WSC 2018 SOCIAL STUDIESBlack Markets

Introducing Markets

Supply• In economics, supply is the amount of something that firms and other economic agents are willing to provide to

the marketplace.

• In the goods market, supply is the amount of a product per unit of time that producers are willing to sell at various given prices when all other factors are held constant. In the labor market, the supply of labor is the amount of time that individuals are willing to spend working, as a function of the wage rate. In the financial markets, the money supply is the amount of highly liquid assets available in the money market, which is either determined or influenced by a country's monetary authority.

• Factors affecting supply: price, price of complements, factors of production, firms’ confidence, government regulation, technological advancement

• The price elasticity of supply (PES) measures the responsiveness of quantity supplied to price fluctuations, and is mostly dependent on firms’ capacity to respond quickly.

Demand• In economics, demand is the quantity of a commodity or a service that people are willing AND able to buy at

various prices, over a given period of time. The relationship between price and quantity demanded is also known as demand curve.

• Factors affecting demand: price, price of complements, disposable income, consumer preferences, consumer confidence, nature of good (commodity = inelastic and high demand)

• The price elasticity of demand (PED) measures the responsiveness of quantity demanded to price fluctuations, and is mostly dependent on the nature of the good in question.

Deadweight loss• A deadweight loss, also known as excess burden or allocative inefficiency, is a loss

of economic efficiency that can occur when equilibrium for a good or a service is not achieved. That can be caused by monopoly pricing in the case of artificial scarcity, an externality, a tax or subsidy, or a binding price ceiling or price floor such as a minimum wage.

• Minimum wage and living wage laws can create a deadweight loss by causing employers to overpay for employees and preventing low-skilled workers from securing jobs. Price ceilings and rent controls can also create deadweight losses by discouraging production and decreasing the supply of goods, services or housing below what consumers truly demand. Consumers experience shortages and producers earn less than they would otherwise.

• Taxes are also said to create a deadweight loss because they prevent people from engaging in purchases they would otherwise make because the final price of the product is above the equilibrium market price. For example, if taxes on an item rise, the burden is often split between the producer and the consumer, leading to the producer receiving less profit from the item and the customer paying a higher price. This results in lower consumption of the item than previously, which reduces the overall benefits the consumer market could have received while simultaneously reducing the benefit the company may see in regards to profits.

Regulation• Regulatory economics is the economics of regulation. It is the application of law by government or

independent administrative agencies for various purposes, including remedying market failure, protecting the

environment, centrally-planning an economy, enriching well-connected firms, or benefiting politicians

(regulatory capture). Regulation curtails the freedom of market participants or grants them special privileges.

• Regulations include rules regarding how goods and services can be marketed; what rights consumers have to

demand refunds or replacements; safety standards for products, workplaces, food and drugs; mitigation of

environmental and social impacts; and the level of control a given participant is allowed to assume over a

market.

• For example, in most countries, regulation controls the sale and consumption of alcohol and prescription drugs,

as well as the food business, provision of personal or residential care, public transport, construction, film and

TV, etc. Monopolies, especially those that are difficult to abolish (natural monopoly), are often regulated.

The financial sector is also highly regulated.

Regulation | how• Regulation is generally defined as legislation imposed by a government on individuals and private sector firms in order

to regulate and modify economic behaviors. Conflict can occur between public services and commercial procedures (maximizing profit), the interests of the people using these services (market failure), and also the interests of those not directly involved in transactions (externalities). Most governments, therefore, have some form of control or regulation to manage these possible conflicts. The ideal goal of economic regulation is to ensure the delivery of a safe and appropriate service, while not discouraging the effective functioning and development of businesses.

• Regulation can have several elements:

1. Public statutes, standards, or statements of expectations.

2. A registration or licensing process to approve and permit the operation of certain services

3. An inspection process or other form of ensuring standard compliance

4. A de-licensing process through which an organization or person operating unsafely is ordered to stop or suffer a penalty.

5. Not all types of regulation are government-mandated, so some professional industries and corporations choose to adopt self-regulating models. There can be internal regulation measures within a company, which work towards the mutual benefit of all members. Often, voluntary self-regulation is imposed in order to maintain professionalism, ethics, and industry standards.

