EDITOR Amaya Vega Lecturer in Economics Department of Enterprise & Technology School of Business, Galway-Mayo Institute of Technology Amaya.Vega@gmit.ie ASSOCIATE EDITORS Trevor Clohessy & Eamon Walsh Department of Enterprise & Technology School of Business, Galway-Mayo Institute of Technology Trevor.Clohessy@gmit.ie & Eamon.Walsh@gmit.ie CREATIVE DESIGN Laura McTigue School of Business, Galway-Mayo Institute of Technology Laura.mctigue@gmit.ie HEAD OF SCHOOL OF BUSINESS Dr. George Onofrei School of Business, Galway-Mayo Institute of Technology Graham.heaslip@gmit.ie Contents EDITORIAL 3 ARTICLES 4 No More Tragedy for the Commons? 4 Colin Callinan The Development of Blockchain as a Solution to the Reduction in 11 Transactions Cost of Customer Verification within the Financial Service Industry Tony Fitzpatrick Blockchain Credentials in Education 18 Tayfun Karabagli A Literature Review on the Applicability of Blockchain Technology 27 for use in Real Estate Transactions Enda McDonnell The Economic Design on Consensus Incentive Methods 38 Iarla Molloy Preventive Health Behaviour – A Blockchain Economy Review 52 Mafalda Santos Cyber Laundering and its Economic Impact of Money Launderers 59 Renata Tenório Sorrentino Editorial Welcome to the first edition of Economics of Blockchain Student Research Paper Series. This is a collection of the best research papers by students undertaking the Certificate in Blockchain for Business at Galway-Mayo Institute of Technology. The purpose of the publication is to showcase excellence in the research carried out by students, as part of the fulfilment of the examination requirements of the module Economics of Blockchain. In this research paper series, students explore the economic implications of distributed ledger technologies and blockchain applied to industry and public policy. All papers included in this volume have been independently reviewed by experts in digital technologies and blockchain, in collaboration with the editorial team. The research presented covers a wide range of applications including core concepts in blockchain economics, such as the consensus protocol, governance issues, agency and incentives, technology adoption, and the economics of trust. This edition demonstrates the breadth of student research interests in this area, and the depth of their discussion of key economic issues associated with distributed ledger technologies and blockchain. Each paper presents a literature review in the context of the various economic approaches and concepts covered during the Programme. Congratulations to the students for the high-quality research presented in this volume. My thanks to Dr Trevor Clohessy, Eamon Walsh, Kevin Derrane and Laura McTigue for their support in compiling this first edition. Dr Amaya Vega Colin Callinan: No More Tragedy for the Commons 4 No More Tragedy for the Commons? Colin Callinan Abstract: Blockchain has emerged in recent times as a potentially revolutionary technology. Its’ proponents would have us believe that it will (amongst other things), democratise the financial industry from the outside, solve the problem of firms profiting from the exploitation of personal data, alter supply chains irrevocably and change traditional professional professions such as accountancy and law forever. While there has been some excellent research emanating from academia and the private sector in the form of case studies that address these, there has been a paucity of research questioning the wider philosophical question of what exactly is a blockchain. This literature review attempts to bring together a portion of the research attempting to address this and focuses on the idea of a blockchain as a new overarching governance structure in the mould of the ‘commons’. Keywords: Blockchain, Technology, Economics, Commons, Governance Colin Callinan: No More Tragedy for the Commons 1. Introduction 5 The increased presence of technology in everyday life and its’ ubiquitous nature offers great opportunities to reshape the landscape of how citizens interact with the state through modes of governance (Mulgan, 2005; Toress, et. al., 2005). Another view of its’ ubiquity is its embedded nature in everyday commerce. A somewhat overlooked avenue is that of the potential creation of new governance structures (Ostrom, 2010; Davidson et. al.). This literature review sets out to fill this gap in a minor fashion. It will do so by reviewing the historical view of the ‘commons’ as a governance structure first espoused by Garett Hardin. Elinor Ostrom’s work on theorising the ‘commons’ will be examined. Following that, the evolution from ‘Commons 1.0’ to ‘Commons 2.0’ will be traced with key features examined such as open source technology, peer production, open science and open innovation. Finally, the idea blockchain as ‘Commons 3.0’ will be theorised. 2. Theoretical Background In the following sections the theoretical background forming the basis of this literature review will be elaborated. 2.1. The ‘commons’ theorised Inspired by the work of Adam Smith, Hardins’ original formulation of the ‘commons’, took the overconsumption view of natural resources (Hardin, 1998). He posited that, essentially, in a shared resource system, (e.g. a field for farming), with individual users acting in their own self-interest, they do not act in the common good and deplete the shared resources through collective action (Hardin, 1998). Following Hardin, in one of her many seminal works, Elinor Ostrom developed a number of scientific studies of groundwater basins to provide a “broader theory of institutional arrangements related to the effective governance and management of common-pool resources” (Ostrom, 1990, p. xiv). At the beginning of the book she lays out three differing models often used to provide a basis for recommending state or market solutions. She then goes on to suggest “theoretical and empirical alternatives to these models to begin to illustrate the diversity of solutions that go beyond states and markets” (Ostrom, 1990, p. 2). As she points out later in the book, these models are not wrong; rather they “are special models that utilize extreme assumptions rather than general theories. These models can successfully predict strategies and outcomes in fixed situations approximating the initial conditions of the models, but they cannot predict outcomes outside that range” (Ostrom, 1990, p. 183). Hardin’s and Ostrom’s work has been commonly deemed ‘Commons 1.0’. The umbrella term is misleading however; Hardin’s view emanated from a negative view of human behaviour Colin Callinan: No More Tragedy for the Commons 6 while Ostrom’s demonstrated humanity’s capacity for common rules and cooperation. 2.2. Evolving perspectives on the ‘commons’ As alluded to above, ‘Commons 1.0’ addressed the analytical requirement to explain the economic and governance aspects of natural resources. In recent times, the idea of ‘Commons 2.0’ has entered the zeitgeist; ‘Commons 2.0 has developed over the past two decades by extending analysis to information and knowledge commons, particularly digital commons, e.g. open source software, peer production, open science, open innovation’ (Davidson et. al., 2016, p. 13). Of the four examples cited in the above quote, open source software has been the greatest success as a democratising artefact. Furthermore, contrary to popular belief outside the technology industry, open source software has been a key driver of innovation and profitability within the private sector, e.g. ‘The Open Source Initiative (OSI) was founded in 1998 to support the new focus on technology rather than ideology. This more pragmatic nature of the movement downplayed some of the most ideological parts of the value system, but also contributed to a wider diffusion of free and open source software’ (Bergquist et. al., 2011, p. 201). Following that initiative, governments started to take notice and engage in a process of adoption. Open source software ‘became attractive to public authorities due to new demands and needs dictated by changes in their own organizations and in society. Economically it was a way to cut costs in the public sector and get value for taxpayer money’ (Bergquist et. al., 2011, p. 202). From a philosophical viewpoint, it was seen as democratising process within the public sector, freeing itself from the proprietary demands of the private sector (Bergquist et. al., 2011). Commons based peer production has become increasingly popular for knowledge based endeavours with Wikipedia offering the most well-known example; ‘Facilitated by the technical infrastructure of the Internet, the hallmark of this socio-technical system is collaboration among large groups of individuals, sometimes in the order of tens or even hundreds of thousands, who cooperate effectively to provide information, knowledge or cultural goods without relying on either market pricing or managerial hierarchies to coordinate their common enterprise’ (Benkler and Nissenbaum, 2006, p.394). Open science is a multi-faceted term that has come be known as ill defined. Running the gamut from ‘the democratic right to access publicly funded knowledge (e.g. Open Access to publications) or the demand for a better bridging of the divide between research and society (e.g. citizen science) to the development of freely available tools for collaboration (e.g. social media platforms for scientists)’ (Fecher and Friesike, 2014, pp. 17-18). There tends to be five core schools of thought involved in the idea of open science. The infrastructure school attempts to create openly available tools, platforms and services for scientists. The public school tries to make science accessible for citizens. The measurement school looks to develop an alternative metric system Colin Callinan: No More Tragedy for the Commons 7 for scientific impact. The democratic school is concerned with making knowledge freely available for everyone. Finally, the pragmatic school wants to make the process of knowledge creation more efficient and goal orientated. (Fecher and Friesike, 2014). Open innovation as a phenomenon has sought to challenge the underlying theory and structures of traditional business strategy. Most traditional business strategies have been characterised at defensive in nature. These strategies have acted as a bulwark against the forces of competition that may threaten the power and profitability of the firm. However, in recent times ‘firms and even whole industries, such as the software industry, are experimenting with novel business models based on harnessing collective creativity through open innovation (Chesbrough and Appleyard, 2007, p. 57). Open innovation can be viewed as a subdivision of a larger overarching structure. One perspective is the outside-in process where the company’s own knowledge is enriched ‘through the integration of suppliers, customers, and external knowledge sourcing’ (Enkel et. al., 2009, p. 312). The second perspective is that of the inside-out process whereby profits are generated ‘by bringing ideas to market, selling IP, and multiplying technology by transferring ideas to the outside environment’ (Enkel et. al., 2009, p. 312). The final perspective is that of the coupled process enabling ‘co-creation with (mainly) complementary partners through alliances, cooperation, and joint ventures during which give and take are crucial for success’ (Enkel et. al., 2009, p. 313). 2.3. Blockchain as ‘Commons 3.0’ The binary choice between market and state often presented by politicians, economists and ideologues can be unhelpful when applied to new economic and technological phenomena such as blockchain. The challenges of group cooperation in joint production and/or shared resources has been examined extensively as discussed above. Elinor Ostrom has previously written that the people she has studied ‘have complex motivational structures and establish diverse private-for-profit, governmental, and community institutional arrangements that operate at multiple scales to generate productive and innovative as well as destructive and perverse outcomes’ (Ostrom, 2010, p. 641). How can we as a species square these competing circles? Is it possible to create new governance structures that satisfies competing interests such as private-forprofit, group cooperation and production, democratic and just governance and polycentricity? With blockchain, are we witnessing the next evolution of the ‘commons’? Davidson et. al., (2016) posits that this may be feasible stating that; ‘A blockchain is a trustless commons in which effective rules are embedded in constitutional smart contracts that are cryptographically secure and cryptoeconomically implemented’ (Davidson et. al., 2016, p. 13). The decentralised consensus mechanism inherent to the design of blockchains may prove to be the defining factor in enabling the creation of a new commons. As Clohessy (2019) makes clear, the elimination of a central authority/broker with innovative consensus protocols can lead to disintermediation and the creation of new power structures. Colin Callinan: No More Tragedy for the Commons 3. Methodology 8 The fundamental problem facing researchers of widely used terminology such as economics, commons, blockchain or technology is that of the vastness of the literature on these subjects. To address this, the authors employed a systematic literature review to cope with the unbounded and ever-growing number of papers published in this area. Fortunately, there exists a number of seminal articles that offer different guidelines and approaches on how to operationalize a systematic literature review (Webster and Watson 2002; Boell and Cecez-Kecmanovic, 2015; Vom Brocke et al., 2015; Watson, 2015). The value of conducting a systematic review is laid out clearly by Boell and Cecez-Kecmanovic (2015, p. 162); “The distinct feature of SLR is a protocol that prescribes how to identify, select, assess and synthesize evidence from the literature. By adhering to such a protocol, SLRs, it is claimed, provide a ‘standardized method’ for literature reviews that is replicable, transparent, objective, unbiased and rigorous”. The first step involves selecting keywords and search terms. For this review, I selected the following keywords and strings: economics AND commons, blockchain AND technology. Given the multidisciplinary nature of the topics under examination, the keywords were entered into renowned academic database such as Web of Science. The database was searched for citations from 1960 to present, while limiting the search of the keywords to titles only. Unsurprisingly, given the generic nature of the terminology the process resulted in the retrieval in a large amount of citations numbering 1135. The titles were then analysed against predetermined inclusion and exclusion criteria resulting in 76 citations. Where there was any ambiguity pertaining to the papers title, the abstract was examined to determine the relevance of the study. Duplicate citations and book reviews were further excluded. Further articles were excluded based on relevance and the scope of this paper. At this point, the author would like to acknowledge the methodological limitation of analysing only the titles. However, this approach was pursued owing to the generic terminology producing an inordinate number of results. Furthermore, others have followed this approach when dealing with a massive amount of citations (Pittaway et al., 2004). 4. Conclusion What society is faced with is an interesting puzzle – is blockchain a new piece of technology, an evolution of, or a radical departure from, governance structures, a new form of economic organisation or all of the above? Clearly, much more interdisciplinary research must be conducted. It is certainly interesting to ponder. Most people, with some justification, will view blockchain as purely a technological utility. That is to say, its core uses will be functional, i.e. tracking food and pharmaceuticals along a global supply chain or programming smart contracts for the purposes of house buying for example. Of course, this functional utility is not something to be dismissed lightly, the revolutionary potential to upend the financial system and change the nature of currency and international payments is important. It must be stated though, that while these will drive efficiencies and create new wealth, they do not offer the potential to change the Colin Callinan: No More Tragedy for the Commons 9 way we live. Blockchain viewed as a new form of economic organisation or a new way to govern has to potential to change the way we live, whether it be the organisational relationship between the citizen and the state or how we collectively manage shared diminishing resources. References Benkler, Y. and Nissenbaum, H., 2006. Commons-based peer production and virtue. Journal of political philosophy, 14(4). Bergquist, M., Ljungberg, J. and Rolandsson, B., 2011, October. A historical account of the value of free and open source software: From software commune to commercial commons. In IFIP International Conference on Open Source Systems. Springer, Berlin, Heidelberg, pp.196-207. Boell, S.K. and Cecez-Kecmanovic, D., 2015. On being ‘systematic’ in literature reviews. In Formulating research methods for information systems (pp. 48-78). Palgrave Macmillan, London. Chesbrough, H.W. and Appleyard, M.M., 2007. Open innovation and strategy. California management review, 50(1), pp.57-76. Clohessy, T. 2019. Blockchain: The Business Perspective. NovoRay Publishers. Davidson, S., de Filippi, P. and Potts, J., 2016, May. Economics of Blockchain. In Public Choice Conference. Dellarocas, C., 2006. Reputation mechanisms. Handbook on Economics and Information Systems, pp.629-660. Enkel, E., Gassmann, O. and Chesbrough, H., 2009. Open R&D and open innovation: exploring the phenomenon. R&d Management, 39(4), pp.311-316. Fecher, B. and Friesike, S., 2014. Open science: one term, five schools of thought. In Opening science (pp. 17-47). Springer, Cham. Hardin, G., 1998. Extensions of “The tragedy of the commons”. Science, 280(5364), pp.682-683. Mulgan, G., 2005. Reshaping the State and its Relationship with Citizens: The Short, Medium and Long-term Potential of ICT’s. The Network Society From Knowledge to Policy, p.225. Ostrom, E., 2005 Understanding Institutional Diversity. Princeton: Princeton University Press. Ostrom, E. (2010) ‘Beyond markets and states: polycentric governance of complex economic systems.’ The American Economic Review, pp. 641–672. Ostrom, E. and C. Hess., 2006. A Framework for Analyzing the Knowledge Commons. In Understanding Knowledge as a Commons: from Theory to Practice. eds. Hess, C. and E. Ostrom, Cheltenham: Edward Elgar, pp.41–82. Ostrom, E., Walker, J., Gardner, R, 1992. ‘Covenants with and without a sword: Self-Governance is possible’ American Political Science Review, 86(2), 40417. Colin Callinan: No More Tragedy for the Commons 10 Ostrom, Elinor., 1990. Governing the Commons. The Evolution of Institutions for Collective Action. New York: Cambridge University Press. Pittaway, L., Robertson, M., Munir, K., Denyer, D. and Neely, A., 2004. Networking and innovation: a systematic review of the evidence. International journal of management reviews, 5(3‐4), pp.137-168. Toress, L., Pina, V. and Acerete, B., 2005. e-Governance developments in EU cities: reshaping government relationship with citizens. Vom Brocke, J., Simons, A., Riemer, K., Niehaves, B., Plattfaut, R. and Cleven, A., 2015. Standing on the shoulders of giants: Challenges and recommendations of literature search in information systems research. Communications of the association for information systems, 37(1), p.9. Watson, R.T., 2015. Beyond being systematic in literature reviews in IS. Journal of Information Technology, 30(2), pp.185-187. Webster, J. and Watson, R.T., 2002. Analysing the past to prepare for the future: Writing a literature review. MIS quarterly, pp. xiii-xxiii. Yli-Huumo, J., Ko, D., Choi, S., Park, S. and Smolander, K., 2016. Where is current research on blockchain technology? — a systematic review. PloS one, 11(10), p.e0163477. Tony Fitzpatrick: The Development of Blockchain as a Solution to the Reduction in Transactional Costs of Customer Verification within the Financial Services Industry 11 The Development of Blockchain as a Solution to the Reduction in Transaction Costs of Customer Verification within the Financial Services Industry Tony Fitzpatrick Abstract: Blockchain has emerged as a credible solution to deliver a universal store of digital identities that is accessible to all financial institutions. The timeline of the development of this solution began with the emergence of crypto currencies where regulators dismissed the technology as a phase and unworthy of their consideration. Since those early days the potential of a Blockchain solution to AML verification has gained credibility and support from mainstream business and more recently regulators. This literature Review looks at how Blockchain emerged as a solution to reduce AML verification transaction costs and the chronology of this development from establishing the scale of the problem, proposed solutions, official support for Blockchain and finally implementation. Keywords: Costs Blockchain, Digital Identities, AML Verification, Transaction Tony Fitzpatrick: The Development of Blockchain as a Solution to the Reduction in Transactional Costs of Customer Verification within the Financial Services Industry 12 1. Introduction Following the Global Financial Crisis of 2007/2008 and the growth of electronic payments regulators have cracked down on financial institutions with unprecedented force and lawmakers have introduced thousands of new regulations around the globe. It is estimated that in 2015 alone 50,000 regulatory updates were made. According to International Banker (2018), banks spend $270 billion per year on compliance. Some 10 percent or more of most bank operating costs can be attributed to compliance, and some estimates have regulatory costs doubling by 2022. Going forward, banks must develop strategies that cut costs and improve the economics of compliance, but still allow them to maintain robust compliance programs. To do this, they are increasingly turning to artificial intelligence, big data, biometrics and analytics technologies to support the ongoing development and deployment of their compliance programs. 2. Anti-Money Laundering, Client Onboarding and Fraud Prevention To start with, Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations for client onboarding are the obvious choice when we talk about use cases for blockchain application in RegTech. Numerous companies try to tackle this area and the reason is simple: All financial institutions need to collect their own data on potential clients before they can start doing business with them. In addition, this data needs to be updated regularly for existing counterparties. Needless to say, that this very time consuming and expensive with regard to both human resources and money spent. The perfect solution would see a universal ledger all banks could use to identify their customers and monitor transactions. However, that is difficult to achieve given the international nature of financial services which would necessitate a single global ledger with the verified identity of every person on the planet that holds an account with a financial institution. That would include banks but also transactions such as buying a sofa on credit over three years. This is an obvious contender for a Blockchain solution. 3. The Scale of the Problem While these issues have been around for some time it was only a few years ago they began to gather momentum. Harrop (2017) found that based off Thomas Reuters annual benchmarking survey carried out to assess the impact of AML verification on financial institutions. This report effectively set out the scale of the problem. Most notable was the fact that AML verification was by far the biggest regulatory issue facing financial institutions. The larger financial institutions spending €150m per year and employing 300 staff just to carry out the AML verification process and deliver results that are barely compliant with regulations (Harrop, 2017). Tony Fitzpatrick: The Development of Blockchain as a Solution to the Reduction in Transactional Costs of Customer Verification within the Financial Services Industry 13 Moser et al. (2018) examined the opportunities and limitations of anti-money laundering (AML) in crypto currencies. While Moser looked at the overall issue of fraud and its prevention within cryptocurrencies the issue, I was interested in was how it could relate to today’s regulation, digital identity and addressing the issues of AML verification. Moser et al. (2018) conclusion on this point was that as Bitcoin and cryptocurrency accounts have weak identities at best, but all transaction records are public, for AML to be effective, it should blacklist transaction histories rather than accounts or account holders. This means that it is OK for a known fraudster to hold an account it’s just not OK for that fraudster to transact on that account. This is a very different approach to regulation which traditionally tried to keep fraudsters and criminals out of the financial system altogether. With such a radical solution being proposed it is easy to see why regulators around the world were not engaging in this space. They also had little understanding of the Blockchain technology underpinning cryptocurrencies (Moser et al., 2018). 4. Proposed Solutions In January 2020 things began to gain momentum with the publication by Kumar et al. (2020) called “A Blockchain Based Approach For An Efficient Secure KYC Process With Data Sovereignty”. Kumar et al. (2020) set out a fully worked solution to digital identity which is central to AML verification. AML verification being the task at the centre of the KYC process. This paper proposed a blockchain based approach to decentralise the storage of personal data and remove the need to trust a third party. Additionally, their proposed solution focused on the problem of data ownership which they solved by storing it in an encrypted format which can only be decrypted by the user. In their implementation, the user has their PII (Personally Identifiable Information) on a QR code in an encrypted format, ensuring two-layer security of data. The banks only have access to the data when the customer explicitly gives it to them. Consequently, implementing the proposed system along with the coordination between the banks, the regulator and other stakeholders will ensure an enhanced user experience and save costs for the service providers (Kumar at al., 2020). Kumar at al. (2020) covered all the angles and addressed considerations of all parties meaning for the first time Regulator and financial institutions had a window into what could be possible. They have moved the discussion from bonkers ideas to credible ones and made the whole idea of a digital solution a serious business. There were numerous other papers published either with the authors own digital solutions or elaborating on the work of Kumar at al. (2020). One of these was by Pachaiyappan and Kasturi (2018) that gave the requirements of a digital solution but not a solution. This was in effect a template for others to work off in designing their own digital solutions. In 2018 the consultancy firm KPMG issued a research paper by Maguire and Chia (2018) called: “Could blockchain truly be the key to a viable KYC utility, or is Tony Fitzpatrick: The Development of Blockchain as a Solution to the Reduction in Transactional Costs of Customer Verification within the Financial Services Industry 14 this a case of a technical solution in search of a problem?” Here Maguire and Chia (2018) set out to consider the business case for a blockchain-enabled AML utility for sharing information among the participating financial institutions, while institutions continue to perform due diligence on customer information obtained from the platform. KPMG in Singapore put together a consortium of three banks and the Singaporean regulator to trial a Blockchain prototype with the idea of demonstrating the effectiveness of the utility’s functionality, security, and scalability. The result was an estimated cost savings of 25–50 percent by reducing duplication and providing a clear audit trail (Maguire and Chia, 2018). KPMG backing the idea of Blockchain for AML was a huge step in altering the acceptability of Blockchain as a credible AML solution. Up until now everything about this solution was academic and theorical but KPMG moved the idea from the world of academia to the business mainstream. This in turn opened up the investor world to join the race to find a solution (Maguire and Chia, 2018). 5. Official approval towards a Blockchain solution In 2019 the Bank for International Settlements which is owned by 60 central banks, published a paper entitled “Embedded supervision: how to build regulation into blockchain finance” (Auer, 2019). Here, Auer (2019) considers how current financial market infrastructures might evolve to use distributed ledger technology. And in turn, those distributed ledgers could enable automated supervision. Focused mostly on the financial supervision of product transactions the report suggested that the role of regulator may evolve to sanction a particular Blockchain based financial product as acceptable where its embedded smart contracts can act as a proxy for the regulator. In effect the regulator is delegating supervision to the smart contract (Auer, 2019). While this paper did not directly discuss a Blockchain solution to AML it laid down a clear marker that the regulatory community was open to Blockchain as a solution to many regulatory issues (Auer, 2019). In March 2020 the Financial Action Task Force which is the global body who sets the AML rules that all financial institutions must follow, issued a report on digital identity (FATF, 2020). In this lengthy study it set out guidance as to technology used to establish digital IDs. Top of the list was Distributed Ledgers. The report also listed digital credentials, biometrics such as fingerprints, face and voice recognition as technologies that would be acceptable for developers to include (FATF, 2020). This official guidance gave the RegTech industry something to aim at rather than developing AML process in the dark that they hoped would make the grade. For example, Revolut’s AML identification process used during new account opening process is under challenge for its use of selfie photo used to compare with the customers passport photo (FATF, 2020). Tony Fitzpatrick: The Development of Blockchain as a Solution to the Reduction in Transactional Costs of Customer Verification within the Financial Services Industry 15 Cunliffe and Cœuré (2020) from the Bank for International Settlements published a report laying out some key requirements for central bank digital currencies, or CBDCs. Their report was supported by all the major global central banks and marked a step up in the global central banks position on Blockchain and digital currencies. It is now clear that the Central banks intend to take the lead in setting out the ground rules for how new technologies will impact their industry rather than their earlier elitist approach of dismissing the new technologies as a passing phase (Cunliffe and Cœuré, 2020). Within the world of central banks, it is the Bank of International Settlement and Financial Action Task Force that are driving this momentum by setting out the framework, guidance and rules within which AML, digital identity and digital currencies will develop. Regtech companies now have a very clear framework within which to develop their blockchain solutions and venture capitalist also can back developments for which there will be a market (Cunliffe and Cœuré, 2020). 6. Implementation In July 2020, the Central Bank of Sri Lanka announced that they were beginning development a blockchain KYC platform to include AML (CoinDesk, 2020). The blockchain based platform is planned to allow the sharing and updating of bank customer data in real time. The key advantage comes from allowing banks to onboard new customers without delays for manual processing, as well as save costs associated with traditional paper-based methods of verifying documents. This is a real-world solution of what Pachaiyappan and Kasturi (2018) set out in their paper. The Central bank of Sri Lanka finds itself in a unique position having been blacklisted by the Financial Action Task Force in 2017 for AML deficiencies. Since then, it has been taking steps to improve its financial sector and meet international standards and was removed from the blacklist in 2019 (CoinDesk, 2020). Delivering a fully compliant blockchain based AML platform would restore credibility to Sir Lanks’s financial sector so they will make every effort to get it right (CoinDesk, 2020). 7. Conclusion The financial industry has now come full circle in its pursuit of a solution to the labour intensive, inefficient and costly AML process. The interesting thing to observe was the change in attitudes towards blockchain as an obvious solution. Initially the vested interests who had controlled the financial services industry for centuries felt safe in their ivory towers until the speed of developments dawned on them and they decided to take a leading role. The speed of developments was also dramatic. Given the prize at stake it’s probably not surprising. However, from Pachaiyappan and Kasturi (2018) theoretical solution to Kumar et al. (2020) fully worked out blueprint followed Tony Fitzpatrick: The Development of Blockchain as a Solution to the Reduction in Transactional Costs of Customer Verification within the Financial Services Industry 16 quickly by a framework from the Bank of International Settlement setting out acceptable technologies and guidance from the Financial Action Task Force of what they would accept to replace a passport and utility bill all parties are very much on board and all are driving development forward. Time will tell how successful the Central Bank of Sri Lanka’s AML Platform will be, but all the elements are now in place for a comprehensive blockchain solution to AML to emerge. References Auer, R., 2019. Embedded Supervision: How to Build Regulation into Blockchain Finance. Federal Reserve Bank of Dallas, Globalization Institute Working Papers, 2019(371). CoinDesk. 2020. Sri Lanka's Blockchain Bank KYC Platform to Enter Development 'Shortly': Central Bank - CoinDesk. [online] Available at: https://www.coindesk.com/sri-lankas-blockchain-bank-kyc-platform-to-enterdevelopment-shortly-central-bank [Accessed 30 October 2020]. Cunliffe, J. and Cœuré, B., 2019. Central bank digital currencies: foundational principles and core features. [online] BIS. Available at: https://www.bis.org/publ/othp33_summary.pdf [Accessed 2 November 2020]. FATF. 2020. Digital Identity. [online] Available at: https://www.fatfgafi.org/media/fatf/documents/recommendations/Guidance-on-DigitalIdentity.pdf [Accessed 1 November 2020]. Harrop, M., 2017. Thomson Reuters Global KYC Surveys Attest to Even Greater Compliance Pain Points. [online] Thomsonreuters.com. Available at: https://www.thomsonreuters.com/en/press-releases/2017/october/thomsonreuters-2017-global-kyc-surveys-attest-to-even-greater-compliance-painpoints.html [Accessed 30 Oct 2020]. International Banker. 2018. The Cost of Compliance. [online] Available at: https://internationalbanker.com/technology/the-cost-of-compliance/ [Accessed 30 Oct 2020]. Pachaiyappan, V. and Kasturi, R., 2020. Block Chain Technology (DLT Technique) for KYC in FinTech. International Journal of Pure and Applied Mathematics, 119(10). Tony Fitzpatrick: The Development of Blockchain as a Solution to the Reduction in Transactional Costs of Customer Verification within the Financial Services Industry 17 Kumar, Manoj & Yadav, Nikhil., 2020. A Blockchain Based Approach For An Efficient Secure KYC Process With Data Sovereignty. Maguire, E. and Chia, T., 2018. Could blockchain be the foundation of a viable KYC utility?. [online] KPMG. Available at: <https://assets.kpmg/content/dam/kpmg/xx/pdf/2018/03/kpmg-blockchain-kycutility.pdf> [Accessed 04 Nov 2020]. Moser, M., Bohme, R. and Breuker, D., 2013. An inquiry into money laundering tools in the Bitcoin ecosystem. 