Transcript Slide 1

Adapting Virtual Finance to Simulate Financial
Information Security Risk Analysis:
A Risk Management Strategy
John W. Bagby
IST @ PSU.edu
Key Terms:
• Banking Regulation, Counterfeiting, Counter
Terrorism, EULA, Financial Information
Assurance, Gambling-Gaming, ISP Duties,
Investigations, Metadata, Money Laundering,
Online Contracting, Online Markets, Risk
Management, IP, Law Enforcement, Political
Economy, Pre-Trial Discovery, Prediction
Markets, Racketeering, Virtual Environments
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Virtual Law is Becoming a Reality
– Virtual Law Conference
• Virtual Worlds 2008 Javits Convention Center
• http://www.virtuallawconference.com/
• American Bar Association Section of Science &
Technology Law
• New Comm. on Virtual Worlds/Multiuser Online Games
• New ABA treatise: Virtual Law
– http://www.abanet.org/abastore/index.cfm?section=main&fm=Product.AddToCart&pid=5450052
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What Virtual Public Policy Issues Arise?
– Is this just CyberLaw All Over Again?
• Jurisdiction, Dispute Resolution, ADR, ODR
• Property Rights: IP
• Contracts
– OSP interactions: EULA, ToS, 3d P Service Outsourcing
– Enforceability of User Side Agreements
– Are Electronic Markets for Real?
• Financial Services, Banking, Securities & Taxes…Oh My!
• Torts, Privacy, Defamation, Fraud/Deception, Stalking
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Why Should Democratic Capitalism Drive Virtual
Environment Public Policy?
– Private Property - Creative Incentives
• Lockean social contract
• Enjoyment, Economic Benefit Internalization, Exclusivity
– Enforceability of Contracts
• Enhances Private Property Ownership
– Alienability of Private Property enhances enjoyment
» Conversion into other asset forms
– Development of Markets enhances enjoyment
» Deception, Barriers to Entry, Transparency
– Gamers, criminals & terrorists will disappear into Morpeg
seclusion thereby concealing their ID & activities
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Dispute Resolution as THE Starting Point
• Jurisdiction is Key
– As in ’90s CyberLaw Development:
• vWorld Seminal Cases Involve Sex
• Litigation with Fellow Users “in World”
– Eros v. Simon (E.D.N.Y, 2007)
• Settled cheap
– Eros v. Leatherwood (M.D.Fl. 2007)
• Default J/
• Settlement negotiations reportedly ongoing
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Litigation with vWorld I/OSP
– Virtual Environment = Internet/Online Service Provider
– Bragg v. Linden Research (E.D.Pa.5.20.07)
• Linden ToS: SL as opportunistic Scrivener
– Choice of Law/Forum & ADR
• ADR Boilerplate is Unconscionable
– Procedural Unconscionability
» cognition, consideration and negotiation
– Substantive Unconscionability
» Shocks the conscience
– EULAs create but control user rights: 2d Life grants IP
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Real Stakes for Real vWorld Users
• Real IP
– Full Range Likely
• Immediate & Diffuse: Copyright, ™ dB
• Possible: Process Patents (s/w, BMP), T/S
– Thresholds have been expressive works
• Copyright, DMCA imposes I/OSP Duties
• Trademark, Famous Marks
• Real Markets
• Real Money
– $L is quickly gaining critical mass
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Common Types of Electronic Payment Systems
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1st ePmts in mid-19th Century telegraphic wire tsfr
ATM & POS – credit/debit cards
Electronic bill payment & presentment
Automated clearing house (ACH)
Credit cards & authorizations
Wholesale EFT
Check 21
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Payment Systems need Durable Architectures
• “Modern” history of non-currency payment systems
– Medieval Europe, Knights Templar
– Then Mercantilists used, Greatly facilitated int’l trade
– Evolved into the law merchant then the UCC
• Transferability (negotiation) of rights to receive pmt
• Requires reliable interrelationships among trusted
intermediaries, e.g., banks
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Economics of Money & Payment Systems
• Money is primary payment system
– Storehouse of value
• Precious metal coins, currency backed (redeemable) into commodity (gold)
• Public confidence is THE key (a/k/a/ “trust”)
– Medium of exchange
• Broad acceptance, wide availability
• Public confidence is THE key (a/k/a/ “trust”)
• Long history of competing currencies
– Weakens trust in government as intermediary
– State currencies, state chartered banks, lending expands money supply
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The Network Effects of Payment Systems
• ePmt systems confront similar network effect difficulties as do
competing monies
• Network effects-economies of scale derived from
standardization and universal acceptance
• Success increases with Critical Mass
– Sufficient customers, subscribers, participating merchants,
infrastructure on line to facilitate frequent & reliable use
– Comp Sci - bloated s/w, debug inserts more bugs than fixed
• Trust expands with standardization,expands market power,
perhaps to monopoly
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vMoney is form of Scrip
• Not “legal tender”
– created outside government sanctioned monetary system
• Substitute as currency
• Traditionally Ltd utility outside closed social networks
– e.g., tokens, tickets and points
• vMoney gaining easier convertibility into legal tender,
• “Near money” equivalent
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vMoney under Interpol Taxonomy
• Identified Virtual Money
– Metadata records
– ID originator, maybe intermediaries & recipient
– Traceability
• Anonymous Virtual Money
– No Inherent Metadata
• But External Metadata Service Providers Possible
– Untraceable?