Regulation | why• Two ideas have been formed on regulatory policy: positive theories of regulation and normative theories of regulation.

• The former examines why regulation occurs. These theories include theories of market power and conclude that regulation occurs because:

1. the government is interested in overcoming information asymmetries and in aligning their own interest with the operator,

2. customers desire protection from market power in the presence of non-existent or ineffective competition,

3. operators desire protection from rivals, or

4. operators desire protection from government opportunism.

• Normative economic theories of regulation generally conclude that regulators should

1. encourage competition where feasible,

2. minimize information asymmetry costs by gathering information and incentivizing operators to improve their performance,

3. provide for economically efficient price structures.

Regulation | pros vs cons• Supporters of regulation tend to cite benefits to the wider society. Examples include limiting mining companies' ability

to pollute waterways, banning landlords from discriminating based on race or religion, and granting credit card users the right to dispute charges.

• Regulations are not always purely beneficial, however, as well-intentioned regulations can carry unintended consequences. Local-content requirements are often imposed in order to benefit domestic industry. A government might require that cars or electronics sold in the country contain a certain proportion of locally manufactured components, for example. These rules do not necessarily succeed in nurturing local manufacturing, but often lead to letter-of-the-law workarounds (components made in fully staffed factories elsewhere and assembled by a handful of employees in-country) or black markets.

• Some advocates of free markets argue that anything in excess of the most basic regulations is inefficient, costly, and perhaps unfair. Some argue that even modest minimum wages raise unemployment by creating a barrier to entry for low-skilled and young workers. Advocates of the minimum wage cite historical examples in which highly profitable companies paid wages that did not provide employees with even a basic standard of living, arguing that regulating wages reduces exploitation of vulnerable workers.

• Link: black markets and deadweight loss may arise from local-content requirements and minimum wage laws

Perfect competition• While reality is far from the theoretical model of perfect competition, it acts as an economic benchmark because of its

ability to explain many real-life behaviors when compared to real-life market structures.

• Perfect competition is the opposite of a monopoly (and by extension, deadweight loss). Companies earn just enough profit to stay in business and no more (normal profits). If they were to earn excess profits, other companies would enter the market and drive profits down.

• Real-world competition differs from this ideal primarily because of differentiation in production, marketing and selling. For example, in agriculture, the owner of a small organic products shop can talk extensively about the grain fed to the cows that made the manure that fertilized the non-GMO soybeans – that's differentiation. Through marketing, companies seek to establish “brand value” around their differentiation and advertise to gain pricing power and market share. Thus, the first two criteria – homogeneous products and price takers – are far from realistic.

• Idealizing conditions for perfect competition:

• A large number of buyers and sellers; Perfect information; Homogeneous products (perfect substitutes); Well defined property rights; No barriers to entry or exit; Market contain only price-takers (no market power to set prices); Perfect mobility for factors of production; Rational buyers; No externalities; Zero transaction costs; no economies of scale or network effects (where the value of product derives from large number of market players using it)

Imperfect competition• Imperfect competition is when some of the rules of perfect competition are not followed – all real world markets

follow this model. When dealing with imperfect competition the equilibrium price can be influenced by the actions of agents. In imperfect competition the price of goods can increase above their marginal cost and thus have customers decrease their level of purchase, and so reach inefficient levels of production. Governments try to avoid these situations and take measures to stop imperfect competition.

• The most common forms of imperfect competition include: monopolies, oligopolies (few firms may form cartels), duopolies, monopolistic competition (most common: heterogenous products by different firms) and monopsony (single-buyer market with many sellers).

• Roy Harrod was the first economist to develop the theory of imperfect competition and, other authors, such as Edward Chamberlin and Joan Robinson renewed its interest and made major contributions. Nevertheless, it is important to point out that Cournot, in his “Researches into the Mathematical Principles of the Theory of Wealth”, 1838, was the first to model this kind of markets.

Monopoly• A monopoly is characterized by the absence of competition, which can lead to high costs for consumers, inferior

products and services, and corrupt behavior. A monopolist can create artificial scarcities, fix prices and otherwise circumvent natural laws of supply and demand. It can stop innovation, while the public — robbed of the recourse of using a competitor — is at its mercy. A monopolized market often becomes unequal and inefficient. Mergers and acquisitions among companies in the same business are highly regulated for this reason. Firms are typically forced to divest assets if federal authorities think a proposed merger or takeover will violate anti-monopoly laws.