2013 APWG eCrime Researchers Summit. Tayfun Karabagli: Blockchain Credentials in Education 18 Blockchain Credentials in Education Tayfun Karabagli Abstract: Blockchain technology gives unique possibilities to educational institutions to issue certificates and badges. These certificates are tamper free, authentic, verifiable and accessible from everywhere. These have been in paper format in the past and were costly. In the recent years there are several organisations which gives the educational institutions and companies the possibility to issue the certifications and badges in digital form on a central databases. Digital certifications on these platforms help the issuers reduce the costs. However, these digital certifications are flawed. Blockchain certifications are tamper resistant, secure, immutable and provides the institutions and organisations with a robust long term solution. This literature review gives detailed information regarding blockchain certifications, it outlines experts viewpoints and points out further research to be done. Keywords: Blockchain, Credentials, Badges, Certification, Education Tayfun Karabagli: Blockchain Credentials in Education 19 1. Introduction For centuries certifications, diplomas or other merit based documents were issued in paper. With the advent of the Internet a wave of digital transformation commenced. Companies and organisations adapted their business models and became more active on this technology medium. In recent years the universities and educational organizations gradually started to offer part of their curriculum online under the name distance learning. Distance learning has triggered the issuing of online certification or digital credentials. Mozilla Foundation started in 2011 the initiative “Open Badges” standard to give a specification to the digital credentials. Online organizations like Credly.com, YourAcclaim.com, Badgr.com and Credential.com started to assist educational organizations to issue certifications on their digital platforms. These platforms ran on central databases with CRUD based systems. Ownership and control of credentials were in the hands of these online organizations. Blockchain technology is a distributed ledger technology and the information changes are recorded on blocks by nodes. This information is across the network and every participant has a copy of the ledger. When issuing a certification in blockchain it provides several advantages to the issuer and holder. It is secure, digital, tamper-free and accessible everywhere at any time. This literature review pays attention to the “Digital Credentials”. The reader will find information about digital and blockchain credentials platforms. This is followed by a selected literature about blockchain credentials and a brief summary about each research project is outlined. In the third section, the research papers will be compared and the similarities/ differences will become clear. The fourth section is dedicated to research gaps followed by the conclusion. 2. Digital Credentials Paper diplomas and certifications are the oldest form of validated papers. This custom started with the advent of the first universities and schools. A diploma or certificate is so called a value document. Paper diplomas has some protection against counterfeit practices. Most of the paper diplomas has micro text, a logo of the issuing organization, a silver foil strip, a cut-out monogram and a protected watermark. On a paper diploma there is a unique paper number in laser perforation. These measures are taken to improve the authenticity (Fontys, 2020). However, that does not prevent third parties such as large number of universities FROM issuing fake diplomas. Fake diplomas has a damaging effect on institutions, employers and society (Ezell and Bear, 2012). Digital badges are a web-enabled version of certifications. These can be obtained as a learning outcome and it can be verified in real time on a public Tayfun Karabagli: Blockchain Credentials in Education 20 accessible website. Digital badges and certifications confirm professional skill achievement through completed learning projects. Digital credentials are also referred to as digital badges and it contains a small image or logo. The holder of the badge could share this online through social media platforms such as LinkedIn. If a person clicks on this image, they will be directed to the platform where the badge is issued. On the page of the badge the necessary skills can be viewed that need to be achieved (‘Digital Credential & Badge FAQs | VDCI.edu’, n.d.). The popular digital badge platforms are credly.com, youracclaim.com, credential.net and badgr.com Open badges is the leading format for the digital badges and certifications. This standard determines the type of digital badges that are issued to the holder. Open badges must contain certain digital packaging information about the accomplishment: portable image file of the badge, resources for web validation and verification, issuer, holder, the criteria to earn the badge, and relevant skills. Current Open Badge protocol is now 2.1. The current version has endorsement features, multi-lingual capabilities, JSON-LD and API connection features (IMS Global, 2020). Among the providers of certified products with Open Badge protocol are Moodle, Hyland Credentials, Badgr, BC Diploma and Open Badge factory (IMS Global, 2019). Blockchain based credentials is a new type of digital credentials and are issued as follows. The issuer creates the cryptographic hash of the document which contains the student’s name, degree name, issuer name and issue date. The institution signs it with its private key and the signature is appended to the certificate. The private key is used again to create a record on the blockchain. When the blockchain transfer is completed, the certification is registered and shared among all the nodes in the network. It is digitally accessible from the public blockchain and it cannot be tampered with. University of Nicosia’s project Block.co is one of the first blockchain certification providers in the world (UNIC, 2020). Another blockchain certification issuer is Hyland Credentials. It uses open standard from MIT Media Lab for blockchain certificates (Blockcerts, 2020. 3. Literature Analysis Blockchain technology can provide a solution for the educational institutions, companies and individual which are exposed to credential fraud. In this section selected papers are analyzed, briefly summarized, synthesized and the main thoughts presented. Saleh et al. (2020) review the types of fake certifications and find that fraud happens at alarming proportions. Blockchain technology is the solution that appears in the paper that can prevent the falsification of certifications. The authors believe that security is a very important theme for certifications in education. Authentication, authorization, confidentiality, ownership and privacy Tayfun Karabagli: Blockchain Credentials in Education 21 must be part of the system when issuing certifications on blockchain. In the same paper the authors analyze in depth the existing blockchain certification platforms (UNIC, MIT Labs, Blockcerts, Smartcerts or RecordKeeper) and stipulate their vulnerabilities or limited functionality. The paper proposes an alternative solution to fill this gap on a permissioned blockchain. This shows that the current blockchain solutions for certifications according the authors are still in infancy (Saleh et al., 2020). Arenas and Fernandes (2018) provide examples of falsified diplomas and show how individuals are able to fulfil important positions under false pretenses. The authors see a big opportunity for blockchain as it can be implemented as a transparent and trusted system which can be used for sharing, securing and verifying educational credentials. In addition to this, the blockchain platform gives the employers the possibility to complete diploma verification. The paper compares paper based records vs digital academic records, central databases vs blockchain and permissionless vs permissioned blockchains. The authors believe that the existing solutions (Blockcerts, OpenCertificate, Gradbase, Stampery and Credence) are challenged by issues around storage, open to everyone, scalability and has a longer chain. The alternative solution is an opensource permissioned blockchain (Arenas and Fernandez, 2018). Gresch et al. (2019) sees that the current systems on issuing diplomas are not effective and unable to meet the expectation demanded by the labor market. Fake diplomas issued by Degree Mills is a huge challenge that needs to be overcome and the educational organisations are still attracted by paper based degree as it is very lucrative. Authors argue that digital certifications are stored in central databases and these databases have many drawbacks. Blockchain technology is the proposed solution, because it provides a tamper-resistant option for degrees. Authors mention the digital platforms Badgr, Mozilla Open Badges and grouped them as a non-blockchain solution. Blockchain based platforms such as BcDiploma, MIT labs, Blockcerts, EduCTX and UNIC are from a cost perspective not ideal, with no automation functionality, accessible to everyone and private key retrieval is a big issue. The authors come with a smart contract solution on public blockchain where documents can be stored (Gresch et al., 2019). Brunner at al. (2019) is critical about the current certification systems. Most of the systems which issues certifications are paper based credentials. The authors find some issues with paper certifications. They argue that paper documents could be falsified, difficult to verify and there is a risk of being lost. If it needs to be reissued or verified by the employers, it is an intensive and time consuming job. The papers see the centralized system where digital credentials are issued, is problematic and unreliable. In those systems the verification procedure is not easy and when documents are lost, the recovery might be a problem. The authors argue for blockchain as a solution, analyses the existing blockchain solutions for digital credentials (MIT Media Labs, UNIC, Blockcerts and Life Long Learning Platform) and find limitations in functionality such as completeness Tayfun Karabagli: Blockchain Credentials in Education 22 (no linked courses to the digital certification or verification in bulk. The alternative solution from the authors is a public blockchain based solution with verified issuer identity (Brunner et al., 2019). Tariq et al. (2019) acknowledge that falsification and fraud in educational credentials is widespread in the education sector and it is a big market. The practices in this field damage the reputation, credibility of education and reputation of educational institutions. The authors argue that falsification happens in the following forms: intuitional fraud, Diploma Mills, accreditation fraud and document fraud. The existing credentials verification solutions according to the authors does not prevent the falsification because it is not transparent, time consuming and very costly. Blockchain technology is seen as a solution which can fulfil this gap and can be an extension to paper-based diplomas. In the paper, the blockchain certification systems (UNIC, Blockcerts, Hypercerts, Echo, UZHBC, EduCtx and Blockchain for Education) are compared. The authors note that these solutions are missing the features such as revocation, scalability, accreditation and selective disclosure of information. The paper proposes a new solution including smart contracts on private permissioned blockchain with different consensus model to fill those gaps (Tariq et al., 2019). 4. Literature Comparison All the research papers selected for the review has similarities and differences. These similarities vary from fraud in the industry, opinion about the existing credentials systems, blockchain as a solution, limitation of current blockchain solution and alternatives. All authors in their research papers mention diploma fraud in the education sector. Falsification of diplomas or certifications are seen as a phenomena which was always there. Individuals and organizations are alternating between victim and perpetuator. The falsification of paper-based diplomas take place in the recognized institutions, in degree mills or by individuals. These practices have huge (social and financial) negative effect on the institutions, education and also on individuals. This is similar in all papers. The existing centralized system for digital credentials is another topic that the majority of the authors highlight. While Saleh et al. (2020) and Tariq et al. (2019) do not mention any information about this topic, all the other authors have an opinion that these systems do not prevent the issues around falsification of diplomas. The majority of the authors believe that the centralized systems are weak and cannot respond the threats from outside. These weaknesses are characterized as having drawbacks, single point of failure, security reliance on existing (traditional) protocols, vulnerable to hackers, unreliable, verification process is not easy, recovery of document could be a big issue. This is a concerning fact. Tayfun Karabagli: Blockchain Credentials in Education 23 Analyzed papers show that all of the authors believe that blockchain technology has huge potential and it can resolve the challenge of counterfeit academic credentials. Gresch et al. (2019) and Brunner et al. (2019) do not go into depth on the characteristics and working mechanism of blockchain technology. Tariq et al. (2019) briefly describes how the technology in general works. Other authors characterize the blockchain technology as decentralized, immutable, open source, cryptographic, secure, consensus based and above all that there is an automation feature called smart contracts. In short, blockchain technology comes forward as an advanced technology system with many features which might be used in the education sector. The current blockchain solution for educational credentials is another topic the authors discuss. There is a big variety of institutions and organizations which operate in this field, however those initiatives are criticized heavily. The critics from the majority of authors focus on weakness and dysfunctionality of the offered services. Saleh et al. (2020) find private data disclosed on the public blockchain and no protection for privacy and ownership. There is no registration feature and the security on these blockchain solutions are weak. Arenas and Fernandes (2018) mention that these solutions are using cryptocurrencies. When the solutions are running on public blockchains, storage costs, longer chain, scalability and open access are issues. Gresch et al. (2019) find that these systems are not easy to integrate into a structure of a university, digital signatures can be bypassed and cost is an issue. Bruner et al. (2019) criticize these systems on the following points: no issuer verification and verification of all documents related to a certification are not included. Tariq et al. (2019) compares these solutions and sees them as not scalable, limited user experience, revocation not available, weak counterfeit protection and there are no features for selective disclosure of information The majority of authors propose a solution to resolve the existing challenges. There are differences in their proposed solution. Saleh et al. (2020) thinks that the challenge can be resolved by a private permissioned blockchain (Hyperledger Fabric) with chain code and predefined participants. Arenas and Fernandes (2018) proposes permissioned blockchain by using open source Multichain as a solution. This project will use streams as abstraction of database for Multichain. Gresch et al. (2019) has a solution which stores hashed PDF documents on the public blockchain Ethereum with smart contracts. Brunner et al. (2019) advocates for Ethereum or Bitcoin blockchain with IPFS and Swarm data storage. His proposal uses off-chain protocol with own consensus SPROOF protocol. Tariq et al. (2019) proposes a Ethereum based solution running on Parity with smart contracts and Proof of Authority protocol. 5. Further Study In the selected papers several topics are missing. Single blockchain solution, localization, interoperability, ownership, GDPR and international standards. Tayfun Karabagli: Blockchain Credentials in Education 24 These topics are very important for the further study of blockchain credentials platforms. There is no single blockchain solution for issuing certification and credentials. The authors select existing private or public blockchains, but those solutions have strong features but, in the meantime, contains weaknesses. Educational institutions and companies need a compact and robust solution which can meet the demand of all participants of the educational sector. That can be done by further study instead of doing trial and errors with existing methods. This is a gap that needs to be addressed. Another gap that is not addressed in the papers and that should be highlighted is international standards and localization. Meeting international standards for certifications will give more recognition to the diplomas and certificates. Realtime translation the certifications to local languages without doing damage to authenticity of the certifications or diplomas. The proposals or compared solutions focus on English speakers and are not internationally oriented. If the certifications are requested for verification by non-English speakers, how is this challenge overcome. A proposed solution must have a multilanguage feature. This is another gap that needs to be filled. Interoperability is a very important point that is missing in the papers and not mentioned by the authors. In the blockchain sector, the interoperability between different blockchain platforms is an important theme. In the research papers the solutions provide no space for interoperability between the blockchain platforms. There is no mention of how to operate with national and international educational systems. The main goal of the proposed solution is onboarding the educational institutions on their platform, rather than providing the mobility to be connected between different platforms. Interoperability is very important gap that needs further research. The last gap finds itself in the ownership and GDPR. The existing and proposed solutions focusing on storing data on the blockchain rather than giving the ownership of the certification or diploma as digital assets platforms provides to its users. Apart from this, GDPR is an issue that rarely mentioned by authors. How do we provide solutions to the issuers and users without compromising the privacy, GDPR and other regulations on these platforms. This is an import topic for the further study. 