ruled that information stored on the Blockchain was “legally valid” and moreover, proved ownership of copyright. In that case, the claimant had uploaded the notation of a copyright claim on a third party Blockchain service and used screen shots of the Blockchain and the digital currency transactions to make its case.

Because the Blockchain acts as an unalterable ledger of information, the record of the micro financial transaction that created the record on the Blockchain was definite for evidentiary purposes.

The Canadian company, Cryptocopyright, was the first in the world to use Blockchain technology and smart contracts, in 2014, to operationalize a system to record legal interests such as copyright and IP claims, on a Blockchain. It filed for a patent in 2014 in the US.

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Granny did it –> millions allegedly seized from banks, PayPal and in Bitcoin & IOTA in European drug bust

By Christine Duhaime | June 30th, 2018

According to a statement by Europol, police in Austria and Spain seized €4.5 million in Bitcoin and IOTA as part of a bust of a transnational criminal organization that manufactured and trafficked LSD and laundered the proceeds of crime. The story is a little weird.

How the police seized the digital currencies is unknown but according to the official news release, the math doesn’t quite add up. Europol stated that €5.5 million worth of Bitcoin was seized and €137,000 worth of IOTA was seized, which is more than the €4.5 million total that Europol says was seized. It also is unclear how digital currency was seized — from an exchange; from cold storage; from an app; was there a mareva injunction?

It appears that perhaps the TCO also dealt in fentanyl because the statement says that drugs acquired from China that are causing an opiod crisis in the US were seized in Spain and sold on the dark net. So that means fentanyl yet there is no mention fentanyl, which is odd. The accompanying video from the bust, below, clearly shows fentanyl pills (the blue ones).

According to the statement, the TCO operated on the dark net since 2012, accepting PayPal, using banks and also accepting Bitcoin since then. The investigation was launched in 2015, which means that it took Europol years to trace on the Blockchain, which seems unlikely. Tracing does not take years on the Blockchain, nor does ascertaining the identity of transactors.

As part of the bust, the police seized 10 luxury vehicles, €1.6 million in an Austrian bank account and arrested eight people.

The bust seems to be a bit of anti-Bitcoin hype because in reality, €12 million was seized; less than 1/3 of which was in digital currencies, which makes it not much of a story about the seizure of Bitcoin from a TCO. It seems to be more of a story about how banks unwittingly banked a TCO trafficking globally in fentanyl, including shipping to the US, since 2012.

In contrast to the Europol statement, this report says that the Spanish police are alleging a Granny ran the global trafficking operation and was not only a Bitcoin and IOTA money laundering expert, but an expert in running a business on the dark net.

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35 darknet drug traffickers arrested in the US; $20 million in Bitcoin seized

By Christine Duhaime | June 26th, 2018

Over 35 people were arrested in a US-wide sweep by the US DOJ, DEA, US Secret Service, ICE, HSI and the FBI agents for selling illegal drugs over the darknet and laundering the proceeds of crime using, inter alia, Bitcoin.

The operation involved agents posing as digital currency exchanges to obtain personal information of drug traffickers online.

According to the DOJ, during the year long operation, law enforcement agents disguised themselves as money launderers on darknet marketplaces, including Silk Road 2, the Canadian-based AlphaBay, Hansa and Dream offering to act as a digital currency exchange by exchanging Bitcoin for US dollars in order to learn the identity and addresses of the drug traffickers on the darknet sites.

As part of the arrests, police seized guns, large quantities of illegal drugs including fentanyl, grenades, Bitcoin mining machines, pill presses, computers and gold. They also seized US$3.6 million and US$20 million worth of Bitcoin.

The US Secret Service called money laundering with digital currencies one of the largest threats to the US financial system.

The  operation, which culminated in four weeks of more than 100 enforcement actions around the US, resulted in the following:

  • Arrests of more than 35 darknet vendors who engaged in tens of thousands of sales of illicit goods;
  • Execution of 70 search warrants, resulting in the seizure of massive amounts of illegal narcotics, including 333 bottles of liquid synthetic opioids, over 100,000 tramadol pills, 100 grams of fentanyl, more than 24 kilograms of Xanax, and additional seizures of Oxycodone, MDMA, cocaine, LSD, marijuana, and a psychedelic mushroom grow found in a residence;
  • Seizure of more than 100 firearms, including handguns, assault rifles, and a grenade launcher;
  • Seizure of five vehicles that were purchased with illicit proceeds and/or used to facilitate criminal activity;
  • Seizure of more than $3.6 million in U.S. currency and gold bars;
  • Seizure of nearly 2,000 Bitcoins and other cryptocurrencies, with an approximate value of more than $20 million.
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Darknet drug trafficker with over $1 million in Bitcoin and Litecoin sentenced in US

By Christine Duhaime | June 15th, 2018

25-year-old Matthew Yensan, from North Carolina, was sentenced to 78 months incarceration today for producing Xanax and Alprazolam, selling them on the darknet and laundering the proceeds of crime using, inter alia, Bitcoin and Litecoin.