Characteristics:

1. Profit Maximizer: Maximizes profits.

2. Price Maker: Decides the price of the good or product to be sold, but does so by determining the quantity in order to demand the price desired by the firm.

3. High Barriers to Entry: Other sellers are unable to enter the market of the monopoly.

4. Single seller: The whole industry is only one company.

5. Price Discrimination: A monopolist can change the price or quantity of the product. Monopolies sell higher quantities at lower prices in elastic markets, and sells lower quantities at higher prices in inelastic markets.

Sources of monopoly power: economies of scale, high capital requirements, no substitutes, control of natural resources, network externalities (social networks), legal barriers (intellectual property), regulatory capture, collusion

Arbitrage• Arbitrage is the simultaneous purchase and sale of an asset to profit from an imbalance in the price. It is a trade that

profits by exploiting the price differences of identical or similar financial instruments on different markets (Forex). Arbitrage exists as a result of market inefficiencies and would therefore not exist if all markets were perfectly efficient.

• Arbitrage occurs when a security is purchased in one market and simultaneously sold in another market at a higher price, thus considered to be risk-free profit for the trader. Arbitrage provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time. With advancements in technology, it has become extremely difficult to profit from pricing errors in the market. Many traders have computerized trading systems set to monitor fluctuations in similar financial instruments. Any inefficient pricing setups are usually acted upon quickly, and the opportunity is often eliminated in a matter of seconds.

• An example: The stock of Company X is trading at $20 on the New York Stock Exchange (NYSE) while it is trading for $20.05 on the London Stock Exchange (LSE). A trader can buy the stock on the NYSE and immediately sell the same shares on the LSE, earning a profit of 5 cents per share. The trader could continue to exploit this arbitrage until the specialists on the NYSE run out of inventory of Company X’s stock, or until the specialists on the NYSE or LSE adjust their prices to wipe out the opportunity.

Bazaar• A bazaar is a permanently enclosed marketplace or street where goods and services are exchanged or sold. The term

originates from the Persian word bāzār. The term bazaar is sometimes also used to refer to the “network

of merchants, bankers and craftsmen” who work in that area. In Balinese, the word pasar means market. The capital

of Bali province, in Indonesia, is Denpasar, which means “north market.” Souq is another word used in the Middle

East for an open-air marketplace or commercial quarter.

• Evidence for the existence of bazaars dates to around 3,000 BCE. Although the lack of archaeological evidence has

limited detailed studies of the evolution of bazaars, indications suggest that they initially developed outside city walls

where they were often associated with servicing the needs of caravanserai (roadside inns). As towns and cities became

more populous, these bazaars moved into the city center and developed in a linear pattern along streets stretching from

one city gate to another gate on the opposite side of the city. Over time, these bazaars formed a network of trading

centers which allowed for the exchange of produce and information. The rise of large bazaars and stock trading centers

in the Muslim world allowed the creation of new capitals and eventually new empires. New and wealthy cities such

as Isfahan, Golconda, Samarkand, Cairo, Baghdad and Timbuktu were founded along trade routes and bazaars. Street

markets are the European and North American equivalents. Shopping at a bazaar or market-place remains the beating

heart of daily life in many Middle-Eastern and South Asian cities and towns.

Bazaar | types

• In pre-Islamic Arabia, two types of bazaar existed: permanent urban markets and temporary seasonal markets. The temporary seasonal markets were held at specific times of the year and became associated with particular types of produce. Suq Hijr in Bahrain was noted for its dates while Suq 'Adan was known for its spices and perfumes.

• Nejad has made a detailed study of early bazaars in Iran and identifies two distinct types, based on their place within the economy, namely:

1. Commercial bazaars (or retail bazaars): emerged as part of an urban economy not based on a merchant system

2. Socio-commercial bazaars: formed in economies based on a merchant system, socio-economic bazaars are situated on major trade routes and are well integrated into the city’s structural and spatial systems

Souk• A souq or souk is a marketplace or commercial quarter in Western Asian, North African and some Horn African cities.

