Presentation describes about the risk and challenges in virtual currencies. It also describes about the working of virtual currencies and bitcoin in specific.

1. Risk and Challenges in Virtual Currencies
Harsh Patel & Swatantra Kumar Gupta

2. Page 2

3.  Co-founder and moderator of
Team Matrix
 Bitcoin education committee
member in Bitcoin Foundation
 Fellow at Bitcoin education
project
 Currently working with IT
Giant
 SCIT Alumni
Swatantra
 Co-founder and moderator of
Team Matrix
 Community Leader for the
ISACA Online Community for
ISO 27001
 APWG member
 Currently working with a Big 4
consulting firm
 SCIT Alumni
About Us
Harsh

4. All the information depicted in this
presentation is purely out of research
orientation. It has no intent to harm any
individual / organizational sentiment.
Disclaimer

5. THEY SAY “TIME IS
MONEY”
WHAT THEY DON’T
SAY IS “MONEY IS
RUNNING OUT OF
TIME”

6. Currency
 a : circulation as a medium of
exchange
 b : general use, acceptance, or
prevalence
 c : something (as coins, treasury
notes, and banknotes) that is in
circulation as a medium of exchange
 d : paper money in circulation
 e : a common article for bartering
Source : Merriam-Webster Dictionary
Page 6

7. Definitions – Currency and its types

8. Page 8

9. What is Bitcoin?
Page 9
A form of online currency which can be exchanged for
goods and services at places which accept it.
First created in 2008 by an anonymous hacker Satoshi
Nakamoto. He named these first Bitcoin as the genesis
Block.
Borderless currency and can be used anywhere.

10. Ummm, but what is the value of 1 Bitcoin ???
Page 10

11. Ummm, but what is the value of 1 Bitcoin ???
Page 11
As of 01 January 2013,
Source : Mt. Gox – Bitcoin Exchange

12. Ummm, but what is the value of 1 Bitcoin ???
Page 12
As of 09:11 AM of 28 September 2013,
Source : Mt. Gox – Bitcoin Exchange

13. Interesting!!!
Now we are talking…
Page 13

14. Drill down into Bitcoin
Upper Stack-
Cryptographic
functions
Lower stack-
Peer to peer
network

15. Drill Down in to Bitcoin – Technicalities
(Ledger Systems)
Closed Ledger System Open Ledger System
Definitions A System where in transaction
details are kept by a central
organization
A system where in
transaction details are kept
open
Example Banking system Crypto currencies
Ethics Defined by laws and terms and
conditions
Defined by technical
protocols (i.e.- Mining
process)
Privacy Maintained by Agreement
between central organization
and individual (Defined by law
of land)
Maintained by inherent
principles of the system.
Control mechanism Regulatory bodies Self stabilizing ecosystem

16. Drill Down in to Bitcoin – Technicalities (Address)

17.  All Transactions are serialized and arranged
in blocks based on timing of transaction
 Simple rule
- Public key for receiving
- Private key for spending
Drill Down in to Bitcoin – Technicalities (the Transactions)

18. Drill Down in to bitcoin – Technicalities
(the Transactions)
Types of Transaction (Tx) :- Reward/generation Tx , Normal Tx and Signed Tx

19.  Is a record of audited and valid transaction
 Block are serialized and form a block chain
 Blocks are generated every 10 min by the
distributed mining operation
Identified by unique hash which is based on
merkel root.
Drill Down in to bitcoin – Technicalities (the Block and Block
Chain)

20.  Process of generating block
 It is a task of constantly auditing transactions and generating new blocks
 Miners earn by
- Protocol Defined Rewards
- Transaction fees
 Resource intensive process
- ASICs / GPU / FPGA required
 Mining is subject to difficulty factor of successfully auditing a legitimate
transaction
Drill Down in to Bitcoin – Technicalities (the mining Process)

21. Drill Down in to bitcoin – Economics

22. Risks
&
Challenges

23. Crypto-currencies are as legal as
TCP/ IP and as Illegal as TCP/ IP
Risk 1. Legal Acceptance
Risk Description Risk Rating Importance Impact
Legal Acceptance 5 5 90

24. All transaction from
inception of block
chain are open but
yet anonymous
Risk 2. Anonymity
Risk Description Risk Rating Importance Impact
Anonymity 3 4 70

25. Use of virtual currencies to
facilitate money laundering
Risk 3. Misuse (Cybercrime)
Risk Description Risk Rating Importance Impact
Unethical use 2 3 60

26. http://blockchain.info/nodes-globe
Risk 4. Distribution
Risk Description Risk Rating Importance Impact
Distribution 4 3 60

27. Mining infrastructure can be
applied in cracking cryptographic
hashes
(only valid for SHA256 hashing algorithm)
Risk 5. Misuse (Mining)
Risk Description Risk Rating Importance Impact
Unethical use of
mining Infrastructure 1 1 10

28. Altering the block chain by owing
more than 51% of network
Risk 6. Hard Fork (51% attack)
Risk Description Risk Rating Importance Impact
Hard Fork 1 1 1

29. Risk Overview
0
1
2
3
4
5
6
0 1 2 3 4 5 6
Priority
Risk Rating
Legal Acceptance
Anonimity
Distribution
Hard Fork
Unethical use
Unethical use of mining
Infrastructure

30. CHALLENGES

31. Regulators dilemma
How to tame virtual
currencies?
Challenge 1. Regulation
Linked Risk Legality/ Misuse

32. FINCEN Guideline on Virtual Currencies.
Challenge 1. Regulation (Contd)
Entity
Currency Types
E Currencies and E
precious metals
Centralized Virtual
Currencies
De-Centralized Virtual
Currencies
Eg
EGold Liberty Reserve Bitcoin
User No MSB regulation No MSB Regulation No MSB regulation
Exchanger MSB Regulation MSB Regulation MSB Regulation
Administra
tor
MSB Regulation MSB Regulation No MSB Regulation

33. In open ledger system,
Privacy is granted by
anonymity
As addresses are not linked to
identity
Concept note - Zerocoin
Challenge 2. Privacy
Linked Risk Anonymity

34. Challenge 3. Pricing
More than 5% of price Fluctuation weekly
Linked Risk Distribution

35. Who would be a cop for such a
system?
And how would the cop function?
Challenge 4. Policing
Linked Risk Misuse / legality / regulation

36. Who to trust and whom not to
trust?
Challenge 6. Standardization
Linked Risk Misuse /Hardfork

37. Linker map ( Challenges to Risk )

38. Virtual crypto Currencies is a 4 year
old baby and is getting into mature
stage.
End Note

39. Page 39
THANK YOU
harsh.patel@teammatrix.org
swatantra.gupta@teammatrix.org