According to the indictment, Yensan had a Glock 27 .40, a Smith & Wesson Revolver .357, a Colt King Cobra Revolver .357, an MP-5.  All the guns were loaded. Agents also located a Trezor with 182 Bitcoin and two other cold wallets. Under his bed, agents found US$300,000 in cash.

After Yensan was indicted, DEA agents later located additional digital currencies – about double the original amount.

Yensan had posted a note on Facebook that he was thinking of using Bitstamp as his digital currency exchange, which is an unusual thing to do if one is a drug trafficker.

Apparently, the government has not located additional Bitcoin Cash and Ether held by Yensan.

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Today’s Blockchain News from Asia

By Christine Duhaime | June 1st, 2018

업비트 압수수색: 가상화폐 거래소의 운영시스템 과 정부의 모호한 태도

By Eunji Lee

지난 5월 10일 서울남부지검 금융조사2부는 업계 1위로 알려진 업비트를 거래소 운영상의 불법 등 혐의로 압수수색을 실시해 업계에 관련된 많은 이들에게 혼란을 주었다.

검찰은 이틀동안 수사관을 보내 업비트의 컴퓨터 하드디스크와 회계 장부 등을 확보했다. 검찰수색의 이유는 업비트가 실제로 갖고 있지 않은 가상화폐를 가진 것터럼 전산시스템에 입력해 고객을 속인 것으로 보고 있었다. 이 압수수색에 앞서 금융위원회와 금융정보분석원 (FIU)의 합동 점검 결과에서 수상한 자금 이동이 포착된 가상화폐 업체를 중심으로 수사에 착수했다.  검찰에 따르면 업비트는 거래소 법인 계좌에 들어있는 고객 자금을 대표자나 임원 명의 계좌로 이체하는 식으로 고객 돈을 빼돌린 혐의를 받고 있다. 또 한, 가상화폐를 실제로 보유하고 있지 않으면서 전산상으로는 보유해 투자자를 속였다는 사기혐의도 적용된 것으로 알려졌다.

거래소에 대한 압수수색이 실시되면서 수사기관과 업비트의 대표 이석우의 악연이 다시 수면 위로 떠올랐다. 2014년, 검찰이 카카오톡을 감청해왔다는 사실이 알려지며 사회적으로 논란을 일었다. 이에 맞서 이석우 당시 대표는 “앞으로 검찰의 감청영장에 불응하겠다”는 초강수를 두면서 사이가 악화돼었다. 2014년 12월 경찰은 이 대표를 전격 소환해, 이 대표가 청소년성보호법을 위반했다는 혐의를 주장했다. 당시 이 대표가 카카오그룹을 통해 유포된 아동*청소년 이용 음란물에 대한 사전 조치를 소홀히 했다는 이유였다. 업계에서는 이 대표에 대한 일종의 보복성 수사라는 소문이 돌았다. 검찰과 사태가 걷잡을 수 없이 악화되자 그는 2015년 11월 돌연 카카오를 떠났었고, 약 2 년후 지난 12월에 업비트를 운영하는 두나무 대표로 다시 복귀했다. 하지만 컴백 반년만에 검찰의 압수수색을 받는 등 수사기관과 악연이 이어지는듯 하다.

업비트는 하루 거래대금이 1000억원대에 달하는 국내 최대 가상화폐 거래소다. 코인마켓캡에 따르면 업비트의 하루 거래량은 총 20억 달러 (2조 130억원)를 상회하는 규모다. 하지만 업비트는 개인이나 다른 거래소로 가상화폐를 전송할 수 있는 전자 지갑을 개설해주지 않아 가상화폐가 없는 것이 아니냐는 의심이 제기되 왔다. 현재 업비트에서 거래되는 137개의 암호화폐 중 46개가 전자지갑을 지원하지 않는다. 개별 전자지갑을 없기 때문에 암호화폐 거래 내용에 대해 거래소가 알려준 내용 외 따로확인할 길이 없다. 이에 대해 업비트 측은 “전자지갑 수가 가상화폐 수에 비해 적다는 것은 예전 이야기며 전자지갑 숫자도 종전보다 증가했다”고 강조했다.

