IS3101 Cryptocurrency & Blockchain
Lecture Regulations
● GP presentation arrangement and submissions
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● Government
● Anti-money-laundering
● Regulation
● ’s BitLicense
● Dapps Development Tools
● Tutorial – PetShop
Final Presentation (10%)
All team members need to speak.
Each team is given 10 minutes to present and Q&A.
○ You can ask questions and earn the 2 remaining participation marks!
Teams exceeding the time given will be penalized.
Teams are strongly suggested to have the Presentation as a “guided tour of your solution”.
You are encouraged to record a short video clip (i.e., 1 to 2 minutes) for your DApp live demo.
Presentation Order
Present Order
Team Number
1. Written Report: Whitepaper (10%)
2. Dapp Files / Web URL: dapp solution (10%)
3. Presentation Slides (10%)
By April 16, before midnight
submission
Ch. Bitcoin
Governments
7.5 Notice
Defeats Capital Controls
• Untraceable digital cash defeats capital controls:
1. country can’t stop Bitcoin value from flowing in or out
2. government countermeasure: disconnect BTC world from fiat currency financial institutions
Untraceable digital cash facilitates some crimes: 1. kidnapping and extortion
2. tax evasion
3. sale of illegal items
Silk Road:
• largest online market for illegal drugs
• ran as a Tor hidden service
• payment in Bitcoins
• site held BTC in escrow while goods shipped
• eBay-like reputation system
• run by “ Roberts”
operated February 2011 to October 2013
• arrested October 2013
• serving two life sentences plus 40 years
• government says he tried to cover his
tracks, but they connected the dots
• government seized 174,000 BTC
• auctioned them to the public
alleged operator of Silk Road
• hard to keep real and virtual separate
• hard to stay anonymous for a long time
• Feds can “follow the money”
• ⇒ money becomes untouchable
Lessons learned
How Blockchain can be used in Escrow?
● Escrow services are now playing a major role in the field of Blockchain
● Before making a transaction, tokens are transferred to a third-party smart
contract called the escrow.
● The escrow holds the deposited tokens until the payment conditions are satisfied.
● The parties involved in the transaction need to ensure that both the agreed product/service is delivered and payment is made.
● One party should not be able to default the transaction at the expense of the other party.
Escrow smart contract considerations
1. Both buyer and seller accept the transaction, the seller gets paid
2. Both buyer and seller cancel the transaction, the buyer gets instantly
3. Seller accepts the transaction, but the buyer does not. The funds will be
eventually returned to the buyer (frozen for 30 days), but the seller has a chance to convince the buyer to accept the transaction by mediating with them.
4. Buyer accepts the transaction, but the seller does not. The funds remain in the contract until it is killed by the escrow creator, and funds are returned instantly to the buyer
● How to ensure that the buyer gets the desired product/service while ensuring the seller gets the payment?
● Escrow concept (deposit, accept, cancel, start time + duration)
● Smart contract dispute resolution or alternative dispute resolution (ADR).
● Smart contracts are programs written into a blockchain that execute an
agreement when specified conditions are met.
● Common misconception is that they are NOT legal contracts.
● Resolving a contract dispute falls under the country’s contract laws.
● Dispute resolution dapp solution will be useful for Escrow disputes.
Dispute Resolution
Ch. Laundering
Anti Money
Anti-Money Laundering (AML)
The goal of AML: stop large amounts of money from
1. crossing border
2. moving from underground to the legitimate
economy without detection
• Know Your Customer (KYC):
(1) identify and authenticate clients (2) evaluate the risk of the client (3) watch for anomalous behavior
• The backbone of a financial institution’s anti-money laundering activities is the Know Your Customer (KYC) process.
Account Opening and Maintenance
Mandatory reporting:
• Must report currency transactions over HK$120,000.
• ⇒ file “currency transaction report”
• Must watch for clients “structuring” transactions to
avoid reporting.
• ⇒ file “suspicious activity report”
• Requirements differ by country; consult your lawyer.
https://www.hkma.gov.hk/eng/smart-consumers/account-opening/
Traditional
KYC Challenges
● Misidentified fraudulent data
● The failure to follow up with customers ● Users presenting misleading information ● Delayed in process completion
Blockchain KYC authentication can help:
1. Work wiped out collecting KYC information unnecessarily replicated by multiple institutions.
2. Isolated view of consumers and their transactions insufficient to detect concealment.
3. Uncertainty in knowing if implemented practices are sufficient.
Laundering
Note well: the government takes this very seriously!
• Bitcoin businesses have been shut down.
• Businesspeople have been arrested.
