This contribution, which for the first time opens a window of knowledge on blockchain technology and the risks of money laundering in a public administration magazine, is taken from Giuseppe Franceschini’s article published in Anfaci magazine, a periodic institutional culture of civil servants of the Interior Administration, a. XXV, n.110, Rome 2022, pp.70-73.
Technological progress has made the world smaller; we constantly live in a network of information that we receive and send in real-time. Today, thanks to blockchain, it will be possible to build networks based on trust, where security, transparency, and legality will no longer have any margin of error.
by Giuseppe Franceschini.
Bitcoin phenomenon: what is blockchain?
In 2022, there is a lot of talk about this phenomenon among the trends of the future of finance related to new technologies. Wired Trends 2022 focused mainly on some new tools: integrated finance, alternative lending, and new frontiers of digital currencies. Amid different feelings of optimism for the post-pandemic recovery and caution regarding the planning and consumption of most Italians, the need to operate more simply, quickly, and globally emerges in the near future. Without going into technicalities, let’s try to understand how the technology behind the most well-known cryptocurrency works.
In Italian, blockchain means “chain of blocks,” and we must imagine it just like that. It represents a public, shared, decentralized, and distributed register among multiple nodes (i.e., computers) of a network. Each block is a file containing information that, when it reaches its maximum capacity, is sealed, and the next block continues. But how does this sealing process happen?
At each block, when full, a hash function is calculated. The hash function allows transforming information into an irreversible and unique alphanumeric code. This means that that information will always be transformed into that code, but the code will not give you the same information. This is essential because it allows binding and encrypting the information of a block without it being manipulable in the future.
So, as we said at the beginning, each block is linked to the next, but how? When block (1) is filled, its hash function will be calculated, and the first information of block (2) will be precisely the hash function of block (1), creating a chain where each element of the sequence is linked to the previous and next one. If someone tried to manipulate the blockchain even by a single comma, the entire code would change with a chain reaction effect. The computers on the network would notice it instantly, and that copy of the blockchain would disconnect. But then, who believes in this code? Blockchain technology believes in 50% +1 of consensus within the nodes, because history has taught us that the individual is fallible.
Historical context: humans cannot trust each other.
Throughout history, humans have used and implemented different forms of payment for the sale and purchase of goods and services. As far back as 2000 BC, there were problems in being able to conclude honest commercial transactions because the first coins of the time did not have the same value for everyone. A third party was needed to act as a guarantor between buyer and seller, so that the commercial agreement would be honest for both parties. This role was used in ancient Greece by the sanctuaries linked to religious temples, which for the first time in history marked the coins. This mark gave total confidence in using and receiving coins because there was an impartial party that fixed their value. Not only that, but the sanctuaries acted as branches, where one could deposit their coins before a long journey, and then withdraw them in another sanctuary with proof of having deposited them in the first. Deposit logistics became useful, necessary and guaranteed at that time, as looting and criminal acts were commonplace.
Subsequently, around 550 BC, Croesus, the last ruler of Lydia, coined the first gold coins to be used in his kingdom and neighboring territories. For the first time, the coin not only depicted the face of its controller but also assumed a geopolitical role. This continuous evolution has led to the creation of different types of currencies in history, where at the base of each territory there was its own exchange currency, with its identity and belonging symbolism. And what linked every currency in the world, as still today, was the need for a third-party guarantor to maintain its value stable.
But why, even in Hellenic times, in an era that was so little bureaucratized and so lively both in culture and in trade, in a phase in which different kingdoms were rich and open to exchange between Western and Eastern peoples, was there already a need for guarantees? It is reasonable to conclude that yesterday’s and today’s economic/financial systems are based on a lack of trust. Centralized figures act as fiduciary intermediaries because humans cannot trust each other.
2008 Financial Crisis: History doesn’t repeat itself, but it rhymes.
In recent history, there have been two catastrophic events in the financial sector that have led to the destruction of economic and social fabric. The first was the Great Depression of 1929, and the second was the mortgage crisis in 2008. Both events were characterized by human greed, corruption, and money laundering that the world had never seen so dramatically in history. One of the most disturbing effects was that those who made mistakes did not pay for their “mistakes,” and the cost of these choices fell on the shoulders of citizens who trusted the system. This has laid the groundwork for a less fair society, where the rich have become even richer, the middle class has drastically decreased, and the poor have increased exponentially. With predictable but frightening cyclicality, we are experiencing this socio-economic phenomenon again today with political and economic decisions in the global fight against the pandemic and its consequences, as well as the imminent climate crisis and its consequences.