6. Conclusion Traditional diplomas and certifications are paper based for centuries. Paper credentials have some limitations and weaknesses. They can be easily falsified, copied or duplicated. The falsification can take place everywhere, in universities, educational institutions, companies and executed by authorities or individuals. This effects the educational industry, society, individuals and Tayfun Karabagli: Blockchain Credentials in Education 25 education in a negative way. Educational institutions need robust systems to prevent this, but they are failing. There are alternatives such as digital credentials and badges platforms. These platforms give companies or educational institutions the option to issue digital credentials. The badges or credentials are stored on the central databases. These platforms are weak from the point of failure and security because these platforms could be hacked, down or erased. The certification owner and the issuer using these platforms has a challenge with the privacy and authenticity of certifications. These platforms do not meet the current standards and respond to the challenges of the education sector. Blockchain is seen as a solution by the authors to overcome the challenge of the falsification of diplomas. The existing blockchain solutions for educational credentials are seen by the authors as weak, missing security or have limited features to help the educational institutions overcome this challenge. Every author has its own proposal which aims to resolve the falsification of educational credentials. Proposed solutions might be the answer on some of the challenges, however there are gaps that need to be further studied instead of executing trial and errors. These gaps are localization, interoperability, single blockchain solution for educational credentials, ownership and GDPR. References Arenas, R. and Fernandez, P., 2018. Credence Ledger: A Permissioned Blockchain for Verifiable Academic Credentials. 2018 IEEE International Conference on Engineering, Technology and Innovation (ICE/ITMC). pp. 1–6. Blockcerts., 2020. Blockchain Credentials [online]. Available https://www.blockcerts.org/about.html [Accessed 30 November 2020]. from: Brunner, C., Knirsch, F. and Engel, D., 2019. SPROOF: A Platform for Issuing and Verifying Documents in a Public Blockchain. Proceedings of the 5th International Conference on Information Systems Security and Privacy. pp. 15– 25. Ezell, A. and Bear, J., 2012. Degree Mills: The Billion-Dollar Industry That Has Sold Over a Million Fake Diplomas. 1st ed. Amherst, N.Y.: Prometheus Books. Fontys., 2020. Degree Certificate Higher Education & Diploma Supplement [online]. Available from: https://fontys.edu/Study-at-Fontys/Practical- Tayfun Karabagli: Blockchain Credentials in Education 26 information-1/Degree-Certificate-Higher-Education-Diploma-Supplement.htm [Accessed 26 November 2020]. Gresch, J., Rodrigues, B., Scheid, E., Kanhere, S. and Stiller, B., 2019. The Proposal of a Blockchain-Based Architecture for Transparent Certificate Handling. Business Information Systems Workshops, pp.185-196. IMS Global., 2020. Digital Badges | IMS Global Learning Consortium. [online]. Available from: https://www.imsglobal.org/activity/digital-badges [Accessed 30 November 2020]. IMS Global., 2019. Product Certifications [online]. Available from: https://site.imsglobal.org/certifications?refinementList%5Bstandards_lvlx%5D %5B0%5D=Open%20Badges [Accessed 30 November 2020]. Saleh, O. S. et al. (2020) Blockchain based framework for educational certificates verification. Journal of critical reviews. 7 (3), 79–84. Tariq, Aamna & Binte Haq, Hina & Ali, Syed. (2019). Cerberus: A BlockchainBased Accreditation and Degree Verification System. UNIC., 2020. Blockchain Certificates [online]. Available from: https://www.unic.ac.cy/iff/blockchain certificates/ [Accessed 28 November 2020]. VDCI., 2020. Digital Credential & Badge FAQs | VDCI.edu [online]. Available from: https://www.vdci.edu/digital-badge-faq [Accessed 25 November 2020]. Enda McDonnell: A Literature Review on the Applicability of Blockchain Technology for use in Real Estate Transactions 27 A Literature Review on the Applicability of Blockchain Technology for use in Real Estate Transactions Enda McDonnell Abstract: This paper presents the result of an examination of published material relating to the applicability of blockchain technology in the field of real estate transactions. It does not examine tokenization, but whether and how Blockchain could aid with property transactions and title transfer. Keywords: Blockchain, Real Estate, Property Enda McDonnell: A Literature Review on the Applicability of Blockchain Technology for use in Real Estate Transactions 1. Introduction 28 Real estate has become the largest asset class of the global stock market next to equities and bonds (Andonov et al., 2014), yet it is characterised by high transaction costs, long term commitment and information asymmetry (Xie, 2017). Problems associated with real estate transactions such as the lack of transparency, high transaction costs and disparate title recording systems could be significantly altered by blockchain. There is a broad range of material in this area, though much of the examination is quite light given Blockchain’s relative infancy as a technology. 2. Research Needed Banking and mortgage lenders are typically risk averse and not associated with fast adoption of new technology. They could potentially push back on the new technology because it is foreign to them (Spielman, 2016). For this reason, it is important to have backup data to argue the benefit of new technologies. There is consensus that research is needed to determine the applicability of Blockchain to property transactions. Wouda and Opdenakker (2019) cite studies by Dijkstra (2017) and Veuger (2017) as stating that Blockchain technology could lead to improvements in efficiency, transparency and therefore trust, but continue that specifics and applications remain unclear. One of their central questions was to identify how blockchain technology could improve a real estate transaction of an office building. The technique employed to conduct the research is through interview with five real estate transaction experts. Stakeholder pain points are identified through Grounded Theory analysis – an approach that can be used to extract research data from interviews. The authors interview just 5 candidates spanning the property transaction stakeholders, which is at the lower end of validity for Grounded Theory analysis. Nijland and Veuger (2019) argue that research is needed to understand how greater transparency could impact the different stakeholders in the process. • • They identify that the buyer benefits from uncertainty – how unknown problems and changes in the asset that may arise are compensated for with reductions in price. On the other hand, the resulting lack of trust between buyer and seller are not in the buyer’s interest, and changes are not good as they deviate from what is likely to have been a planned strategy on behalf of the buyer. Enda McDonnell: A Literature Review on the Applicability of Blockchain Technology for use in Real Estate Transactions 29 Separately, Veuger (2017) indicates from his study that little research had been done on the impact of Blockchain on the buying process for real estate 1. 3. Issues with Current Process McNamara (1998) identifies four factors that can significantly delay the due diligence process in property transactions. • Previously unknown or ignored inherent problems • Changes in the asset e.g. tenant default • Change in market conditions • Changes in the circumstances of the purchaser, for example o Difficulty of funding. Increasing use of debt was said to sometimes result in an additional due diligence process which could cause delay o Re-assessment of offer price Graglia and Mellon (2018) argue that transaction costs are deemed to be high for property transactions. For the median house sold in the US, transaction costs can account for 10% of the transaction price. They quote Goldman Sachs as estimating that $2-$4billion could be saved in efficiencies in property title insurance alone. Such costs result in fewer transactions and have a negative impact on society welfare. • Transaction costs reduce mobility. Venti & Wise (1989) 2 suggest that mobility among the elderly is generally low – which they put down to transaction costs. They argue that the significant jump in mobility when necessary (such as with a change in marital status, or children moving out of family home) points to the fact that moves would be more frequent if transaction costs were not a barrier. • Furthermore, the negative welfare effects of such transaction costs if they h ttp s ://fib re e .o rg /in d u s try-e xp e rt-d r-ja n -ve u g e r/ h ttp s ://co re .a c.u k/d o w n lo a d /p d f/6483625.p d f 3 h ttp ://w ra p .w a rw ick.a c.u k/1664/1/WRAP_Os w a ld _ 475_tw e rp _475.p d f 1 2 Enda McDonnell: A Literature Review on the Applicability of Blockchain Technology for use in Real Estate Transactions 30 reduce mobility are significant. Oswald (1996) 3 relates a 2% increase in unemployment with a 10% increase in home ownership. He identifies renters as having more mobility and thus can exit unemployment faster. • • Oswald continues to point out that regions with higher proportion of renters have lower rates of unemployment. As shown in Figure 1 Figure 1. Oswald's alignment of Unemployment to Proportion of Private Renters. Oswald (1996). 4. The Buying Process Given the issues with the current process and the need for further research, Nijland and Veuger (2019) tackle the central research question: ‘In which stage of the buying process of commercial real estate can Blockchain provide added value for the stakeholders involved?’ Firstly, the authors interviewed Blockchain experts to understand its demands and possibilities. A second phase saw them interview experts of the real-estate buying process (managers, commercial advisors, notaries, and legal/fiscal professionals). The goal was to learn which stage of the buying process would be most suitable for the implementation of Blockchain. Enda McDonnell: A Literature Review on the Applicability of Blockchain Technology for use in Real Estate Transactions 31 Though deductive approaches were used to extract qualitative analysis from the semi-structured interviews, the data gleaned from both cohorts is funneled through the authors, which limits potential outcomes by the authors’ understanding of each field. Perhaps a better approach would be to bring these groups together in a working group, where problems and potential solutions could be explored unfiltered. Additionally, the process assumes incremental improvement is appropriate for Blockchain implementation. Stakeholders where asked about obstacles with current process. However, blockchain has the potential to radically alter the process. If it were to remove intermediaries, for instance, it is not likely that the affected intermediaries would cite themselves as an obstacle. A smart aspect of the field research describes how the interviews would be transcribed to facilitate later additional analysis if deemed worthy. 4.1 Findings Nijland and Veuger (2019) do not make grand claims for blockchain. They determine that the positive characteristics of Blockchain are mainly focused on safety/security aspects of data. Due to the early nature of blockchain, large adoption by the majority is not forthcoming. Controlling, and sharing real estate documents could become more efficient using a Blockchain, which would have a positive effect on the duration of the process and therefore on the costs. Interestingly, they specifically call out that contrary to the expectation that blockchains will disintermediate, the total disappearance of these parties in real estate transactions will not be the case due to their special knowledge in a part of the process. 5. A Proposed Infrastructure Through their interview analysis, Wouda and Opdenakker (2019) identify reliability, transparency, and security of data to be the main challenges for actors in the real estate transaction. They “propose an infrastructure for a blockchainbased application to enhance the current way real estate is transacted by introducing a more comprehensive, better quality and more complete asset information overview.” They propose storing original legal and contractual documents on the servers of the involved parties and maintaining an audit trail of amendments to the original documents on the blockchain. Wouda and Opdenakker (2019) point out that the immaturity of the technology, a lack of standardization and limited examples of successful applications present Enda McDonnell: A Literature Review on the Applicability of Blockchain Technology for use in Real Estate Transactions 32 challenges for using blockchain as a solution. They continue to argue that property reports and inspection information must be standardised, which could enhance verification through the use of APIs. They quizzed the five interviewees again to assess the utility of their architecture and heard the following benefits mentioned • Storing and sharing data avoids need for party interaction • Information validated in the network is more reliable • Information shared between parties is the same • Structured and standardised data facilitates more efficient workflows and analysis Importantly, parties identified the need for all stakeholders to sign-up to create sufficient incentive to develop the blockchain infrastructure. 6. A Deeper Examination Blockchain and Property in 2018 is a more considered examination (Graglia & Mellon, 2018). They take a broader, more philosophical approach, concerning themselves with the degree to which society will embrace decentralised governance, and how inherently political Blockchain is, compared to other technologies. They point out that the power we have placed in the hands of a few tech giants must be redressed and that, of technologies currently available, only blockchain has the power to do this. Graglia and Mellon (2018) state that transaction costs for the median house sold in the US can account for 10% of the transaction price, and that entire industries exist with the sole purpose of capitalising on the inefficiencies of property transfers. They quote Goldman Sachs as estimating that $2-$4 billion could be saved in efficiencies in property title insurance alone. They reckon this saving could be achieved in the short term by sharing contracts and approvals on a blockchain, which is also the approach recommended by Wouda and Opdenakker (2019). In addition to this short term saving, Graglia and Mellon (2019) look further into the future to imagine a peer-to-peer property transfer market where transaction times drop from months to minutes and costs drop from thousands to small service fees. They consider a time where unbundling permits shares in property to be sold, and blockchain facilitates real estate investment not limited by geography. However, they admit it is difficult to envision a genuine peer-to-peer Enda McDonnell: A Literature Review on the Applicability of Blockchain Technology for use in Real Estate Transactions transactions without intermediaries. 33 • This will come as good news to the real estate agents who partook in a study on the impact of Blockchain on the Real Estate sector in Pakistan (Uzair et al., 2018). Their conclusion was that “the real estate brokers would rather not have this technology implemented […] as it would enable any new or old buyer or seller to see the prices at which these properties are being traded, which would cut into their profits as well as eventually make them redundant.” • However, a perhaps wiser view came from intermediating notaries in Georgia. Nijland and Veuger (2019) quote Straub (2018) as pointing out how ‘Notaries in Georgia have contributed to the switch to Blockchain. Because the system eliminated exactly the work that required little intellectual effort, allowing the notaries to focus on the more interesting and challenging tasks. We might lose some revenue due to the implementation of Blockchain, but we could earn more money due to the better focus on more complex dossiers.’ Graglia and Mellon (2019) outline the benefits of blockchain and, assuming it can achieve societal acceptance, list prerequisites for any solution for the real estate sector. These include an identity mechanism, a method to require more than one person’s authorisation for transactions to proceed, and training, among others. Graglia and Mellon (2019) examined how a blockchain-based registry might evolve and, uniquely in the literature, list eight maturity levels 1. No Blockchain Integration (this is the status quo) 2. Blockchain Recording: important documents are stored on the blockchain such that they can be independently verified. Though feared by some surveyors and notaries, the authors believe this will continue. 3. Smart Workflow: Efficiencies are gained by publishing steps of a transaction to the chain and avoiding the current process of physically sending proof between parties. 4. Smart Escrow: Buyers, sellers and banks interact and transfer funds via smart contracts. The authors raise concerns here about the vulnerability of smart contracts and the potential for legal issues if they do not behave correctly 5. Blockchain Registry: Central datastore of property titles moves to a decentralised blockchain. Detailed transaction data would be stored on a private, permissioned blockchain, while the public aspects of a land registry would be stored on a public chain. Enda McDonnell: A Literature Review on the Applicability of Blockchain Technology for use in Real Estate Transactions 6. Disaggregated Rights. 34 7. Fractional Rights. 8. Peer to Peer Transactions: all previous levels must be realised first. The authors find it difficult to envision genuine P2P without intermediaries. 9. Interoperability: global interoperability between blockchain registries in different jurisdictions – the holy grail as they call it. Theirs is an excellent, considered piece that delves deeper than other papers. They conclude with a series of thought-provoking questions about the future of Blockchain for Real Estate, the highlights of which suggest… • Premiums for title insurance may drop by 30% in the US if titles are stored on a blockchain. • The authors make the point that addressing problems like corruption is a greater incentive for blockchain adoption than the desire to upgrade an already functional system. • Efficient access to foreign property markets is more significant for emerging economies than for developed ones. • Accurate data helps all participants. The authors argue that blockchain can help in encouraging accuracy and point to a Ghanaian test where users are rewarded for adding accurate data and penalised for adding erroneous information. • The authors argue that governments must regulate the economy and enforce the law, and as blockchains become integrated into registries at higher levels, national laws, taxes, fees, and regulations will have to be integrated into smart contracts. 