The equivalent Persian term is bazaar. In general a souq is synonymous with a bazaar or marketplace, and the term souq is used in Arabic speaking countries.

• Evidence for the existence of souqs dates to the 6th century BCE. Initially souqs were located outside city walls, but as cities became more populated, souqs were moved to the city centre and became covered walkways. In the 18th and 19th centuries, Western interest in Oriental culture led to the publication of many books about daily life in Middle Eastern countries. Souqs, bazaars and the trappings of trade feature prominently in paintings and engravings, works of fiction and travel writing. Shopping at souq or bazaar is a standard part of daily life throughout the Middle East. Today, souqs tend to be found in a city's medina (old quarter) and are often important tourist attractions.

• A souq was originally an open-air marketplace. Historically, souqs were held outside cities at locations where incoming caravans stopped and merchants displayed their goods for sale. Souqs were established at caravanserai, places where caravans arrived and remained for rest and refreshments. Since this might be infrequent, souqs often extended beyond buying and selling goods to include major festivals involving various cultural and social activities. Any souq may serve a social function as being a place for people to meet in, on top of its commercial function. Around this time, permanent souqs also became covered marketplaces. In tribal areas, where seasonal souks operated, neutrality from tribal conflicts was usually declared for the period of operation of a souq to permit the unhampered exchange of surplus goods.

Exchange• An exchange, or bourse also known as a trading exchange or trading venue, is an organized market where

tradable securities, commodities, foreign exchange, futures, and options contracts are sold and bought. The term bourse is derived from the 13th-century inn named Huis ter Beurze owned by the Van der Beurze family in Bruges, Belgium, where traders and foreign merchants from across Europe, especially the Italian Republics of Genoa, Florence and Venice, conducted business in the late medieval period. Its managers became famous for offering judicious financial advice to the traders and merchants who frequented the building. This service became known as the “Beurze Purse” which is the basis of bourse, meaning an organized place of exchange. Eventually the building became solely a place for trading in commodities.

• Exchanges bring together brokers and dealers who buy and sell these objects. These various financial instruments can typically be sold either through the exchange, typically with the benefit of a clearing house to reduce settlement risk.

• Exchanges can be subdivided:

• By objects sold:

1. Stock exchange or securities exchange

2. Commodities exchange

3. Foreign exchange market

• By type of trade:

1. Classical exchange – for spot trades (immediate delivery & settlement)

2. Futures exchange

Swap meets• A flea market (or swap meet) is a type of bazaar that rents or provides space to people who want to sell or barter

merchandise. Used goods, cheap items, collectibles, and antiques are commonly sold. Many markets offer fresh produce or baked goods, plants from local farms and vintage clothes. Renters of the flea market tables are called vendors.

• Flea market vending is distinguished from street vending in that the market itself, and not any other public attraction, brings in buyers. Many flea markets have food vendors who sell snacks and drinks to the patrons. Some flea market vendors have been targeted by law enforcement efforts to halt the sale of bootleg movies and music or knockoff brand clothing, toys, electrical goods, accessories, or fragrances.

• Etymology & origin:

1. Fly Market located on a vlaie (salt marsh) at Maiden Lane near the East River in Manhattan, NYC

2. The term “flea market” is translated from the French marché aux puces, an outdoor bazaar in Paris, France, named after fleas that infested the upholstery of old furniture brought out for sale.

3. Paris street vendors were dislodged due to imperial architect Haussmann’s plans in the time of Napoleon III, but were allowed to sell at the Porte de Clignancourt (north Paris) – gathering together the exiles from Parisian slums – thus they were given the name marché aux puces (literally “flea market”).

Boot sales• Car boot sales or boot fairs are a form of market in which private individuals come together to

sell household and garden goods. They are popular in the United Kingdom. Car boot sales are becoming prevalent across many cities and towns and have evolved from shady operations selling mass produced products to anyone and everyone attempting to sell any surplus household items. To shoppers, the rotation of surplus household stock as essential as it prevents waste and disposal costs also produces a small community where thriftiness and entrepreneurship flourish.

