Bitcoin Does Not Protect Against Fraud

There is a common misconception that the cryptocurrency Bitcoin is safe and secure and will protect those who trade in it from fraud. However, as white collar criminologist Bill Black explains, Bitcoin is just as susceptible to fraud as any other type of transaction and complacency makes the likelihood of fraud only greater

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Story Transcript

GREG WILPERT: It’s The Real News Network. I’m Greg Wilpert.

The cryptocurrency Bitcoin. It keeps making the news. Usually it’s because the value keeps going up and up, turning early Bitcoin investors into multimillionaires. Sometimes, though, it’s also about the enormous ecological footprint that Bitcoin has. Making transfers and creating Bitcoins requires enormous amounts of computing power, and thus, energy. Another recent issue has been the occurrence of Bitcoin fraud. In theory, the currency is supposed to be immune to fraud, yet reports of such fraud keep surfacing, such as in India a few weeks ago, and last week about the artificial inflation of Bitcoin’s market value.

Joining me now to take a closer look at Bitcoin fraud is Bill Black. Bill is a white-collar criminologist, former financial regulator, and associate professor of economics at the University of Missouri Kansas City. He is also the author of the book The Best Way to Rob a Bank Is to Own One. Thanks again for joining us, Bill.

BILL BLACK: Thank you.

GREG WILPERT: So before we start digging into the fraud issue, we can’t assume that everyone knows what Bitcoin is. So give us, our viewers, a brief explanation of what it is.

BILL BLACK: Sure. It is one of a number of what you accurately called cryptocurrencies. That word crypto comes from cryptography. So this is codes, creating codes, and being able to understand what those codes mean. It means that it’s not a currency issued currently by any government, although a government could issue a cryptocurrency. So these things are seen as huge advantages in terms of privacy, and very attractive particularly to libertarian males.

It’s married, the Bitcoin and other cryptocurrencies, to the development of something that has to do with codes. And that’s called blockchain. And blockchain basically has three functions. One, you have interlinked computers that communicate with each other. Two, they share data. And three, they reach a consensus on that data and create a code that is designed, proponents would say, to make fraud impossible. Others might say to make it more difficult to commit fraud.

So the idea is that we send, when you have a transaction, you buy something for one Bitcoin or a fraction of a Bitcoin. That record goes not just to the merchant but is spread broadly among people in a network. And that information is encoded, and can be decoded by everybody, and they should all reach the same result. And if they don’t, then you know that somebody is trying to cheat the system, and presumably you have, say, 50 accurate records and one inaccurate one, well, the inaccurate one would be disregarded. The other thing is that all of these systems need some, to create a shortage. In other words you can’t have unlimited Bitcoins, or they wouldn’t be worth anything.

And the way Bitcoin does it is different than some others, but it basically, this is what you’re talking about in terms of the ecology. It has you use brute force computer power and sophisticated algorithms to basically solve math-type problems. Not useful math-type problems in the world, but just particular math problems. And when you do, you get rewarded with Bitcoins. And then the, whoever created it, and it’s anonymous who created it, though there’s been rumors about this person or persons. Also, they got some Bitcoins. And so as Bitcoins increased in value, as you said, in the early years, a number of people become millionaires. But they peaked in value, the Bitcoin, at about 20000 U.S. dollars near the beginning of this year, and they’re now down to slightly over $6000. So they’ve lost an enormous portion of their highly inflated value.

GREG WILPERT: So it seems that one of the main features of Bitcoin is that it’s supposed to increase the level of transparency in transactions, not necessarily because you know who was involved, but you do know through various usernames, I guess, that it’s possible to track all Bitcoin transfers without having to rely on a centralized leger, because each Bitcoin embeds all of the transactions digitally. So in this kind of environment, then, which is supposed to be very secure, because every coin tracks every transaction, how is fraud possible under such circumstances?

BILL BLACK: Okay, so that’s excellent. I would say that it’s not so much that it makes it transparent as that it allegedly made it secure. Indeed, transparency is not what they were aiming for, because again, it was very connected with libertarian thought. And the idea was you had a currency not created by the government at all, not monitored by the government, and that was supposedly self-enforcing and invulnerable to fraud. Well, first problem. OK, so you share data. That’s fine. But all you’re sharing the data on is you spent one Bitcoin. Fine, but what did you get in return? Did you get something that was worth one Bitcoin? Well, there’s nothing blockchain that can tell you that.