7. An Examination of Costs Hermansson (2020) determined that a real estate smart contract would be simpler than CryptoKitties contract and therefore cost less to deploy. However, documents needed to support a real estate transaction would be prohibitively expensive to store on the blockchain. For example, storing a 10KB document on the Ethereum network was estimated to cost roughly $10 in Dec 2019. Thus, real estate transaction documents would need to be stored on IPFS, with the hashed representation going on the blockchain. Hermansson (2020) also expresses concerns about price volatility on blockchains – that changes in the value of Enda McDonnell: A Literature Review on the Applicability of Blockchain Technology for use in Real Estate Transactions 35 Ethereum would alter the value of the down payment may alter. It is argued that stable coins would solve this challenge. 8. Practical Experiment - Sweden A Swedish project by Lantmäteriet (The Swedish Mapping, Cadastre and Land Registration Authority) along with several private corporations compared 33 steps needed today for private persons to purchase small properties via agents, with how that could occur using blockchain. They identified several improvements in accordance with the literature (Lantmäteriet (The Swedish land registration authority), 2016). • Time reduced from 4 months to a few days (and could become real-time). • Information needed for bill of sale is shared, so can be signed by buyer and seller upon taking up occupation. • The risk of title not transferring is much reduced because legal prerequisites can be ensured prior to signing. • Digital signatures provide higher levels of security, which increases confidence in the system for multiple signatories. 9. Conclusion The main papers agree that blockchain is a potential game changer for real estate transactions. However, they also all agree that blockchain is in its infancy and that more research is needed. Wouda and Opdenakker (2019) argue that specifics and applications of blockchain remain unclear. Nijland and Veuger (2019) call for research to understand how transparency could impact stakeholders in the process. Verger (2017) says how little research has been done in this area. In discussing the current status, McNamara (1998) identifies significant delays in property transactions. Graglia and Mellon (2019) argue that transaction costs are extremely high, putting forward figures that they believe Blockchain could reduce. Venti & Wise (1989) point to the impact on welfare caused by lower mobility due to high property transaction costs. Oswald relates reduced mobility to increased unemployment, pointing out how renters can exit unemployment faster due to their more favourable mobility. Nijland and Veuger (2019) set out to determine which stage of the buying process of commercial real estate could Blockchain provide added value. They conclude that controlling and sharing real estate documents could become more efficient using a Blockchain and reduce the process duration. They also point out that Enda McDonnell: A Literature Review on the Applicability of Blockchain Technology for use in Real Estate Transactions 36 blockchain is not likely to completely disintermediate agents due to their special knowledge in a part of the process. Wouda and Opdenakker (2019) also identify reliability, transparency, and security of data to be the main challenges for actors in the real estate transaction. They propose an infrastructure for a blockchain-based application to enhance real estate transactions. They suggest that standards in real estate documents would enhance blockchain’s benefit by permitting automated API verification. They also make the point that all stakeholders would need to sign up to use the solution before there would be sufficient incentive to develop the blockchain infrastructure. Graglia and Mellon (2018) provide a deeper analysis of what groundwork is needed to lay the foundation for a blockchain solution. They provide a vision of how such a framework might evolve through eight levels. They provide some forward-looking statements of how blockchain could impact the industry with a drop in insurance premia for instance. They also point out that regions with corruption have more to gain from blockchain and how blockchain has the potential to improve data accuracy through built-in rewards. From a practical point of view, Hermansson (2019) provided light examination of the costs of running a property system on Ethereum. A Swedish industry project to examine the use of blockchain for the land registry there also drew conclusions that matched the literature. References Andonov, A., Eichholtz, P. and Kok, N., 2014. Intermediated investment management in private markets: Evidence from pension fund investments in real estate. Graglia, M. J., & Mellon, C., 2018. Blockchain and Property in 2018. MIT Press Journals. 12(1/2), pp.90-116. Hermansson M., 2020. Real Estate Transactions using Blockchain Technology. Dissertation, Umeå University. Lantmäteriet (The Swedish land registration authority)., 2016. The Land Registry in the blockchain. [ebook]. Available at: http://icait.org/pdf/Blockchain_Landregistry_Report.pdf [Accessed 6 November 2020]. Enda McDonnell: A Literature Review on the Applicability of Blockchain Technology for use in Real Estate Transactions 37 McNamara, P., 1998. Exploring liquidity: Recent Survey Findings. Brighton: Paper to the 7th Investment Property Databank Conference. Nijland, M., & Veuger, J., 2019. Influence of Blockchain in the Real Estate Sector. International Journal of Applied Science, 2(2). Spielman, A., 2016. Blockchain: digitally rebuilding the real estate industry. Doctoral Dissertation, MIT. Uzair, M., Karim, E., Prof. Dr. Shair, & Ahmed, S., 2018. The Impact of Blockchain Technology on the Real Estate Sector Using Smart Contracts. MPRA. Wouda, H. P., & Opdenakker, R. (2019). Blockchain technology in commercial real estate transactions. Journal of Property Investment & Finance, 37(6), 570579. Xie, J., 2017. Who Is “Misleading” Whom in Real Estate Transactions?. Real Estate Economics, 46(3), pp.527-558. Iarla Molloy: The Economic Design of Consensus Incentive Methods 38 The Economic Design of Consensus Incentive Methods Iarla Molloy Abstract: Incentives play a key role in the success and sustainability of blockchain solutions. Their effect and impact range the whole spectrum from miner rewards, staking rewards, transactions-fee and play a role in the critical design of the blockchain. In this paper, we explore the economic impacts of consensus design decisions and design a framework to capture the economic consequences of specific incentive intents. A consensus method e.g. (Proof of Work, Proof of Stake) is the mechanism use by distributed systems achieve an agreement on state of the blockchain in turn maintaining the blockchain integrity. Each of these mechanisms are designed to reward actors; a summary of the mechanisms is explored in this paper with their design goals. Keywords: Blockchain, Incentives, Economics, Consensus, PoW, PoS Iarla Molloy: The Economic Design of Consensus Incentive Methods 1. Introduction 39 Incentives are the pillar of successful permissionless blockchains. We explore the economic objectives behind the Proof of Work (PoW) and Proof of Stake (PoS) consensus designs. We introduce a simplified model called Blockchain Incentive Rewards (BIR) to capture the scope of the different consensus types. 2. Literature Review This section provides a review of existing literature in the areas of the blockchain incentive schemes, PoW and PoS systems. It finishes up with a brief look at the verifiers dilemma. 2.1. Survey of blockchain incentive schemes Catalini and Gans (2020) point to incentives being created through organic growth of blockchain where early adopters benefit from early engagement. They categorize incentives into two classes; adoption phase and incentives phase to support continuous contribution. The first phase can include the issuing of the tokens through an Initial Coin Offering (ICO) scheme, while the second phase incentives are created through consensus mechanisms. Groups incentive strategies into two primary groups; issuing a token in response to what a network node deserves and based on the allocation of the tokens (Huang et al. 2019). In the issuing mechanism for example Bitcoin, nodes win invoicing rights under PoW consensus algorithms and Bitcoin rewards the miners. The second method manages the distribution of existing tokens in the system through evaluating the nodes contributing to the network, the contribution of each node and the random factors that guarantee fairness. In the original allocation model proposed by Nakamoto (2008), the first miner that succeeds can get a bitcoin while the rest all fail and can only expect the next turn although they paid the computing power to go through mining pools. 2.2. Incentives and Proof of Work systems In a PoW consensus, solution miners have separate functions; creating blockchains and checking the validity of each blocks. Luu et al. (2015) discuss the concept of verifiers dilemma (resulting as consequence of lack of incentives in the PoW protocol). The miners get paid for the work done and use the rewards system as financial incentives. In the original bitcoin paper by Nakamoto (2008), the first transaction in a block starts a new coin. Blocks can only be added by Iarla Molloy: The Economic Design of Consensus Incentive Methods 40 solving a complex hash function. The hashing power for the PoW system can be provided by individual miners or mining pools. The mining pool combine resources and shared rewards using schemes such as Pay-Per-Share (PPS) and Full Pay-Per-Share amongst others (Bitcoin, 2020). 2.3. Incentives and mining pools Wang et al. (2020) point out several limitations associated within the mining pools that can influence the motivational effects of mining pool. One of these limitations is the security of the hardware and selection of mining pools (in 2018 – the top 5 mining pools had over 60% of the hashing power). They also outline dishonest actor strategies such as self-mining attacks (an attack where a miner does not release a block and creates a private fork) which can bias a mining pool. The existence of mining pools shifts the blockchain principle from a decentralized metaphor towards semi-centralized command and control metaphor. There are many reward types associated with each of the mining pools (Bitcoin, 2020). 2.4. Incentives and governance Blockchain governance is explored by Beck et al. (2018) under three dimensions; decision rights, accountability and incentives. They point out that there are several target areas for the incentives such as incentives for users, systems development, token holders and technical consensus. In platforms such as Polkadot, they have inbuilt governance mechanism e.g. ‘Dot’ holders can create governance proposals and voting rights as shown in Figure 1 (Petrowski, 2020). Figure 1. Polkadot Governance. Petrowski (2020). Iarla Molloy: The Economic Design of Consensus Incentive Methods 41 The governance on a blockchain impacts the reputation of the blockchain and how the market behaves on the blockchain. 2.5. Reputation based incentives In Wang et al. (2020), a reputation-based incentive scheme is proposed in the consensus process. Reputation networks have their origins in the early P2P networks, but a model proposed by the Gupta at al. (2003) model trust and reputation in decentralized multi-agent systems. Their model is built off the Entropy model which captures the exchange of the trust in the business environment. The Proof-of-Reputation is a proposed mechanism that can be integrated into the consensus protocols. They propose a new set of rules in the mining process in that it is the reputation decline if nodes fail to produce blocks within a period. 2.6. Incentives and Proof of Stake systems PoS addresses issues with PoW systems by providing a consensus mechanism that is not impacted by computation cost and consensus time delays. The main idea of a PoS consensus mechanism is that the proportion of users’ stake in the system is inversely proportional to the difficulty of block generation. The larger the stake held by nodes in the system, the easier the holder windows wins. In a preliminary paper by Fanti at al. (2019), economic rewards in PoS systems can be manifested in two ways; block rewards which are given to the proposer of the longest chain and transaction fees paid by the sender for transferring the amount which is split between a set of validators and the block proposer. 2.7. Incentives blockchain architectural layer Huang et al. (2018) have categorized incentives into two primary areas; issuance and allocation. Issuance, which is typically associated with the public blockchain provides rewards to miners who contribute resources such as CPU/network or storage to the upkeep of the network. The allocation incentives are designed to ensure that there are incentives for the continuous processing and forwarding of data on the network. Li et al. (2020) divide the architecture into multiple layers as shown in Figure 2 below. The combination of the incentive and consensus layers are a key fabric of the blockchain. In the architecture, the incentive layer plays a key role in the blockchain solutions. We extend this work by making the incentive layer orthogonal to all the other architecture layer and we include a new governance layer. Iarla Molloy: The Economic Design of Consensus Incentive Methods 42 Figure 2. Blockchain layers. Li et al. (2020). 2.8. & Incentive compatibility Luu et al. (2015) describes the verifiers dilemma as a situation in which rational miners are incentivized to accept invalid blockchains or decide to skip the verification of expensive transactions. They cite two potential attack resource exhaustions (using the Ethereum gas to include resource-intensive transaction in new blocks) or incorrect transaction attacks (skipping part of the attacks that are compute intensive). Incentive compatibility occurs when the incentives that motivate the actions of individual participants are consistent with following the guidelines established by the group for the common good. Chiu and Koeppl (2019) describe modelling incentives as the No-Double-Spending constraint (NoDS) which outlines how reward and confirmation lags play a critical role in the design incentives to prevent users from double sending. 3. PoW Economics and Incentives PoW miners have separate functions in consensus; checking that it is that blocks are correctly constructed and checking the validity of each blocks. The contribution of the work by Luu et al. (2015) includes the introduction of the verifier’s dilemma. The miners get paid for the work done and use the rewards system as financial incentives. The work originates in the original bitcoin implementation. 3.1. Individual miner economics Individual miner can earn revenue from the mining the blockchain but need to buy hardware and pay energy costs. Once a complex puzzle is solved and a block Iarla Molloy: The Economic Design of Consensus Incentive Methods 43 is created, the miners are given rewards. A lot of energy is expended when solving the puzzle which make the expense quiet intimidating thus the need for pools. 3.2. Mining pool monopolies In a study by Silva et al. (2020) on the Ethereum network, they identified selfish behavior within the pools and the prevalence that these power mining pools have impacted the blocked delays. Their analysis looked at fifteen mining pools that created most of the blocks, with Sparkpool and F2Pool2 holding approximately 61% of the hash power. A study by Miller et al. (2015) concluded that 2% of nodes accounted for 75% of mining power. These monopolies can act as a disincentive for new miners to engage in the consensus. 3.3. ASIC economics and mining pools In order to mine a cryptocurrency, a miner will need an upfront investment in the ASICs. The cost prices that are based ASIC hardware is typically based on the expected returns from the hardware. Yaish and Zohar (2020) argue the contrary by showing that the underlying hardware can be considered as financial options. Their analysis also showed that a reduction in Bitcoin volatility negatively impacts the value of the hardware and thus becomes a financial disincentive. The energy cost of running the equipment is important from an individual’s mining/pooling perspective. Initial estimates from De Vries (2020) calculated that in 2018, the total consumption of the bitcoin network equalled the consumption of energy in Ireland. 4. PoS Economics and Incentives PoS protocols were developed as energy saving alternatives to PoW. Instead of computational power resources, leaders are selected based on their stakes, i.e., contributions to the blockchain network. The algorithms use a Follow-the-Satoshi (FTS) algorithm that have been adopted in PoS based blockchain networks such as Cardano, Sp8de, and Tezos. The staking rewards are created through inflation and the reward scheme is designed to incentive consensus participation by rewarding block creators and validators while at the same time penalizing poor behaviors’ and prevent attacks. Table 1 below shows these consensus protocols Iarla Molloy: The Economic Design of Consensus Incentive Methods Table 1. Consensus Protocols Protocol Casper Algorand Tendermint 44 Incentive scheme Deposit confiscated for poor validator behaviors Pure POS (every node can particulate in the network) Rewards divided between validators and deposit confiscated for mis-behaviors 4.1. Ethereum transition to POS Ethereum (2020) is transitioning away from a PoW system towards a PoS system in which validators will be paid to perform tasks to ensure the network is healthy. The incentive stakes influence the number of validators on the network and cost of the network. There are several factors that a validator must consider before taking up an incentive; computing costs, capital acquisition cost (deposit of 32 ETH), cost risk and general uptime of a maintenance cost and security risk. Polkadot is a multi-chain network that connects blockchain and uses a NPoS protocol as its consensus mechanism in which it nominates a subset of validators that can perform the consensus. There is a limited number of validators that get equal powers and equal rewards. 