암호화폐 거래소 업비트에 대한 압수수색 소식이 알려진 지난 11일 비트코인, 이더리움 등 대부분의 암호화폐 시세는 급락했다. 하락을 뜻하는 파란색이 가득한 시세창을 두고 일부 투자자들은 “다른 나라에서 한국 정부에 소송을 걸어야 하는 거 아니냐”는 반응을 보였다. 우리 정부의 모호함이 논란을 키우고 있기 때문이다.

中国国家主席习近平“拥抱”区块链

By Tongtong Xu

在5月28日举行的中国科学院第十九次院士大会、中国工程院第十四次院士大会上的讲话中,中国国家主席习近平肯定了中国目前在科技事业方面的进步。在提及人工智能以及量子信息、移动通信、物联网等为代表的新一代信息技术时,区块链,作为代表之一成为了讲话内容。

其实早在2016年中国国务院发布的“十三五”国家信息计划中, 区块链就被提及成为驱动网络空间演化进步的重要技术。国务院同时也表达了通过加强区块链技术的基础研发和前沿布局,建立先发主导优势的愿景。

对比2017年北京叫停国内的虚拟货币交易,并且在9月正式禁止销售新型的数字代币,同时也禁止了新ICO的发行。原本在这一系列的表态之后,比特币的价格以及中国地区区块链的应用都受到了一定短期冲击,然而习近平此次讲话对区块链技术表达出来的期望和赞许让区块链在中国的前景十分明朗。

事实上,不论政府的态度如何,区块链技术在中国的发展一直未曾停止。

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Canada doing a lot worse combatting money laundering and drug trafficking according to 2018 US INCSR report

By Christine Duhaime | March 31st, 2018

Canada once again a “Major Money Laundering” country

The 2018 “International Narcotics Control Strategy Report” (INCSR) published in March 2018 by the U.S. Department of State identifies Canada once again as a “major money laundering country” along with a host of risky countries for financial crime, and is generally doing a lot worse combatting money laundering and drug trafficking.

A “major money laundering country” is one whose banks and financial institutions allow financial transactions involving significant amounts of proceeds of crime. For several years in a row, Canada has been identified as such.

Canada has also been identified as a “major precursor country” which means it is a leading country that produces precursors or essential chemicals used in the production of illicit narcotics, such as fentanyl. Other countries include Columbia, Nigeria, China, Afghanistan and Mexico.

Key Findings

Volume 1 - The key findings of Volume 1 on drug trafficking vis a vis Canada are that:

  • Canada is a primary source country of high-potency marijuana and MDMA to the United States.
  • Canada exports illegally, synthetic opioids to the United States.
  • Canada exports, illegally, synthetic drugs and amphetamine-type stimulants to Asia and Australia.
  • Cannabis destined for the US is produced mostly in British Columbia.
  • Methamphetamine continues to be produced in large quantities in Canada.
  • Canada increasingly illegally imports fentanyl from China via mail courier.
  • Recent seizures of multi-kilogram quantities of illegal fentanyl and carfentanil in powder form indicate these substances are increasingly manufactured illegally within Canada.

Volume 2 - The key findings in respect of money laundering  in Volume 2 for Canada are different in 2018, compared to 2017, and indicate a much greater global concern for money laundering in Canada.

The Report says, for example:

  • Foreign-generated proceeds of crime are laundered in Canada.
  • Professional, third-party money laundering is a key concern – this often includes accountants and lawyers.
  • Transnational organized crime groups and professional money launderers are key threat actors.
  • Canada does not do enough on enforcement and prosecution.
  • Laundering methods in Canada primarily involve cash smuggling, money services businesses, casinos, real estate, wire transfers, offshore companies, hawalas, credit cards and digital currencies, like Bitcoin.
  • The illicit drug market is the largest criminal market in Canada.
  • Transnational organized crime groups represent the most threatening and sophisticated actors.
  • Experts have noted that when the magnitude of money laundering risks in Canada is taken into account, the prosecution rate is low.
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US Govt Issues Sanctions Against Venezuela’s ICO – the Petro Coin

By Christine Duhaime | March 25th, 2018

Executive Order 

President Trump issued an Executive Order imposing economic sanction on the initial coin offering (“ICO“) by the Government of Venezuela, called the Petro Coin (the “Petro ICO“).

