security and crypto-currency: forecasting the future of privacy for private investors

Security and Crypto-currency: Forecasting the Future of Privacy for Private Investors PWM APAC SUMMIT | Kuala Lumpur Nov. 2-4, 2015 Bill Majcher

The Power of Prosecution

U.S. v. Rosner 2nd Circuit Court of Appeals, 9-26-73

“In human experience, the pressure of imminent incarceration tends to snap the bonds of loyalty”

Stronger than loyalty.

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WHYFamily Offices are Targets

1 Governments are broke

2 FO’s typically low profile – What are they hiding?

3 Unregulated – Threat of financial instability

4 Source of wealth often opaque

5 Control large pools of capital

6 May lack security resources and sophistication of regulated entities

Follow the Money

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WHOis Targeting Family Offices?

IDEA

Follow the Money

• Governments – Police, Tax, Regulators

• Media – News of the World

• Activists – Political, Environmental, Netizens

• Criminals – Theft, Fraud, Blackmail, Kidnap

• Competitors – Disrupt, learn, steal

• Disgruntled family members or associates, former employees

• Economic Mercenaries – Whistleblowers

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Examplesof Covert Scenarios Global Random Virtue Testing

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FATCA Scenario:

•US Client with large sums of money held offshore to be invested

Approach:

•Representative of private Family Office looking to preserve multi-generational wealth

•Family is discreet and prefers stable management over yield

•Money has been held offshore for several generations but family is US based and wishes to remain discreet and offshore

Test:

•Offer to disclose assets most susceptible to scrutiny and pay higher management fee to keep rest offshore

•Ask banker prior to mandated FATCA disclosure to help modify portfolio to “park” dividends within an arms length tax free structure

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FamilyOffices: Challenges Global Random Virtue Testing

1. Humans Commit Crimes

2. Technology and IT systems detect crime

3. Technology designed and monitored by humans

There is a disconnect between regulatory theory and reality

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FamilyOffice Vulnerabilities - typical Most are inadequately prepared.

Best defence is active offense.

And…INADEQUATE SYSTEMS

Improperly Trained Staff

Lost or Stolen PCs (laptops)

Unsecured Network (wifi) Trading Platforms .

Customer Records .

Mobile Devices .

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ChallengesIn 2015 Whom should you trust?

Blind acceptance of what the computer shows leaves family offices fully exposed to prosecution and litigation

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HowFamily Offices will be targeted Threats.

Hacking, Malware, Cloning

Cyber Penetration

By trusted employees, partners,

family members

From Within

Social engineering

Covert Techniques

Facebook, Linkedin.

Social Media Deception

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TheCyber Problem Your data is everywhere.

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CyberThreats Your data is under attack.

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CHALLENGESof Cryptocurrencies The new frontier of asset transfer.

• No central authority issues or regulates the currency

• Increasingly easy to exchange for goods or traditional currencies

• Cross-border transactions frictionless and cheap

• Use of proxy or other anonymization tools make transactions difficult or impossible to trace

• Example: Silk Road marketplace

• ‘Smurfing’ very viable ML technique by placing transactions though multiple exchanges

• Possibility of government/regulatory intervention

• Risk of bugs that lead to a loss of confidence

• Risks of competition: Over 100 ‘alt’ currencies in use, of which BTC is by far the most successful

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WHATis Bitcoin? Leading cryptocurrency.

• Bitcoin is proposed as a “peer to peer electronic cash system” by Satoshi Nakamoto (pseudonym), an anonymous software engineer, October 2008.

• A stateless, peer-to-peer payment system. "There's no central bank to regulate it; it's digital and functions completely peer to peer”—Jim Cramer

• Transactions do not go through bank or credit card

• Relies on the blockchain, a cryptographically-protected public ledger, to ensure a given user owns a given BTC and has not spent it already—solves the “double-spend” issue

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WHATis Bitcoin? Continued. Leading cryptocurrency.

• Bitcoins are “mined” by computers “solving” a special mathematical problem

• Mining will cease around 2040 when 21m BTC have been issued.

• Bitcoin / USD exchange rate:

• July 17, 2010 1 Bitcoin = $ 0.0495

• October 16, 2015 1 Bitcoin = $ 271.00

• Highest ever: $1124.76 on November 29, 2013

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AUTHORITIESsee benefits/challenges First regulations promulgated in the U.S.

• FBI issues internal report worrying that the currency could become a payment method for cyber criminals in the near future, and could be used to fund “illicit groups.” Report is leaked to the Internet. April 2012

• U.S. Treasury’s first official guidance on virtual currencies, March 2013. Bitcoin Exchanges—businesses that convert BTC into “real” currencies—operating in the U.S. must obtain “money transmitter licenses” and are regulated as Money Services Businesses

• US regulators, including Fed chairman comment positively on bitcoin at a Senate hearing, November 2013.

Wall Street Journal 11/18/13

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KEYTerms Critical to your understanding.

Peer-to-Peer – payments are person-to-person, not through a bank or intermediary

Blockchain – a public register that tracks all BTC transactions

Satoshi – the unknown creator of the BTC protocol

Exchange – allows the conversion of traditional currencies into/from BTC

Bitcoin Mining – the creation of BTC units, which are awarded in a ‘lottery’ to computers solving a special problem

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AMLRisks of BTC/cryptos Guard against money-laundering

01

03

04

02

But… • size of entire BTC/crypto

market is small…for now.

At placement stage • BTC converted with

ease to traditional currency

At integration stage • Accepted by more and more

merchants

At layering stage • Transactions are peer-to-peer

• do not go through a regulated intermediary • Transactions are completely anonymous

• With small degree of sophistication, transactions untraceable

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HOWto Protect Yourself Your subtitle goes here

to deal with Human Risk

Institute Principles Based Governance

Deploy continuous offensive cyber tactics

against yourself with ability to remediate if

attacked or under attack. Equally important is

to know who attacked you.

A Good Offence is a Better Defence

Don’t use mobile phone, computer or any electronic device

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ContactInfo

Bill Majcher bill.majcher@emidr.com www.emidr.com +852 6891 7919

For more information about the marcus evans investments

summit series: investmentseries@marcusevanscy.com