4.2 DeFi as a dis-incentive for PoS Incentives from the PoS have competition from new offerings in the DeFi space. The PoS requires validators to commit their assets to earn rewards while decentralized financial application such as Compound and maker provide ways in which the user and validators can lock-up Ethereum from the blockchain. The white papers on the asset protocol from Park et al. (2020) outlines these problems in detail: • • • Staking can damage the ecosystem as the new DeFi lending offers higher rates. Tokens that are DeFi staked cannot contribute to network security. Staked tokens cannot be traded as their true value cannot be reflected on the market. 4.2.1 Voting mechanism for disincentives The nature of staking can lend itself to monopolies. EOS is a blockchain similar to Ethereum but in EOS there is an option to buy votes which slew the democracy of the blockchain producers. EOS however only runs 21 Iarla Molloy: The Economic Design of Consensus Incentive Methods 45 miners. Significant development has occurred in the PoS consensus mechanism over the last few years. 5. Design of the Model In this section we will test the consensus models against a reference model that captures the economics decisions that influence the design mechanism used in the blockchain. We refer to this as the Blockchain Incentive Reward (BIR) model. 5.1 BIR Model The model is captured below in Figure 3. The model is derived from Rakoff’s Gameplay Model game playing model is assessed on co-operating, competition, immersion and achievement Albertarelli et al. (2018). The framework is composed of three tiers; external factors, game playing framework and blockchain mechansim stacks. These are decribed below in Figure 3. Figure 3. BIR Model. Albertarelli et al. (2018) 5.1.1 External Factors This tier captures the external factors such as PESTEL and the rewards and state of the dependent markets that might influence an agent’s decision to engage in the consensus mechanism. Iarla Molloy: The Economic Design of Consensus Incentive Methods 46 The PESTEL factors can be a co-operating (political beliefs) and a competitive factor to the blockchain e.g. cost of energy. The incentives can be allocations or issuance orientated. 5.1.2 Game Playing Framework This tier will capture the agents state and motivations to engage in blockchain incentives. These states can be co-operating, competition and achievement orientated of immersive factors. Defi monopolies are competitive factors to incentives while staking is seen as positive incentive factor. Figure 5. Game Playing Framework. Albertarelli et al. (2018) Figure 4. Blockchain Mechanism Stack. Albertarelli et al. (2018). Iarla Molloy: The Economic Design of Consensus Incentive Methods 47 5.1.3 Blockchain Mechanism Stack In this tier the incentives can be applied several levels within the blockchain. The incentives can be applied at multiple technical layers within the technology stacks. Sometimes an incentive might span multiple layers in a stack. 5.2 Testing the model This section outlines how each consensus can be mapped into the framework. 5.2.1 Analyzing Proof of work The are some notes from this model, in order to co-operate into the network you need to invest while energy costs and mining pools could be a competition factor. Figure 5. PoW consensus. Albertarelli et al. (2018). 5.2.3 Analyzing Proof of Stake The investment is the PoS stake while the competition factor is DeFi. Iarla Molloy: The Economic Design of Consensus Incentive Methods If we look at the nPOS model the governance layer is activated. 48 6. Conclusions and future directions We captured academic research into incentives behind the consensus mechanism. As part of the exploration there are number of key observations: • • • • • The PoW mechanisms will be superseded by more advanced forms of PoS. The DeFi investment options can have a negative impact on the returns PoS systems. The governance and voting the model when considering investing option. The Data/Network layer outline in the document can be converged into a verifier layer. The BIR external model needs to be refined and the layers coding to create a simulation tools for incentives References Albertarelli, S., Fraternali, P., Herrera, S., Melenhorst, M., Novak, J., Pasini, C., Rizzoli, A. and Rottondi, C., 2018. A Survey on the Design of Gamified Systems for Energy and Water Sustainability. Games, 9(3), p.38. Iarla Molloy: The Economic Design of Consensus Incentive Methods 49 Beck, R., Müller-Bloch, C. and King, J., 2018. Governance in the Blockchain Economy: A Framework and Research Agenda. Journal of the Association for Information Systems, pp.1020-1034. Bitcoin. 2020. Comparison of mining pools. [online] Available at: https://en.bitcoin.it/wiki/Comparison_of_mining_pools. [Accessed 5 November 2020]. Catalini, C., Gans, J., 2020. Some simple economics of the blockchain. Communications of the ACM, 63(7), pp.80-90. Chiu, J. and Koeppl, T., 2019. Incentive Compatibility on the Blockchain. Studies in Economic Design, pp.323-335. Ethereum. 2020. Eth 2.0 Economics. [online] Available at: https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/. [Accessed 9 November 2020]. Fanti G, Leonid Kogan L., Viswanath P. 2019 Payment Systems. Economics of Proof-of-Stake Gupta M., Judge P., Ammar M. (2003), A reputation system for peer-to-peer networks, Proceedings of the 13th International Workshop on Network and Operating Systems Support for Digital Audio and Video, ACM (2003), pp. 144152 Huang, J., Lei, K., Du, M., Zhao, H., Liu, H., Liu, J. and Qi, Z., 2019. Survey on Blockchain Incentive Mechanism. Communications in Computer and Information Science, pp.386-395. Li, A., Wei, X. and He, Z., 2020. Robust Proof of Stake: A New Consensus Protocol for Sustainable Blockchain Systems. Sustainability, 12(7), p.2824. Luu, L., Teutsch, J., Kulkarni, R. and Saxena, P., 2015. Demystifying Incentives in the Consensus Computer. Proceedings of the 22nd ACM SIGSAC Conference on Computer and Communications Security, pp.706-719. Miller A., Litton J., Pachulski A., Gupta N., Levin D., Spring N. and Bhattacharjee B., 2015. Discovering bitcoins public topology and influential nodes. Iarla Molloy: The Economic Design of Consensus Incentive Methods 50 Nakamoto, S., 2008. Bitcoin: A Peer-to-Peer Electronic Cash System. SSRN Electronic Journal. Li, A., Wei, X. and He, Z., 2020. Robust Proof of Stake: A New Consensus Protocol for Sustainable Blockchain Systems. Sustainability, 12(7), p.2824. Park R., Kim J., Hong D. (2020) https://anchorprotocol.com/docs/The_bAsset_Protocol.pdf. [online]. Available at: https://anchorprotocol.com/docs/The_bAsset_Protocol.pdf [Accessed 12 April 2020]. Petrowski, J., 2020. Polkadot Governance. [online]. Available at: https://polkadot.network/polkadot-governance/ [Accessed 2 April 2020]. Silva, P., Vavřička D., Barreto J. and Matos M., 2020. Impact of GeoDistribution and Mining Pools on Blockchains: A Study of Ethereum - Practical Experience Report and Ongoing PhD Work. 2020 50th Annual IEEE-IFIP International Conference on Dependable Systems and Networks-Supplemental Volume (DSN-S). de Vries, A., 2020. Bitcoin’s energy consumption is underestimated: A market dynamics approach. Energy Research & Social Science, 70, p.101721. Wang, E., Liang, Z., Chen, C., Kumari, S. and Khan, M., 2020. PoRX: A reputation incentive scheme for blockchain consensus of IIoT. Future Generation Computer Systems, 102, pp.140-151. Yaish, Aviv & Zohar, Aviv., 2020. Pricing ASICs for Cryptocurrency Mining Mafalda Santos: Preventive Health Behaviour – A Blockchain Economy Review Preventive Health Behavior – A Blockchain Economy Review 51 Mafalda Santos Abstract: Current healthcare focuses on treating and medicating people to treat ailments, which is costly on governments as well as on people’s lives and quality of life, people are used to react to their health as opposed to be active about their health and adopt preventive behaviors. By instigating people’s decisions making towards a preventive health behavior, people can avoid developing certain preventive diseases and related deaths, improving their health and have better quality of life. Traditional economics postulates that people are rational, take the best decisions to maximize their utility and cannot be influenced however, this is not how humans behave. That’s why people take healthy risks such as smoking, have unhealthy diets and don’t exercise, these risky behaviors underline many of the preventive diseases. Behavior economics developed several theories to explain how humans make decisions do way they do and why they’re not always rational about their decisions, making decisions that aren’t on their best interest. Behavioral economics, neuroeconomics and health psychology together make strong theories and studies about the decision process. Neuroimaging is a powerful tool to understand where in the brain computations happen in different decision context however, lots of data being collected in these studies are based on peoples’ perceptions and there’s lack of uniformity in definitions. Information isn’t readily available, and it is difficult to understand pertinent information from different fields. Blockchain technology is a great tool that can support storing and sharing data across different fields of investigation. It can also be used to develop applications to instigate people adopting health behaviors while preserving personal and health data security and anonymity. Keywords: Health behavior, neuroeconomics, blockchain, AI behavioral economics, incentives, Mafalda Santos: Preventive Health Behaviour – A Blockchain Economy Review 1. Introduction 52 Most problems in healthcare are neither medical nor scientific, they’re behavioral and in many cases preventable by improving people’s decisions making. Individual decisions of healthy habits lead to a better health, prevent diseases and related deaths however, humans don’t always take the best decisions about their health, which is in contradiction to traditional economics that states that humans are rational, always maximize their utility, seek for all the information required, can handled several amounts of data and are not influenced. With the limitations of traditional economics, behavioral economics has emerged and developed better tools to understand human’s decisions and how people make choices the way they do even if it’s advised not to in their own best interest. The consilience of behavioral economics, neuroeconomics and health psychology provides a better set of tools to understand the mechanics of decision making and how to incentive healthy decisions to prevent diseases and related deaths. In this paper it will be reviewed the process of decision making in the health context and the challenges this area is facing. Then it will be reviewed the potential of blockchain in health care and finally the directions for future research. 2. Decision making process 2.1. behavioral economics and health psychology Rice (2017) centers his paper around the concepts of maximizing and sufficing, where maximizing the utility (maximizing the satisfaction gained from an option) is opposed to sufficing (settling for an ok option). According to Rice (2017), these concepts are the basis for the emergence of behavioral economics which states that people do not behave rationally, they don’t seek all the information required, do not use it in the best way, don’t always take the best decisions and individuals put present’s rewards ahead of future wellbeing. Behavioral economics theories therefore refute traditional economics’ postulates that people are perceived as having perfect information and if markets are not inflated by monopolistic firms, they’re rational, use information to maximize their utility, they can handle huge amounts of information and cannot be manipulated. Traditional economics’ focus is on the outcome of human decisions as opposed to behavioral economics that focuses on the process of decision making. An underlying postulation of health psychology is that a myriad of modern diseases is preventable by the adoption of health behaviors. Health risking behaviors such as smoking, unhealthy diet and sedentarism underpin many of the preventable diseases and related deaths. Health decisions are multiply determined and the combination of neuroeconomics and health psychology provides Mafalda Santos: Preventive Health Behaviour – A Blockchain Economy Review 53 foundation for the study of decision making as follows: “(a) Coherence of the field around a set of biologically rooted constructs described in a common language across fields; (b) concept parameterization, which helps make theories more measurable, falsified and parsimonious; and (c) confirmatory evidence of existing models” (DeStasio et al., 2019). Neuroeconomics theories and tools such as incentivized elicitation of value, and neuroimaging methods to identify which parts of the brain are involved in different decision making computations are a great addition to understand the process of decision making and to stimulate health behavior decisions (DeStasio et al., 2019). An important aspect to take into consideration when studying decision making in the health context, is that people making health decisions face information asymmetry, too much information, too many unknown risks, time pressure and other constraints (DeStasio et al., 2019). From a behavioral economics perspective, too much choice overwhelms, demotivates and brings higher levels of unsatisfaction to people, particularly to those who strive to maximize. Decision fatigue is another important component, after making several decisions the brain gets tired and starts making poor decisions, leading to people when in the same circumstances not always making the same decision (Rice, 2017). 2.2. Health decisions The decision making in the health psychology context is composed of multiattribute models and bounded accumulation models. For example, in the scenario of the flu vaccine, the multiattribute model states that people weight the rewards (protection against the flu) and punishments (the pain of the shot) as such, the individuals who highly value their health add greater value to the vaccine than those who undervalue their health (DeStasio, 2019). According to the bounded accumulation model, in the same flu vaccination context, an individual passing a sign reminding them to take the vaccine, if the individual already has the record of taking the vaccine might influence them to take the vaccine however, by analyzing the costs of fitting the vaccination in their busy schedule might demotivate them from taking the vaccine. However, if passing a sign that the vaccine is administered in the moment, might make the individual to change the decision to yes, to take the vaccine due to the cost reduction (DeStasio et al., 2019). The scenario described above is supported by behavioral economics, according to Herbert Simon, people have limited cognitive functions which is the base of the bounded rationality theory he developed. People have limitations in the amount of information they can process and how much they can remember, as such people make shortcuts or heuristics decisions rather than the classical utility maximization behavior, therefore people satisfice when making choices to Mafalda Santos: Preventive Health Behaviour – A Blockchain Economy Review 54 mitigate the overwhelming of constantly looking for information and maximizing utility due to their cognitive limitations (Rice, 2017). Prospect theory was developed by Kahneman and Tversky in the individual economic risk-taking behavior. This theory states that people evaluate risks not based on the utility, but rather based on the gains and losses of the outcomes and that people are risk averse. Another interesting factor is that people show a phenomenon called loss aversion, they try to avoid loss even if that requires them to engage in risky behaviors, loss is perceived to weight twice as much as gain, the decision is influenced on how the choice is formulated if in terms of losses or gains (Rice, 2017). Another related phenomenon is overly discounting the future, where decisions about the present’s rewards are much more weighted with regards to decisions about the future’s rewards. Prospect theory and overly discounting the future are very relevant in the context of health decisions with distinct emphasis on painful preventive health behaviors such “invasive cancer screenings for which the risk of the immediate outcome (e.g. pain) feels more certain and salient than do that of the potential long-term outcome if the behavior is not enacted (e.g. illness severity)” (DeStasio et al., 2019). Another contribution of the prospect theory, is the fact of phrasing preventive behaviors in terms of gains rather than losses, “for example, when the human papillomavirus vaccine is described as 100% effective against 70% of cervical cancers, people are more likely to express vaccination intentions than are they when the same vaccine is described as 70% effective against 100% of cervical cancers” (DeStasio et al., 2019). Nudge is a term coined by Richard Thaler and Cass Sunstein that supports the idea of ‘libertarian paternalism’, in the libertarian view, people should be given choices whereby the decision-making process should be guided by experts, hence the paternalistic view. The endowment effect explains the fact that when a person comes into possession of something, they feel they own it and want to keep it, even it is in their own best interest not to keep it. A similar concept is the status quo bias, whereby people prefer the current state of affairs as an example people usually choose the predefined option and usually do not choose the opt-in (or opt-out) options even if it is in their own best interest. For example, in countries where there are programs to support the cost of prescription drugs, have faced problems of enrolment due to too much choice available making it difficult for people to choose the most cost-effective plan for the drugs they’re prescribed. Every year people are allowed to change plan however, rarely people do so, which is in agreement with the status quo bias problem. Another pertaining occurrence is the low enrolment in government sponsored health insurance programs when people are eligible for it, from a behavioral Mafalda Santos: Preventive Health Behaviour – A Blockchain Economy Review 55 economics’ point of view this situation could arise due to people not understanding the costs and benefits of the several options, having too much choice, discounting the future over the present, not understanding the risks of not having health insurance or how people interpret the problems in their own mind. With regards to the smoking problem, behavioral economists have found that having people signing contracts to quit smoking and being rewarded financially was very successful it has been studied that people respond well to financial rewards. Another approach is the behavioral idea is that it is easier to get people to engage in a related activity as opposed to eradicating it completely and as such it would be easier to switch to electronic cigarettes instead of quitting smoking. According to OECD, over the past 30 years the obesity rates have doubled in the OECD countries. As per Zimmer, obesity is not a rational choice and as such is not a result of people maximizing the utility from their food preferences, instead, it is a result of how food-producing companies try to change people’s taste to a fatty and high calorie content foods. To counteract these effects, people buy more healthy food when their placed in strategic places, when fresh fruit and vegetables are placed at the checkout instead of sweets and also when people are financially rewarded for losing weight, they also engage more at losing weight. 