The Executive Order makes it illegal to engage in transactions, dealings or financings in connection with the Petro ICO, which would include buying, selling, trading, marketing, listing or facilitating, in any way, the Petro ICO by any US person or any person in the US.

It is also illegal to attempt to violate the Petro ICO sanctions, as well as to conspire to violate the sanctions or to avoid or evade them (sanctions avoidance that occurs, for example, when money is moved through a secondary country, often Dubai, to hide its illegal origin).

Continue reading

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Bitcoin and taxes in Canada – do you have to pay?

By Christine Duhaime | March 19th, 2018

As tax time approaches, purchasers, sellers, traders and holders of digital currencies are wondering whether taxes are payable on digital currencies in Canada. The answer is that it depends.

While the Income Tax Act governs in respect of taxes payable in the digital currency space, the issue of taxes payable on digital currencies in Canada is anything but clear because different government agencies are not on the same page on the legal nature of digital currencies.

Bank of Canada

First of all, the Bank of Canada has apparently said since 2013, that digital currencies are not money, currencies, assets or a securities and earlier this year, that digital currency trading is gambling.

And that’s what may cause confusion because in Canada, gambling winnings are not taxable. The exception is if the gambling activities are professional or are undertaken as a business. Professional gamblers, for example, must pay taxes on their winnings whereas winnings from occasional gambling activities are not taxable.

Continue reading

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First unexplained wealth orders take effect in the UK against a non-UK person

By Christine Duhaime | March 18th, 2018

The National Crime Agency in the UK has been granted the first set of Unexplained Wealth Orders (“UWO”) under the Criminal Finances Act, by the UK High Court requiring that an unnamed foreign national from Asia provide a written statement explaining how they obtained sufficient wealth to purchase property. The foreign national subject to the first UWO is a politician and a politically exposed person who owns mansions and office property worth over US$30 million in London. Under the UWO, the owner is prohibited from transferring the properties.

The Criminal Finances Act came into force at the end of January, 2018, following evidence that the UK was being used by corrupt foreign nationals or PEPs to purchase expensive real estate with proceeds of crime or corruption. Several research studies showed that over US$6 billion of proceeds of foreign corruption is parked in London real estate.

Broad application

UWOs are available for property over £50,000 in two cases: (a) where there are reasonable grounds to suspect that the person, or a person connected to them, is or has been involved in the commission of a serious criminal offence in the UK or anywhere else in the world; or (b) where the property is held by a PEP.

The application of the legislation is quite broad and can capture anyone connected to the person targeted including business partners. Essentially, if a person is suspected of having property they clearly could not afford based on their salary or reported income, or taxes paid, or if they are connected to such a person as a business partner, shareholder, family member or otherwise connected, they could be subject to a UWO.

Interim freezing orders

In terms of disclosure, UWOs require proof of legitimate sources of wealth and the disclosure of owners, including beneficial owners, shareholders, trustees, etc. or the property or asset subject to the UWO. If a person subject to a UWO refuses to comply with the disclosure of information to prove the legitimacy of wealth, their property is subject to forfeiture by the government. UWOs are issued with interim freezing orders over the property to prevent a situation where wealth can’t be proven and the person attempts to sell the property.

It is likely that assets held by people from places like Iran, Nigeria and China will be the most difficult to prove were paid for with funds obtained lawfully. With respect to Iran, that is because Iranians as a matter of course, violate sanctions law by funnelling money illegally through Dubai to hide its origin and move it to places like London and Vancouver. Sanctions avoidance is a serious criminal offence. With respect to China or Nigeria, while there is no issue of sanctions, often their foreign nationals have acquired wealth from corruption.

Any property, shares or money from anywhere

It is important to note that UWOs have an international reach: a person does not need to be a UK resident, and the property can be located outside the UK – ergo, you can be chilling in Canada with property in Canada, or in a Canadian bank, or be holding shares of a Canadian company and be subject to a UWO if you have unexplained wealth.

Also, a UWO can be made in respect of any “property” worth more than £50,000 – not just real estate. “Property” is defined broadly under the Proceeds of Crime Act 2002, to include property wherever situated, including money, bank accounts, cars, boats, shares, real property and other intangible or incorporeal property.