With these premises, current Italian society will not be able to generate trust despite the PNRR (National Recovery and Resilience Plan), especially among young people, that is, citizens and taxpayers of the future. One of the consequences could be “the ethics of being clever” or the slalom between rules, which could encourage individuals to behave selfishly towards the community, feeling freer to not comply with the law and justified in evading or laundering the money they possess because they cannot provide for themselves and their families in a dignified way.
Are we on the brink of catastrophe? Do we still have any chance of building a healthier, freer, fairer society?
This chance is proposed as a Copernican revolution by exchanges and electronic payment systems, now followed by major changes in the use of digital technology that no one would have imagined becoming part of our daily lives. A single subject or a group of people, under the pseudonym of Satoshi Nakamoto, published the Bitcoin White Paper on October 31, 2008. The title read “Bitcoin. A peer-to-peer Electronic Cash System,” which for the first time launched a digital currency as an electronic payment system without third parties. Thanks to the complex technology behind Bitcoin, namely blockchain, an agile tool has finally been devised where intermediaries (banks, payment networks, companies, and traditional deposits) will no longer be needed to send and receive value.
Blockchain is the first technology capable of solving the problem of trust through simultaneous and certain sharing of information that makes trust itself unnecessary. Are we fighting or favoring money laundering? Since their inception, cryptocurrencies have never been viewed in a good light. In particular, Bitcoin, which is considered the top tool for sending and receiving money for illicit purposes. Of course, no one denies it! But if we know it, it’s precisely thanks to the technology on which Bitcoin itself is based. The biggest difference between fiat money laundering (euros, dollars, etc.) and cryptocurrency-based money laundering is that, due to the intrinsic transparency of blockchain, we can more easily trace how criminals move cryptocurrencies in an ultimate attempt to convert them back into fiat currencies. Today, cash is the tool par excellence, the protagonist in money laundering, even of illicit origin. Most likely, cash is the primary cause of money laundering because we simply do not have the tools to monitor its traceability.
Blockchain is the most traceable system ever invented by mankind. Therefore, in the future, only a self-harming person would use blockchain to commit crimes, as they can be traced at any time, even retroactively. There would always be a record of the illicit transaction. Furthermore, this technology is based on cryptography, supported by algorithms that today would be almost impossible to hack.
Today we also need to analyze and understand where money laundering and tax evasion come from. Are there only a few entities that move enormous amounts of capital, or are there many people and companies that do not contribute to the common good? According to the Revenue Agency, there are about 19 million profiles that are not in compliance, representing the abnormal figure of €1.1 trillion in missed revenues. The system is cumbersome, and there is an urgent need for infrastructures and networks that work in a combined manner to ensure that everything functions with the least margin of error. Inefficiencies weigh over €200 billion per year, and bureaucracy has further increased over the past two years with the load of procedures and obligations, weighing heavily on both companies and citizens. If we all paid for efficient common goods/services, we would all pay less and perhaps be socially less angry and more cooperative. Conversely, honest people currently pay for everyone who thinks they have the right to use the common good without the duty to contribute to its maintenance.
A look into the future: the legality and security that society needs.
A decentralized world is not only possible, it is necessary. A more equal, transparent, and fair society needs infrastructures that do not concentrate power in the hands of a few. The implementation of tools that prevent the proliferation of illegal activities, thanks to the digitization of money, would be possible and desirable.
The younger generation, digital natives, are ready. Traceability should not be understood as a violation of one’s privacy, but as the guarantee where the community can place trust in society. Certainly, the road is long and today we still have difficulties in digitizing our country which needs fiber and connection throughout the national territory, in the inland areas, in the mountains, and on the islands. However, it is important to understand that technological progress is the quintessential tool for laying the foundations for the society of tomorrow.
History has taught us that humans are fallible, circumventable, and influencable if the engine of the system is dictated by the prevalence of the interests and profits of a few at the expense of all. Too many consultants, investments promised as competitive, scams on platforms, and variables that promised advantages have influenced the financial market by implementing the desire to subvert or deceive the rules.
With the mathematics and tools available to us today, we can finally make the accounts balance, live happier, and imagine a fairer future for the society that humans themselves have created.