3. Health behavior challenges It is necessary a more precise and mechanistic approach in order to better understand the process of health decisions (DeStasio et al., 2019). Conner and Norman (2017) make a review of four health behaviors, smoking, binge drinking, healthy diet and physical activity. According to Conner and Norman, health behaviors include ‘behavioral patterns, actions and habits that relate to health maintenance, to health restoration and to health improvement.” In order to understand what health behavior is, it is necessary to first define what behavior is. Majority of reviews are based on self-report measures of behavior, which poses problems with reliability due to the low correlation between selfreported and objectively measured physical activity. According to the authors, “definitions of physical activity vary along the dimensions of frequency, intensity, time or duration and type.” Another problem faced is the relation between the definition of health behaviors and the several possible health outcomes. For example, according to Conner and Norman (2017), a healthy diet represents a very complex situation due to “the mixed evidence about which components of diet (e.g. fat content) are important to which health outcome”. The third issue pointed out on this publication is the link between health behaviors and to the estimates of prevalence. There are problems of consistency of how Mafalda Santos: Preventive Health Behaviour – A Blockchain Economy Review 56 health behaviors and related outcomes vary across different segments of population, across countries. It is important to have standard definitions and measures across countries to better understand and correlate health behaviors with desired health outcomes. Another crucial factor is how is data collected and published across countries. The study of health behavior would greatly benefit if there were consistent definitions for each health behavior, the data collected would have the same standards for collection and stored in a single publicly available to anyone. The interventions reported to change health behaviors always produced smallsize effects on target health behaviors, which “highlights the need for systematic programmes of research to develop more effective interventions” also it “might suggest the presence of potential moderators of intervention effectiveness”. “Four potential moderators worthy of further investigation are: the use of theory, behavior change techniques, modes of delivery and level/type of intervention” (Conner and Norman, 2017). 4. The potential of blockchain in healthcare Blockchain is changing healthcare and medicine to more reliable practices, effective diagnosis and treatments due to the ability of being a secure vault for storing and sharing data securely, in order to exchange sensitive clinical data, it is required trustworthy and collaboration between the parties involved. “In the healthcare field and clinical settings, safe, secure, and scalable (SSS) data-sharing are highly imperative for diagnosis, as well as combined clinical decision making.” (Siyal et al., 2019). According to Siyal et al. (2019) the biggest constraints to safely exchanging clinical data are the sensitivity, data sharing agreements, procedures, complex patient matching algorithms, ethical policies, and governing rules. Blockchain technology is a decentralized, peer-to-peer, ledger that uses cryptography and distributed consensus algorithms to add transactions to the network. Syial et al. (2019) defines the blockchain network as having the following 6 characteristics: Decentralized, Transparent, Immutable, Autonomy, Open source and Anonymity. Several studies have been made to use blockchain in several domains of healthcare such as neuroscience, genomics medicine, clinical, pharmaceuticals, biomedical and HER medical. The Healthcare Data Gateway is a centralized private network which allows patients to have freedom to access, monitor and manage their clinical data. Another study based on the Ethereum protocol, allows for safe usage of sensor monitors enabling practitioners to track the healthcare status of their patients remotely. Blockchain can also play an important role in biomedical research and clinical areas as the blockchain can be used to store all Mafalda Santos: Preventive Health Behaviour – A Blockchain Economy Review 57 the consents, protocols, plans and smart contracts can be used in each step. Blockchain based technologies can be used for telemedicine, remote operations, support an active living of aging people and many more health applications. Medical drug supply chain is prone to fraud as there’s several intermediaries along the chain, a blockchain platform would introduce transparency and traceability across all the chain. Developments in neuroscience could benefit from blockchain technologies to store electric brain activity, brain activity is then translated into commands to control external electronic devices. An example is the company Neurogress that uses machine learning to improve brain activity reading accuracy. “Blockchains are a form of information technology with several important future applications, capable of supporting brain augmentation, stimulation of the brain, brain thinking and digitize a brain” (Syial et al., 2019). These technologies can be used to record sensory experiences, improve decision making, and leaning. After the text edit has been completed, the paper is ready for the template. 5. Directions for future research By understanding that people have bounded rationality and don’t always make decisions in their own best interest and that increasing taxes and providing more information isn’t always the solution to help people making better decisions, with the use of behavioral economics, blockchain and artificial intelligent algorithms, it would be interesting to understand how ones decisions can be changed, how to incentive people to adopt health behaviors by building blockchain applications that support decision making. With the usage of nudges by reducing the amount of choice and information available and as such reducing the cost and cognitive effort and decision fatigue and reducing heuristic decisions. To promote people’s welfare by supporting them to make healthy decisions. 6. Conclusion Neuroeconomics and behavioral economics developed important theories about the decision-making process and where in the brain those decisions take place. Understanding how people make decisions, what motivates/demotivates them in decision making can lead the way to develop strategies to incentive preventive health behaviors and consequently prevent certain diseases and related deaths. The core nature of blockchain of being transparent and immutable can help resolve many of the issues health behavior studies are facing. Also, blockchain applications can be used to support people making better health decisions, adopting health behaviors and eschew preventable diseases. Mafalda Santos: Preventive Health Behaviour – A Blockchain Economy Review 58 References Rice, T. (2013). The Behavioral Economics of Health and Health Care. Annual Review of Public Health, 34(1), pp.431-447. Conner, M. and Norman, P. (2017). Health Behaviour: Current issues and challenges. Psychology and Health, 32(8), 895-906. DeStasio, K. and Clithero, J. and Berkman, E. (2019). Neuroeconomics, health psychology, and the interdisciplinary study of preventive health behaviour. Social and Personality Psychology Compass, 13(10). Siyal, A., Junejo, A., Zawish, M., Ahmed, K., Khalil, A. and Soursou, G., 2019. Applications of Blockchain Technology in Medicine and Healthcare: Challenges and Future Perspectives. Cryptography, 3(1), p.3. Renta Tenório Sorrentino: Cyber Laundering and its Economic Impact on Money Launderers 59 Cyber Laundering and its Economic Impact on Money Launderers Renata Tenório Sorrentino Abstract: Money Laundering has been a critical issue in society for years. It plays a role in the financial and non-financial sectors as it interferes indirectly on the costs that are applied to the users of these services due to the Anti-Money Laundering controls that some business sectors are obliged to implement. However, Anti Money-Laundering (AML) controls are increasingly making money launderers’ lives more and more difficult due to the advance of technology and stronger regulations. Such controls are forcing launderers to search for new methods to cleanse their dirty money without raising suspicion or to avoid being prosecuted, causing a higher cost in the money laundering process. Through the revolutionary creation of Blockchain technology, Satoshi Nakamoto introduced cryptocurrency to the world. An invention that would help many unbanked people to have access to the financial system, to give people autonomy on their money without any governmental or third-party intervention, and to reduce the instance of payment fraud. Unfortunately, when a new opportunity arises, criminals and money launderers seek to take advantage of these new opportunities. After exploring many relevant works in this research topic, the Literature Review aims to expose the vulnerabilities of the cryptocurrencies' features while analysing the economic incentives of them for the money launderers to increase their revenue and it makes a comparison between the traditional Money Laundering and Cyber Laundering. Keywords: Anti-Money Laundering; Money Laundering; Cyber Laundering; Cryptocurrency; Blockchain Renta Tenório Sorrentino: Cyber Laundering and its Economic Impact on Money Launderers 60 1. Introduction Markets in development that are implementing new transaction methods such as digital currencies can transform communities and economies around the world. However, with these new technologies, new risks to effective and operational economies, societies, and everything that is involved with them are emerging. Still, anti-Money Laundering controls are lacking in regulations, legislation, and governmental rules concerning the risks that the blockchain derivatives may bring to societies (Kosobutskaya & Rudakova, 2018). Cryptocurrency instruments are vulnerable to criminal actions. How fast new cryptocurrencies can be created and how fast the transactions through it can be completed are challenging law enforcement and the sectors that are obliged to follow AML controls (Holman & Stettner, 2018). “Many of these risks materialize not on the blockchain itself, but in the surrounding ecosystem of issuers, VCEs, and wallets that support consumer access to DLT” (Holman & Stettner, 2018). In 2017, $266 million was laundered and in only the first half of 2018, $ 761 million was laundered by money launderers using cryptocurrencies. It was estimated that in 2019, more than $ 1,5 billion would be laundered. In Europe alone, Europol estimates that criminals have laundered from $4.1 to $ 5.5 billion (Kosobutskaya & Rudakova, 2018). 2. Money Laundering The definition of Money Laundering is "the process of making illegally-gained proceeds (i.e. 'dirty money') appear legal (i.e. 'clean')" (Bryans, 2014). Money Launderers try to disguise the proceed of crime without any suspicion to be able to re-use that illegal money as if it were obtained legally. Their idea is to break any link with the underworld (Brenig et al., 2015). The biggest portion of illegal profits is in cash due to its anonymous and untraceable properties, making it difficult to be caught by authorities (Brenig et al., 2015). Placement, layering, and integration are the three phases of Money Laundering. This process can be seen below in Figure 1. Placement is when the launderer place the illegal money into the financial system (i.e. legitimate small business) (Mabunda, 2018) in a way or place that authorities are less likely to suspect (Brenig et al., 2015). Renta Tenório Sorrentino: Cyber Laundering and its Economic Impact on Money Launderers 61 The second phase layering is when a sequence of transactions is made in different institutions or jurisdictions to make the traceability of the criminal gain more difficult and more distant from the committed crime (Mabunda, 2018). The type of transactions could be by buying and selling investment instruments or by transferring the illegal money to multiple accounts, preferentially, to accounts in jurisdictions where the AML controls are ineffective (Brenig et al., 2015). The third and final phase is the Integration. At this stage, the criminal fund is re-integrated into the financial system as if it was gained as legitimated, such as selling a good or service and depositing the amount back into the bank (Mabunda, 2018). As the distance between the ill-gotten fund and the crime increases, this makes it more difficult to detect. Businesses and particularly financial institutions should have tactics and procedures in place to detect the crime in the early stages (Cabral, 2019). The biggest problem regarding money laundering across the world is the direct interference it causes in the countries’ economies and its integrities, including in financial institutions, having as a consequence, interference in the cash flow and international investments avoidance (Mabunda, 2018). Besides, Money Laundering is, also, intimately connected to terrorism financing, corruption, and infiltrating politics (Gonçalves, 2019). Concerning terrorism, the financing can proceed from legal or illegal actions. What it is difficult to detect from this activity is that terrorism financing is, usually, made of transactions of small amounts and from a legit source. The main difference between money laundering and terrorism financing is the purpose of both. One intends to hide the gain obtained from criminal activity, while the other focuses on hiding the intention for what that money is going to be used for (Cabral, 2019). Renta Tenório Sorrentino: Cyber Laundering and its Economic Impact on Money Launderers 62 Figure 1. Three phases of Money Laundering. European Institute of Management & Finance (2018). Although the act of money laundering is a non-violent crime, criminals are always searching for new methods to cleanse their illegal money and the internet and crypto currencies has provided them with ways to do this (Gonçalves, 2019). Banks and financial institutions are the preferred method used by criminals. However, virtual currencies are becoming popular which is increasing online money laundering (Mabunda, 2018). 2.1. Impact of Money Laundering in Society Crimes such as drugs, sex, human trafficking and illegal gambling are incentivized to operate and to grow when criminals can make profits from such illegal networks and are successful in doing it. This causes a serious threat to society (Brenig et al., 2015), as it is not a victimless crime, producing suffering around the world (Weber et al., 2019). Money laundering threatens the financial systems as well when, for example, 'the financial resources for criminals and terrorists to operate and expand their business, undermine the legitimate private sector and financial markets and diminish tax revenues' (Brenig et al., 2015). 2.2. Money Launderers X AML Controls Until 2018, 'the annual value of money laundered globally stands between 2% and 5% of global gross domestic product, meaning that between US$800 billion and US$2 trillion are laundered each year' (Gonçalves, 2019). Renta Tenório Sorrentino: Cyber Laundering and its Economic Impact on Money Launderers 63 For the money laundering to be successful, it depends 'on the existence of information asymmetries between money launderers and investigative authorities' (Brenig et al., 2015). This process is called the Money Laundering Process and it is performed through a Money Laundering instrument. Lawmakers and authorities are in charge of procedures and regulations to establish AML controls. The stronger the AML control is, the more difficult is for money launderers to proceed with their cleansing obtained on their criminal acts. 