And so the big frauds that, for example, produced the financial crises and hyperinflate the bubbles, well, those involve inflating the value of an asset, like a home. And blockchain technology is absolutely useless in preventing that kind of fraud. That’s the first problem. Second problem is, great, so I got four Bitcoins. But what do I do with the four Bitcoins? How do I protect them? And most people’s answer was to leave them at these Bitcoin currency exchanges. Well, those have been prime targets for crypto theft, and basically you just, you know, send a bot that corrupts the files and allows people to steal information, and Bitcoins are essentially information. And once that money is gone, you know, there’s essentially nothing about blockchain that lets me get it back. Nor, for example, if a merchant simply defrauds me is there anything about blockchain that lets me get it back. So it’s vulnerable to both of those kinds of thefts.

And then, of course, there was the whole Silk Road stuff, which is essentially a market largely using Bitcoin for everything illegal in the world. You know, from drugs, to prostitution, to espionage, to terrorist funding. So Bitcoin was, you know, happy to do all of those things. Well, many of those things were outright frauds, Ponzi schemes as well, because all of these kind of websites attract that kind of thing. And those people went to prison as well.

Then there is price manipulation. We can talk about that, as well.

GREG WILPERT: Yeah, go ahead. Go ahead. How is the price manipulated?

BILL BLACK: OK. So as I said, there are multiple cryptocurrencies, and many of them are very poorly traded. And when you have anything that’s not traded very much, knowing what its price is is really hard. And it’s subject to easy manipulation. Right? It’s a much smaller pool of things. I can pretend to buy it from myself at inflated prices and report this huge gain in another cryptocurrency. So the people backing Bitcoin, that held large positions in Bitcoins, were using, according to a study by a finance professor at the University of Texas, these much smaller cryptocurrencies that were far easier to manipulate, causing them to spike in value, and then doing transactions with Bitcoins off of those allegedly inflated value. And the bottom line of the study was they thought half of the entire price rise, which was a massive price rise, in Bitcoins last year was due entirely to this manipulation of these other currency values that were then used to inflate Bitcoin.

And of course, the proof in the pudding has been the dramatic fall in not just Bitcoin, but other cryptocurrency values in response to reports about this price manipulation. But also, we are now up to something like five of these major thefts from exchanges, which are in the hundreds of millions of dollars at times, and such. So all of this has discredited the cryptocurrencies. And of course, they’re not backed by anything real. Right? They, you can’t go to the government and say hey, I want to pay my taxes, here’s a bitcoin. The governments don’t accept them. And there’s, you know, maybe someday they will. But it’s not terribly logical for them to allow that.

So all of these currencies are at great risk of loss of value. Yes, they made a number of people millionaires, because anything speculative that goes up, you know, during the bubble phase, makes people a ton of money. But this is an excellent way for your uncle and your grandfather and grandmother to go bankrupt. So do not do this. This is an absolutely nonsensical investment.

GREG WILPERT: Well, on that note, just finally, very briefly, what can or should individuals and governments do to prevent or to guard against Bitcoin fraud?

BILL BLACK: Well, there, the exchanges, if they’re going to continue to operate, need vastly better, simply, computer security. Because again, these thefts are occurring because people penetrate their systems and put malware in, basically, that allows them to loot. So that’s the obvious, easy thing for them to do. Now, the fact that consistently they have failed to do so again tells you something about the vulnerability of this kind of currency. In terms of Silk Road type things, those are massive illegal operations. They have to be shut down. Silk Road was shut down by prosecutions.

In terms of day-to-day frauds from merchants and such, it’s no guarantee of quality. You can get defrauded for all the reasons you can usually get defrauded. You know, you buy a lemon at a car lot, and you pay a Bitcoin instead of using dollars. Well, you’re still going to get defrauded. So one of the grave risks in fraud is complacency. If you don’t think you’re at risk, and again, there’s been this propaganda that blockchain prevents fraud. No. Not even close. And by the way, it’s going to get worse.

So sooner or later these bottlenecks where literally hundreds of millions of computers and other devices have been taken over and can be used to send false messages, what are you going to do with this so-called, so-called consensus in the blockchain record when some botnet creates 12 million phony copies. You’re no longer going to be able to create consensus and there’s going to be a real meltdown in whatever crypto currency is attacked by those kinds of bots. And we’ve been lucky so far that there really hasn’t been a massive bot attack more globally on these cryptocurrencies. There have been bot attacks that have helped with some of these penetrations and thefts at cryptocurrency exchanges.

GREG WILPERT: OK. Well, we’re going to have to leave it there for now. I was speaking to Bill Black, associate professor of economics and law at the University of Missouri Kansas City. Thanks again, Bill, for having joined us today.

BILL BLACK: Thank you.

GREG WILPERT: And thank you for joining The Real News Network. Also, keep in mind we recently started our summer fundraiser, and need your help to reach our goal of raising $200000. Every dollar that you donate will be matched. Unlike practically all other news outlets, We do not accept support from governments or corporations. Please do what you can today.