• The term refers to the selling of items from a car’s boot. Although a small proportion of sellers are professional traders selling goods, or indeed browsing for items to buy, most of the goods on sale are used personal possessions. Car boot sales are a way of attracting a large group of people in one place to recycle useful but unwanted domestic items that otherwise might have been thrown away. Car boot sales generally take place in the summer months. Items for sale are extremely varied, including for example antiques and collectables, as in a flea market.

• It has been said that Father Harry Clarke, a Catholic priest from Stockport, introduced the car boot sale to the UK as a charity fundraiser, after seeing a similar event in Canada while on holiday there in the early 1970s.

Stock market• The stock market refers to the collection of markets and exchanges where the issuing and trading of equities or stocks of

publicly held companies, bonds, and other classes of securities take place. This trade is either through formal exchanges

or over-the-counter (without exchange supervision) marketplaces. Also known as the equity market, the stock market is

one of the most vital components of a free-market economy. It provides companies with access to capital in exchange for

giving investors a slice of ownership.

• The stock market consists of two main sections, the primary market, and the secondary market. The primary market is

where new issues are first sold through initial public offerings (IPOs). Institutional investors typically purchase most of

these shares from investment banks. The worth of the company going public and the number of shares issued will

determine the opening price of the IPO stock. All subsequent trading happens in the secondary market, where

participants include both institutional and individual investors. A company uses the money raised from its IPO to grow,

but once its stock starts trading, it does not receive funds from the buying and selling of its shares.

• The idea of debt dates back to the ancient world, as evidenced for example by ancient Mesopotamian city clay tablets

recording interest-bearing loans. While the Italian city-states produced the first transferable government bonds, it was

the Dutch East India Company (VOC) became the first company in history to issue bonds and shares of stock to the

general public. Economist Ulrike Malmendier of the University of California at Berkeley argues that a share market

existed as far back as ancient Rome. One of Europe’s oldest stock exchanges is the Frankfurt Stock

Exchange (Frankfurter Wertpapierbörse) established in 1585 in Frankfurt am Main.

Futures market• A futures market is an auction market in which participants buy and sell commodity and futures contracts (financial

derivatives) for delivery on a specified future date. The first modern organized futures exchange began in 1710 at the Dojima Rice Exchange in Osaka, Japan. Hammurabi’s Code allowed sales of goods and assets to be delivered for an agreed price, at a future date; required contracts to be in writing and witnessed; and allowed assignment of contracts. The code facilitated the first derivatives, in the form of forward and futures contracts. An active derivatives market existed, with trading carried out at temples. See also: Thales and the olive press contract (which he sold when demand for the use of olive presses went up)

• Futures contracts are made in attempt by producers and suppliers of commodities to avoid market volatility. These producers and suppliers negotiate contracts with an investor who agrees to take on both the risk and reward of a volatile market.

• For instance, if a coffee farm sells green coffee beans at $4 per pound to a roaster, and the roaster sells that roasted pound at $10 per pound and both are making a profit at that price, they’ll want to keep those costs at a fixed rate. The investor agrees that if the price for coffee goes below a set rate, then the investor agrees to pay the difference to the coffee farmer. If the price of coffee goes higher than a certain price, then the investor gets to keep profits. For the roaster, if the price of green coffee goes above an agreed rate, then the investor pays the difference and the roaster gets the coffee at a predictable rate. If the price of green coffee is lower than an agreed upon rate, the roaster pays the same price and the investor gets the profit.

• Futures markets are for more than simply agricultural based contracts, and now involve the buying, selling, and hedging of financial products and future values of interest rates. Futures contracts can be created as long as open interest is increased, unlike other securities which are issued. The size of futures markets (which usually increase when the stock market outlook is uncertain) is larger than that of commodity markets, and are a key part of the financial system.

Trade agreement• A trade agreement is a wide ranging taxes, tariff and trade treaty that often includes investment guarantees.

When two or more countries agree on terms that helps them trade with each other. The most common trade agreements are of the preferential and free trade types are concluded in order to reduce (or eliminate) tariffs, quotas and other trade restrictions on items traded between the signatories. This helped them determine the tariffs and what they needed so that they could impose imports and exports on counties. Some common features of trade agreements are (1) reciprocity, (2) a most-favored-nation clause (equal treatment), and (3) national treatment of nontariff barriers.