Ch. Regulation
Try to address the failure
• The argument against regulation is common and well understood.
• The argument for regulation is not as well understood.
• When markets fail and produce bad outcomes,
regulation can address the failure.
Lemons market
1. Market failure example: Lemons market
2. Market for widgets, can be low-quality or high-quality
3. High-quality (HQ)
1. costs a bit more to make
2. consumers like them much better
4. Efficient market would deliver mostly HQ
5. What if consumers can’t tell HQ apart from LQ?
1. ⇒ consumers won’t pay extra for HQ
2. ⇒ sellers won’t sell HQ
Fixing a lemons market
• Market-based approaches 1. seller reputation
2. warranties
• Regulation
1. required disclosure, with penalties for lying 2. quality standards, with enforcement
3. required warranties, with enforcement
Market failure example: Price fixing
• Sellers agree to raise prices
• related: agreement not to compete
• These are illegal in most jurisdictions.
• part of “antitrust” or “competition” law
Ch. ’s BitLicense Proposal
“BitLicense” proposal
July 2014 http://www.dfs.ny.gov/about/press2014/pr1407171-vc.pdf
Would need a “BitLicense” from NYDFS to do any of these things:
Virtual Currency Business Activity means the conduct of any one of the following …
involving or a Resident:
(1) receiving Virtual Currency for transmission or transmitting the same; (2) securing, storing, holding, or maintaining custody or control of Virtual Currency on behalf of others;
(3) buying and selling Virtual Currency as a customer business;
(4) performing retail conversion services, including the conversion or exchange of Fiat Currency or other value into Virtual Currency, the conversion or exchange of Virtual Currency into Fiat Currency or other value, or the conversion or exchange of one form of Virtual Currency into another form of Virtual Currency; or
(5) controlling, administering, or issuing a Virtual Currency
• Provide information on
1. ownership
2. finances and insurance 3. business plan
• Pay an application fee
Apply for a license
1. Provide updated information to NYDFS
• including periodic financial statements
2. Maintain a financial reserve • amount set by NYDFS
3. Follow rules on
1. custody of consumer assets
2. anti money laundering
3. cybersecurity and disaster recovery
4. recordkeeping
4. Designate a compliance officer, have written policies 5. Disclose risks to consumers
Licensee must
• Proposed by NYDFS in 2014
• Public comments solicited by NYDFS
• After comments are in, NYDFS will decide what to do
• Launch in 2015, BitLicense will be put in place
• In 2016, HKMA launched Fintech Supervisory Sandbox (FSS)
• In 2019, Wyoming’s Permissive Approach – regulatory sandbox
(financial technology sandbox)
• Relexed BitLicnese in 2020
BitLicense
https://www.hkma.gov.hk/eng/key-functions/international-financial-centre/fintech/fintech-supervisory-sandbox-fss/ https://mdpi-res.com/d_attachment/JOItmC/JOItmC-06-00043/article_deploy/JOItmC-06-00
Terminologies
● Smart Contract
● Web3.js library
● Flutter + Web3dart ● Off-chain storage ● Infura
development
Truffle Suite
● The Truffle Suite is an ecosystem for Web3 development that consists of three different tools: Truffle, Ganache, and Drizzle.
● Truffle is a development environment, asset pipeline, and testing framework for developing smart contracts.
● Ganache is a personal blockchain for rapid Ethereum and Corda distributed application development.
● You can use Ganache across the entire development cycle;
● enabling you to develop, deploy, and test your dApps in a safe and deterministic environment.
Developing Blockchain Applications With Flutter
○ Flutter is an open-source UI software development kit created by Google.
○ To develop Cross platform applications. ● Web3dart
○ Web3dart is a dart library that connects to interact with the Ethereum blockchain.
○ It connects to an Ethereum node to send transactions, interact with smart contracts, and much more!
● The InterPlanetary File System (IPFS) is a protocol and peer- to-peer network for storing and sharing data in a distributed file system.
● IPFS uses content-addressing to uniquely identify each file in a global namespace connecting all computing devices.
● IPFS is a distributed system for storing and accessing files, websites, applications, and data.
chain storage
● Infura provides the tools and infrastructure that allow developers to easily take their blockchain application from testing to scaled deployment – with simple, reliable access to Ethereum and IPFS.
Tutorial 12: Truffle & Ganache
● This tutorial will take you through the process of building your third dapp—an adoption tracking system for a pet shop!
● This tutorial is meant for those with a basic knowledge of Ethereum and smart contracts, who have some knowledge of HTML and JavaScript, but who are new to dapps.
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