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Challenges for New Monies
• Switching Costs
– Overcome Competition Facilitating Switch
• Legacy Money Unattractive
• New Money’s Competitive Edge
• Critical Mass
– Accessibility
• Sufficient Supply for User Demand
– Trust
• Storehouse of Value, Intrinsic Value (gold or on the gold standard)
• Favorable Government Controls
– EX: Permit New Money, Assume Trusted Intermediary Role
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Roles for Trusted 3d P Intermediaries in eMoney
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Invest, own, operate ePmt system
R&D, set stds for system design & process
Issue electronic value to consumers
Financial liability for the electronic value
Resale agent for other issuers of eMonies
Recruit consumers & merchants
Operate computer data & storage
Operate telecom network infrastructure
Escrow services
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vMoney’s Success
• Competes Well in Niche Markets
• Achieved Some Reliability Engendering Trust
• Anonymity Lowers Switching Costs
– But to whom?
• Regulatory Costs Remain Very Low
– May change when FinCEN, Fed, SEC, DoJ Awaken
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What is MoneyLaundering?
– Law Enforcement motto: “Follow the Money!”
– Term originated in 20s-30s gangster era
• Coin cash flow from “numbers” racket cleansed
through mob-operated coin-op laundries
– But has Existed for nearly 4000 yrs
• Hide earnings from despotic govt confiscation & taxes
• Essential to terrorism, illegal drug trade, organized
crime, smuggling
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Money Laundering Model
• Placement
– laundered funds initially made less suspicious
– more convenient
– first fall into financial system after initial acquisition
• Layering
– process moves funds to separate from illegal source
– multiple complex financial transactions
• E.G., wire transfers, monetary instruments, asset purchases/sales
– Obscures links between placement and integration
• Obfuscates audit trail
– May alter size of lump sum
• Integration
– funds re-enter legitimate economy
– expenditure or investment
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Money Laundering Methods & Tools
• Well-known practices, detection is costly
• Transactions with minimal recordkeeping
– Pmts under $10K avoid Currency Trans. Rpts (CTR)
• FinCEN flooded with CTR & SAR data
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Cash: whenever possible, smsll & unmarked
Minimize: checks, wire transfers, credit cards
“Legitimate Fronts” apparently respectable businesses (e.g., Morpeg)
Plausible Business Purpose avoids Suspicious Activity Rpt (SAR)
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Money Laundering is Illegal
• Post 9-11 Legislation Broadens Anti-Money
Laundering Enforcement (AML)
• Requires AML programs & training
• Increasingly Closer Regulation: Pvt. &
Correspondent Banking, Novel Financial Services
• Stiffened civil & criminal penalties
– USA Patriot Act & its Revisions
– FCPA - form of unlawful bribery
• Internal Controls Required…Pre SOX
– RICO - Predicate Offense
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Harsh Reality for Morpeg CyberLibertarians
• Morpeg NOT distinct CyberLaw despite contrary
cyberlibertarian dogma
– Public Policy Applies to vWorld!
– Rising Stakes are the Main Reason
– Morpeg vEnvironment Sponsor is just another type of I/OSP
• Hopes to take advantage of ISP Safe Harbors but still Owes Duties
• Discovering Identities/Monitoring Traffic Diverges depending
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– Military, Intel, Law Enforcement, Regulatory, Civil, Internal Investigation,
Independent Sleuth, Unlawful Hacker
• EULAs: Why do vEnvironment Sponsor/ISPs Limit User Rights
– E.g., IP, trading, L$, vote off island – cya!
• Seclusion of Assets & Transactions Becomes More Challenging
• “Play Money” - many users not as fully invested in the stakes
of vMoney as are users of conventional money
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Now Some Rosy Reality for Libertarians
• Libertarian economic theory supports construction of
new markets, eCommerce now vEnvironments are
great examples
• vMoney Exch Rate (5.24.08) approx L$264/$1
• Virtual (IP) Asset Creation is a Good Thing
• vMoney is a Unique ePmt Success
– Anonymity Attracts Users from Real Money
• But Traditional Payment System Architectures Remains
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Still Rosy: vMoney is a Unique ePmt Success
• vMoney users apparently do not yet demand trust
equal to or superior to conventional payment systems
– Competes well w/ conventional money in ltd instances
• Some Reliability Engendering Trust
– vMoney May be Scalable BUT May Not be Stable
• Why would vMoney need stability if goal is temporary: enhance ML
• Regulatory Costs Govt. Oversight Largely Avoided
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Parting Observations:
• Morpegs are Interesting not so deserving of Scorn
• Most ePmt Experiments Eventually Fail
– Thousands of ePmt patents, few make money or royalties
• New eMoney Forms Weaken FRB’s Monetary Policy,
Financial Institution Solvency & FDIC
• Alan Greenspan has predicted:
“Electronic money is likely to spread only gradually and play a
much smaller role in our economy than private currency did
historically.”
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Next Steps, Research Promise:
– Prove vMoney-Denominated Money Laundering
– Raise Awareness among Financial Regulators
– Simulation methods applied to public policy experimentation
• Challenges for law enforcement & AML in using vWorlds as testbeds
• Explore Information/Prediction Markets Analogies
– Compare/Contrast w/ vMoney: Stakes put at risk, economic
activity signals new information, arguably violates public
policy (banking, counterfeiting), low transaction costs attract
• Market Manipulation Architectures & Enforcements
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