• The logic of formal trade agreements is that they outline what is agreed upon and the punishments for deviation from the rules set in the agreement. Trade agreements therefore make misunderstandings less likely, and create confidence on both sides that cheating will be punished; this increases the likelihood of long-term cooperation.An international organization, such as the IMF, can further incentivize cooperation by monitoring compliance with agreements and reporting third countries of the violations. Monitoring by international agencies may be needed to detect non-tariff barriers, which are disguised attempts at creating trade barriers.

Laissez-faire• Laissez-faire, (French: “allow to do”), policy of minimum governmental interference in the economic affairs of

individuals and society. The term is derived from the answer Jean-Baptiste Colbert, controller general of finance under King Louis XIV of France, received when he asked Le Gendre, an industrialist, what the government could do to help business: “Leave us alone.” The doctrine of laissez-faire is usually associated with the economists known as Physiocrats, who flourished in France from about 1756 to 1778.

• Laissez-faire economists argue that there is no need for business and industrial affairs to be complicated by government intervention. They oppose any sort of federal involvement in the economy, which includes any type of legislation or oversight; they are against minimum wages, duties, trade restrictions, and corporate taxes.

• Raw capitalism, however, is morally ambiguous: it does not inherently protect the weakest in society. While laissez-faire advocates argue that if individuals serve their own interests first, societal benefits will follow, detractors feel laissez-faire actually leads to poverty and economic imbalances. The idea of letting an economic system run without regulation or correction in effect dismisses or further victimizes those most in need of assistance, they say. The 20th-century British economist John Maynard Keynes criticized laissez-faire economics, arguing that the question of market solution versus government intervention needed to be decided case-by-case basis.

Laissez-faire

In his 2004 book A Political Economy of Lebanon, economist Toufic Gaspard laid out what he saw as the axioms of laissez-faire:

1. The individual is the basic unit in society

2. The individual has a natural right to freedom

3. The physical order of nature is harmonious and self-regulating system

4. Corporations are creatures of the state and therefore must be watched closely by the citizenry due to their propensity to disrupt the spontaneous order

ContractsFormalizing Exchanges

Formation

• A contract is a promise or set of promises that are legally enforceable and, if violated, allow the injured party access to legal remedies. Contract law recognizes and governs the rights and duties arising from agreements. In the Anglo-American common law, formation of a contract generally requires an offer, acceptance, consideration, and a mutual intent to be legally bound. Each party must have capacity to enter the contract. Although most oral contracts are binding, some types of contracts may require formalities, such as being in writing or by deed. A so-called gentlemen’s agreement is one which is not intended to be legally enforceable, and which is “binding in honor only”.

Offer | Acceptance | Agreement• In order for a contract to be formed, the parties must reach mutual assent (meeting of the minds). This is typically

reached through offer and an acceptance which does not vary the offer's terms, which is known as the mirror image rule. An offer is a definite statement of the offeror’s willingness to be bound should certain conditions be met. If a purported acceptance does vary the terms of an offer, it is not an acceptance but a counteroffer and, therefore, simultaneously a rejection of the original offer.

• Contracts may be bilateral or unilateral. A bilateral contract is an agreement in which each of the parties to the contract makes promises to each other. For example, in a contract for the sale of a home, the buyer promises to pay the seller $200,000 in exchange for the seller's promise to deliver title to the property. These common contracts take place in the daily flow of commerce transactions, and in cases with sophisticated or expensive precedent requirements, which are requirements that must be met for the contract to be fulfilled. Less common are unilateral contracts in which one party makes a promise, but the other side does not promise anything. In these cases, those accepting the offer are not required to communicate their acceptance to the offeror. In a reward contract, for example, a person who has lost a dog could promise a reward if the dog is found, through publication or orally. The payment could be additionally conditioned on the dog being returned alive. Those who learn of the reward are not required to search for the dog, but if someone finds the dog and delivers it, the promisor is required to pay. In the similar case of advertisements of deals or bargains, a general rule is that these are not contractual offers but merely an “invitation to treat”.

Breach• Breach of contract is a legal cause of action and a type of civil wrong, in which a binding agreement is not honored by

one or more of the parties to the contract by non-performance or interference with the other party’s performance. Breach occurs when a party to a contract fails to fulfill his or her obligation as described in the contract, or communicates an intent to fail the obligation or otherwise appears not to be able to perform his or her obligation under the contract.