'They aim at decreasing the information asymmetries between money launderers and investigative authorities' (Brenig et al., 2015). Basically, the money launderers will be more incentivized to utilize certain Money Laundering instruments when the AML controls are weaker, as criminals will keep their expenses at a minimum, turning profits during the cleansing process higher. For this reason, some ML instruments will be more advantageous than others from an economic perspective. In addition to that, another motivational factor is concerning the risk. When procedures and policies are heavily implemented in specific instruments, it causes a negative incentive as the risk of detection of suspicious activities and on individuals increase. “This risk imposes costs on criminals and therefore negatively influences their economic incentives for utilizing a ML instrument” (Brenig et al., 2015). To reduce the level of risk, money launderers may increase the level of methods, such as multiple transactions, multiple jurisdictions, additional parties, etc. However, such implementation would increase the cost of the Money Laundering process. Another option, when available, would be to use less risky instruments or not launder the money that was originated from the criminal act. “That is the case when the costs for laundering money undetected are greater than its valuation” (Brenig et al., 2015). 3. Anti-Money Laundering Controls It is not the purpose of this literature review to analyze individual AML controls that financial institutions and specific sectors are required to be compliant with the recommendations of the Financial Action Task Force (FATF) or any other regulation, directives or acts, in international or national level, however, the most effective prevention against money laundering is the risk approach method through Know Your Customer (KYC) process, followed Renta Tenório Sorrentino: Cyber Laundering and its Economic Impact on Money Launderers 64 by High-risk countries analysis, record keeping, auditing, training and the obligation to report suspicious activities. For the purpose of this literature review, a superficial explanation of KYC will be made. 3.1. Know your Customer KYC is the most efficient method of combating money laundering as it provides businesses (banks or required sectors) to identify their customer, by their identification document, proof of address, and photography (Brenig et al., 2015) This requirement of KYC can be grouped in 3 different moments: a) in the beginning of customer-business relationship; b) During the customer-business relationship, called ongoing monitoring; c) after the business relationship, when the business needs to keep a record for audit trails purposes (Brenig et al., 2015) The purpose of the KYC is not only to know the customer's identification but to "know enough about their customers to be able to determine the risk level they represent to the institution." (Financial Crimes Enforcement Network, 2019). 4. Virtual and Digital Currencies Digital currencies include e-money (digital 'fiat currency') and virtual currency ('non-fiat currency’) as the two types of digital representations (Gonçalves, 2019). Different to e-money, virtual currency is not controlled by any financial institution or jurisdiction and the users must validate it to make a valid representation of the payment. Also, virtual currency can be convertible, when it can be exchanged for fiat currency, and non-convertible, when no exchange is possible, as they are issued by a central authority (centralized). Convertible virtual currencies can be centralized or decentralized (Gonçalves, 2019). Whereas decentralized currencies are not issued or supervised by any central authority, centralized currencies are, “which means that a third party controls the system as it "issues the currency; establishes the rules for its use; maintains a central payment ledger; and has the authority to withdraw the currency from circulation” (FATF, 2014). Renta Tenório Sorrentino: Cyber Laundering and its Economic Impact on Money Launderers 65 Figure 2. Digital Currencies. Gonçalves (2019). For this Literature Review, only cryptocurrencies will be explored, and any indication of virtual currency may be understood as cryptocurrency. Although there are many cryptocurrencies available on the market, Bitcoin will be used on this project as it is the most popular among academics. 4.1. Cryptocurrency One of the main reasons for the creation of virtual currencies was to have an alternative payment method that could be used by a portion of society that did not have access to financial institutions due to their low-income (Weber and Domeniconi et al., 2019). This is because AML controls are costly to financial institutions which means that it has a negative impact on low-income people, refugees, and immigrants. Approximately 1.7 billion adults are unbanked. In addition to the costs of policies and procedures implementations, the risk of compliance failures increases the negative impact on the less favored, a risk that the financial institutions do not want to bear (Weber and Domeniconi et al., 2019). “Consider global remittances to low-and middle-income countries, which reached a record-high $529 billion in 2018, far outpacing the global aid contribution of $153 billion. The current average cost of sending $200 is an Renta Tenório Sorrentino: Cyber Laundering and its Economic Impact on Money Launderers 66 expensive 7 percent, with some countries suffering rates of over 10 percent. The United Nations Sustainable Development Goal number 10.7 targets a reduction to 3 percent by 2030” (Weber and Domeniconi et al., 2019). For these reasons, cryptocurrencies were well-received for their low costs and accessibility as they do not involve a third party due to their peer-to-peer network protocol (Pocher, 2020). Cryptocurrency is defined as "a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community" (ECB, 2012). Undeniably, Bitcoin is the most popular cryptocurrency that exists and to create a Bitcoin account (software), the user needs to download the Bitcoin software at https://bitcoin.org/en/choose-your-wallet, and users will have a digital wallet where they can store their bitcoins (digital currency). To create a Bitcoin account, users do not need to provide their real names or proof of identity. Once the account is created, each individual user is a node in the peerto-peer Bitcoin network, making them, part now of the Blockchain structure (Böhme et al., 2015). “Bitcoin is built on a transaction log that is distributed across a network of participating computers. It includes mechanisms to reward honest participation, to bootstrap acceptance by early adopters, and to guard against concentrations of power. Bitcoin's design allows for irreversible transactions, a prescribed path of money creation over time, and a public transaction history” (Böhme et al., 2015). The idea of this literature review is to not go into the deep technicalities of cryptocurrency. For this reason, a superficial explanation of its characteristics will be explained to understand its vulnerabilities that could be used by money launderers. 4.1.1. Anonymity Bitcoin is well-known for being anonymous, however, it is considered to be pseudonymous and, although it might be difficult to identify the person behind the transaction, it is not impossible. One of the solutions would be to have identities requested in the moment that cryptocurrencies are exchanged by fiatcurrency on the terminals and vice-versa (Mabunda, 2018). Renta Tenório Sorrentino: Cyber Laundering and its Economic Impact on Money Launderers 67 According to Pfitzmann & Hansen (2010), "a pseudonym is an identifier of a subject other than the subject's real names". Therefore, without access to identifying information from outside the system connecting public keys with subjects, it is impossible to identify particular individuals (Brenig et al., 2015). As blockchain analysis has been enhanced, a certain degree of traceability is also been improved over time and there will be always ways to connect real identities to public addresses, even when the account creator did not inform his real identity (Pocher, 2020). The anonymity will be preserved as long as the users do not interact with third parties that are not involved in the network, such as exchanges and online retails (Brenig et al., 2015). Additionally, Bitcoin mixers were created involving “inputs and outputs of different transactions into a larger one, in order to sever the links between addresses of senders and recipients” (Pocher, 2020). This type of mixing service is offered to obscure the traceability record (Pocher, 2020) and the most efficient is located in countries where the AML controls are soft (Crawford & Guan, 2020). The anonymity of cryptocurrency is useful for illegal purposes as it can be an effective feature for money laundering. The pseudonymous feature of the cryptocurrency is a positive incentive for money launderers to use the network as a money laundering instrument. However, due to the transaction records, if the traceability connects to an account where the user can be identified, it can cause a negative incentive to use this instrument (Brenig et al., 2015). 4.1.2. Speed and Portability Transaction within the peer-to-peer network allows the user to transfer cryptocurrencies in real-time and to any jurisdiction without any impediments, as long as the internet is available. Portability incentivizes money launderers positively as it makes transactions monitoring more difficult (Brenig et al., 2015) and causing jurisdictional issues (Pocher, 2020). Time efficiency and jurisdiction boundaries are also positive factors to incentivize money launderers (Brenig et al., 2015). Renta Tenório Sorrentino: Cyber Laundering and its Economic Impact on Money Launderers 68 4.1.3. Decentralization The idea in the creation of cryptocurrency was to have no intervention from central authorities whatsoever (Pocher, 2020). For this reason, law enforcement cannot interfere in illegitimate account creations (even if one person creates multiple accounts) or to confiscate ill-gotten funds, causing positive economic incentives to money launderers (Brenig et al., 2015). 4.1.4. Flexibility Accounts are easily created and transactions are easily operated (Gonçalves, 2019), economically incentivizing positively the use of cryptocurrencies for money launderers (Brenig et al., 2015). 4.1.5. Low Transaction Costs As the transaction activities are made between the peer-to-peer accounts, the only transaction cost existent is the operational cost, which is the cost to have the payment authenticated and verified (Brenig et al., 2015). The profit of the Money Laundering is higher when the cost of the transaction is lower. For this reason, this factor is, also, a positive economic incentive to money launderers (Brenig et al., 2015). 4.1.6. Lack of Regulations The lack of AML regulation on cryptocurrencies increases the chances that criminals will use cryptocurrencies as an instrument to launder their ill-gotten money (Gonçalves, 2019). Banks are not taking crypto coins seriously due to the lack of regulation on AML and KYC rules, while some firms are applying AML compliance methods on their crypto coins services according to existent AML law (Campbell-Verduyn, 2018). 4.1.7. Irrevocability When the transaction is completed, it is not possible to be revoked, not even for law enforcement. This characteristic is also financially positive to money launders (Brenig et al., 2015). Renta Tenório Sorrentino: Cyber Laundering and its Economic Impact on Money Launderers 69 4.1.8. Price Volatility As cryptocurrencies are not backed by fiat currencies, their price volatility fluctuates constantly, forcing money launderers to monitor the market frequently to not have their funds reduced during the exchange, providing a negative economic incentive for money launders (Brenig et al., 2015). 5. Cyber Laundering The evolution of the internet made it possible to money launderers to use the online environment to cleanse their proceed of crime, due to the development of virtual currencies and its attractive untraceable feature (Gonçalves, 2019). In the three stages of money laundering based online, the placement stage would take advantage of how fast an account can be opened and accessed and the pseudonymity on the settlement of the ill-gotten funds. The facilitation to transact to other jurisdictions, using multiple exchanges would implicate the layering stage. Criminals can purchase services and goods in cryptocurrencies (Pocher, 2020) or exchange for fiat currencies (Gonçalves, 2019) to complete the final and last stage of integration (Pocher, 2020). In Europe, three to four billion pounds ($4.1 to $5.5 billion) of illicit money is being laundered by criminals, through the purchase of Bitcoin and its distribution in smaller parts in different e-wallets and addresses (Kosobutskaya & Rudakova, 2018). The process and consequences of money laundering in the online environment is the same, however, the possibilities the cryptocurrencies’ characteristics provide challenges the regulators (Mabunda, 2018). The Financial Action Task Force (FATF) has recognized that cryptocurrencies are susceptible to be exchanged for fiat-money and vice-versa for launderers and terrorists as transfers between senders and recipients are permitted without proper identification (Kosobutskaya & Rudakova, 2018). Launderers may be perpetrating online crimes, such as ransomware, malware, etc., and laundering the proceeds of those crimes in an online environment as well, through cyber laundering. The clean money might be used to commit new illicit crimes as well (Gonçalves, 2019). Such as the traditional money laundering method, cryptocurrencies are also used for terrorism financing purposes, however, the last one provides an even greater advantage to terrorists as increases the level Renta Tenório Sorrentino: Cyber Laundering and its Economic Impact on Money Launderers 70 of anonymity and due to the real-time transactions to other jurisdictions (Gonçalves, 2019). Figure 3. Crypto-laundering process. Gonçalves (2019). 5.1. Economic Considerations on Cyber Laundering There is a lack of in-depth analysis on the economic benefits for money launderers and, due to this reason, it is assumed that launderers are incentivized to choose to proceed with cyber laundering instead of traditional money laundering because of the characteristics of cryptocurrencies. Factors that may affect the process of money laundering still need to be analysed, as they might influence the economic incentives on criminals (Brenig et al., 2015). In contrast, the integration of illegal funds is more limited compared to traditional money laundering as the acceptance of cryptocurrency is not as broad in cyber laundering, restricting the movement of large amounts of illicit funds and posing a negative incentive on money launderers (Brenig et al., 2015). The importance of choosing the money laundering instrument that will be applied to money laundering activities must be taken into consideration as its costs are transaction costs. As criminals need to make multiple transactions with their ill-gotten funds and, sometimes, in different jurisdictions to reduce their risk of being caught, lowering the transaction costs means a higher revenue to them. For this reason, cryptocurrencies show to be a better costefficient instrument, which offers more positive incentives to launderers compared to the traditional money laundering. However, “technological Renta Tenório Sorrentino: Cyber Laundering and its Economic Impact on Money Launderers 71 developments and regulatory approaches may affect the economic incentives” (Brenig et al., 2015). Factors that may affect economic incentives would be technological developments focused on transaction traceability, the applicability of rules to monitor suspicious transactions, and to link transactions to the real users as precise as possible. The regulatory approach would, also, influence the economic incentives. These considerations would increase the costs on money launderers as they would need to implement new money laundering methods, or they would need to accept a higher risk of being prosecuted for their illicit transactions (Brenig et al., 2015). Particularly concerning Bitcoin transactions, another aspect that might affect the incentive of launders is the risk scoring tools that were developed by AML compliance programs and have been implemented by exchanges and services providers. In the case where a Bitcoin has a suspicious or high-risk past, it may have its valuable decreased in comparison to Bitcoin with no such risk score (Crawford & Guan, 2020). 6. Conclusion As criminals will always pursue new methods to commit their crimes, the online environment has opened many doors as the risk of getting caught is lower compared to the physical world. For money launderers, this is no different. As traditional money laundering is facing an increase in transaction costs and the risk of prosecution due to the improvements of AML controls, money launderers are looking for new instruments of money laundering to reduce their costs and to decrease the risk of being caught. Cryptocurrencies are a great invention that can benefit many people. However, AML controls are facing a serious threat because of the use of cryptocurrencies for the bad as some of its characteristics is to protect the autonomy of the users, which encourages criminals to commit online crimes and cyber laundering. For this reason, criminals are immigrating to the online environment as they are having better befits from it, financially and risk-wise. The better the effectiveness the AML control is, the less likely the criminal will use that method. On the other hand, the weaker AML control is the more likely criminals are to use that method. Renta Tenório Sorrentino: Cyber Laundering and its Economic Impact on Money Launderers 72 For example, International regulations such as the Fifth EU Directive, extended AML obligations to the virtual currency exchange platforms and custodian crypto wallet providers. However, some other countries around the world are in a slow-pace discussion about the implementation of rules and laws about it. The lack of knowledge of lawmakers and governments in the technological area is one important reason why there are still many countries struggling to implement AML regulations on virtual currencies. In addition, filling the technological gap between account users and anonymity is essential to link money laundering to criminals and enhancing technology developments to track suspicious activities and patterns are vital as well. New technologies will emerge from time to time and lawmakers and governments should act fast, otherwise, their inertia or endless bureaucracies will be condescending with the launderer's crimes. While cyber launderers get away with their crimes, society and victims are the ones that are being punished. 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