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How the US Alien Tort Statute might expose Canadian financial institutions

By Christine Duhaime | March 18th, 2018

The US Supreme Court this term is ruling on a case that may impact Canadian banks and other financial institutions. The case, Jesner v. Arab Bank, involves over 6,000 petitioners from Israel who were victims of terrorism in the Middle East who filed a tort claim against a corporation in New York, the Arab Bank, under the Alien Tort Statute, 28 U.S.C. 1350 (“ATS“). The ATS allows a civil action by a foreign national in the US for a tort committed in violation of the law of nations or a US treaty. The US Supreme Court has interpreted the ATS to permit litigation of a narrow set of common law actions derived from the law of nations available for alleged violations of international law norms that are specific, universal and obligatory.

The petitioners allege that the Arab Bank violated international law by financing (e.g., banking) and facilitating (e.g., exchanging foreign currency and wiring funds) the activities of a terrorist organization that committed the terrorist attacks in the Middle East that caused their injuries. Although the victims are in another country and the torts occurred in another country, the nexus to the US is that the Arab Bank had a branch in New York (as well as a correspondent relationship), and wired funds through the US.

The case is important and being closely followed because the US Supreme Court is being asked to determine whether a corporation can be held liable under the ATS. The petitioners allege that the Arab Bank violated the law of nations insofar as it financed terrorism, and also insofar as it directly and indirectly engaged in genocide and crimes against humanity as a result of banking terrorist organizations and wiring  funds for them. In their view, the ATS can be used to hold foreign corporations civilly liable essentially for terrorist financing that caused injuries to foreigners.

A number of groups, including the U.S. Chamber of Commerce, have filed to defend against corporate liability, pointing to the fact that there are more than 150 ATS lawsuits against US and foreign corporations doing business in two dozen industry sectors arising out of corporate activity in more than 60 countries which would be harmed by the ability of foreigners to sue corporations for torts that occurred outside the US.

Interestingly, the US federal government filed its brief, arguing that the ATS allows corporate liability but that in this case, no liability should flow because the mere fact that a bank managed and wired  transactions through its US branch does not establish a sufficient nexus to the US. It also argued that holding foreign banks liable may cause foreign banks to be less cooperative with the US to prevent terrorist financing, including in particular in respect of the Kingdom of Jordan and its efforts to defeat ISIS.

The reason why I think it may cause exposure to some Canadian banks and financial institutions in particular, is because at least one large Canadian bank relied upon a legal opinion it received from a law firm in respect of anti-money laundering law and counter-terrorist financing law that effectively advised the bank that AML and CTF laws only kick in to affect the on-boarding of a bank’s clients if and when there is a predicate criminal offence that occurred in Canada. The opinion arose in the context of the practice by some Canadian banks to allow the receipt of funds from smurfing of hundreds of wires from China of up to US$50,000 each from one person that violated China’s federal banking laws on reporting outflows of currency – it apparently advised the bank that, provided  no criminal offence had been committed in Canada, the Criminal Code of Canada allowed the receipt into Canada by banks of funds from other countries. In order words, the opinion was that as long as no offence occurred in Canada in connection with a client’s funds, the bank was go-to-good and it did not need to undertake due diligence beyond the borders of Canada for AML and CTF purposes in respect of funds.

There are problems with that advice. The Criminal Code prohibits importing into Canada (whether by wire transfer or other means), of any property (which includes funds) or proceeds thereof obtained or derived from an indictable offence that occurred anywhere, whether in Canada, China or the Middle East. In anti-money laundering law, the concept of funds or income “lawfully obtained” has always been used and it means income or funds obtained lawfully under the laws of the country from where the income or funds arise (see for example, the Criminal Finances Act 2017).

If one or more Canadian bank acted upon the view that only criminal offenses that occur in Canada were relevant for AML and CTF on-boarding purposes, then it means there is a gaping hole in how they on-board when it comes to banking clients from foreign countries which may impact them if the US Supreme Court decides banks, including Canadian banks, can be held liable under the ATS for foreign torts committed that injure foreigners.

Thinking ever further ahead, it is likely going to be in the area of injuries sustained from torts committed by cybercriminals and cyberterrorists in foreign countries against foreign nationals or foreign corporations, that have a Canadian banking connection, that may come back to bite Canadian financial institutions who have a too-narrow view of the application of the Criminal Code of Canada if the US Supreme Court holds foreign corporations liable for foreign torts in Jesner v. Arab Bank. Illustrative is the case of US v. Baratov, the 22-year-old Canadian convicted hacker who had no job but was able to buy a Mercedes Benz, an Aston Martin, a home, multiple Rolexes and to blow through millions in cash and his Canadian bank did not de-risk him despite the lavish lifestyle not matching his unemployed status.

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