• Types of breaches:

1. Minor breach: other party cannot sue for specific performance, only damages (exception: if breach was in violation of specified condition)

2. Material breach: failure to perform that permits the other party to the contract to either compel performance, or collect damages because of the breach (only if in violation of condition set by test of essentiality)

3. Fundamental breach: breach so against the “hard core of the contract” that it permits the other party to terminate and sue

4. Anticipatory breach: an unequivocal indication that the party will not perform when performance is due, or a situation in which future non-performance is inevitable. An anticipatory repudiation gives the non-breaching party the option to treat such a breach as immediate, and, if repudiatory, to terminate the contract and sue for damages (without waiting for the breach to actually take place).

Estoppel• Estoppel is a judicial device in common law legal systems whereby a court may “estop” a person from making

assertions or from going back on his word. Estoppel may prevent someone from bringing a particular claim, particularly if a promise unsupported by consideration is being relied on by the other party.

• There are many different types of estoppel which can arise, but the common factor between them is that a person is restrained from asserting a particular position in law where it would be inequitable to do so. By way of illustration:

1. If a landlord promises the tenant that he will not exercise his right to terminate a lease, and relying upon that promise the tenant spends money improving the premises, the doctrine of promissory estoppel may prevent the landlord from exercising a right to terminate, even though his promise might not otherwise have been legally binding as a contract. The landlord is precluded from asserting a specific right.

2. If a person brings legal proceedings in one country claiming that a second person negligently injured them and the courts of that country determine that there was no negligence, then under the doctrine of issue estoppel (or collateral estoppel) the first person will not normally be able to argue before the courts of another country that the second person was negligent (whether in respect of the same claim or a related claim). The first person is precluded from asserting a specific claim.

• Estoppel is an equitable doctrine. Accordingly, any person wishing to assert an estoppel must normally come to the court with clean hands.

Duty of care• In tort law, duty of care is a legal obligation which is imposed on an individual requiring adherence to

a standard of reasonable care while performing any acts that could foreseeably harm others. It is the first element that must be established to proceed with an action in negligence. The claimant must be able to show a duty of care imposed by law which the defendant has breached. In turn, breaching a duty may subject an individual to liability. Duty of care may be considered a formalization of the social contract, the implicit responsibilities held by individuals towards others within society.

Condition• A future and uncertain event upon the happening of which certain rights or obligations will be either enlarged, created,

or destroyed.

• A condition precedent must occur before a right accrues. In contract law, if an agreement is signed by one party and sent to a second party with the intention that it will not become enforceable until the second party signs it, the second party's signature would be a condition precedent to its effectiveness.

• A condition subsequent means that a right may be taken away from someone upon the occurrence of a specified event. An owner of property may convey land to a town on the condition that it be used only for church purposes. If the land conveyed is used to build a shopping mall, then ownership would revert to the original owner. A condition subsequent may also affect a transaction involving a gift. In many states, an engagement ring is regarded as an inter vivos gift to which no conditions are attached. In some states, however, its ownership is considered to be conditioned upon the subsequent marriage of the couple involved; therefore, if a woman does not marry the man who gave her the engagement ring, ownership reverts to him and she must return it to him.

• Concurrent conditions are conditions in the law of contracts that each party to the contract must simultaneously perform.

Consideration• Consideration is a concept of English common law and is a necessity for simple contracts but not for special

contracts (contracts by deed). The court in Currie v Misa declared consideration to be a “Right, Interest, Profit, Benefit, or Forbearance, Detriment, Loss, Responsibility”. Thus, consideration is a promise of something of value given by a promissor in exchange for something of value given by a promisee; and typically the thing of value is goods, money, or an act. Forbearance to act, such as an adult promising to refrain from smoking, is enforceable only if one is thereby surrendering a legal right.

• Consideration may be thought of as the concept of value offered and accepted by people or organisations entering into contracts. Anything of value promised by one party to the other when making a contract can be treated as “consideration”: for example, if A signs a contract to buy a car from B for $5,000, A’s consideration is the $5,000, and B’s consideration is the delivery of the car.

Capacity

• Sometimes the capacity of individuals or organizations to either enforce contracts, or have contracts enforced against them is restricted. For instance, very small children may not be held to bargains they have made, on the assumption that they lack the maturity to understand what they are doing; errant employees or directors may be prevented from contracting for their company, because they have acted ultra vires (beyond their power). Another example might be people who are mentally incapacitated, either by disability or drunkenness, or corporations in insolvency.

• Each contractual party must be a “competent person” having legal capacity. The parties may be natural persons (individuals) or juristic persons (corporations). An agreement is formed when an offer is accepted.

Misrepresentation

• Misrepresentation means a false statement of fact made by one party to another party and has the effect of inducing that party into the contract. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality or nature of the product that the seller has may constitute misrepresentation. A finding of misrepresentation allows for a remedy of rescission (unmaking the contract to revert to status quo) and sometimes damages depending on the type of misrepresentation.

• There are two types of misrepresentation: fraud in the factum and fraud in inducement. Fraud in the factum focuses on whether the party alleging misrepresentation knew they were creating a contract. If the party did not know that they were entering into a contract, there is no meeting of the minds, and the contract is void. Fraud in inducement focuses on misrepresentation attempting to get the party to enter into the contract. Misrepresentation of a material fact (if the party knew the truth, that party would not have entered into the contract) makes a contract voidable.

Duress

• Duress has been defined as a “threat of harm made to compel a person to do something against his or her will or judgment; especially a wrongful threat made by one person to compel assent by another person to a transaction without real volition.” An innocent party wishing to set aside a contract for duress to the person need only to prove that the threat was made and that it was a reason for entry into the contract; the burden of proof then shifts to the other party to prove that the threat had no effect in causing the party to enter into the contract.

• Duress is pressure exerted upon a person to coerce that person to perform an act they ordinarily would not perform. Duress has two aspects. One is that it negates the person’s consent to an act, such as sexual activity or the entering into a contract. Secondly, as a possible legal defense or justification to an otherwise unlawful act. A defendant utilizing the duress defense admits to breaking the law, but claims that he/she is not liable because, even though the act broke the law, it was only performed because of extreme unlawful pressure. Duress can also be raised in an allegation of rape or other sexual assault to negate a defense of consent on the part of the person making the allegation.

Quid pro quo

• Quid pro quo, Latin for “something for something” or “this instead of that” is used to describe when two parties engage in a mutual agreement to exchange goods or services. In a quid pro quo agreement one transfer is contingent upon a reciprocal transfer. Quid pro quo is used in contractual and legal contexts to convey that a good or service has been exchanged for something of equal value. In common law, quid pro quo indicates that an item or a service has been traded in return for something of value, usually when the propriety or equity of the transaction is in question (sexual harassment). In some contexts, a quid pro quo may entail more of a questionably ethical “favor for a favor” arrangement rather than a balanced exchange of equally valued goods or services. Quid pro quo sexual harassment takes place when a supervisor requires sex, sexual favors, or sexual contact from an employee/job candidate as a condition of their employment. To establish a prima facie case of quid pro quo harassment, the plaintiff must prove three things: (1) unwelcome sexual conduct; (2) unwelcome conduct was a term/condition of employment; (3) submission or rejection of this conduct formed the basis of a tangible employment decision.

Caveat emptor

• Caveat emptor is a neo-Latin phrase meaning “let the buyer beware”. It is a principle of contract law in many jurisdictions that places the onus on the buyer to perform due diligence before making a purchase. The term is commonly used in real property transactions, but applies to other goods, as well as some services. Under the principle of caveat emptor, the buyer could not recover damages from the seller for defects on the propertyor good bought. The only exception was if the seller actively concealed latent defects or otherwise made material misrepresentations amounting to fraud. A common way that information asymmetry between seller and buyer has been addressed is through a legally binding warranty, such as a guarantee of satisfaction. But without such a safeguard in place the ancient rule of caveat emptor applies, and the buyer should beware.

Force majeure • Force majeure, or casus fortuitus, “chance occurrence, unavoidable accident” is a common clause in contracts

that frees both parties from liability when an extraordinary event or circumstance beyond the control of the parties, usually an event described by the legal term act of God (hurricane, flood, earthquake, volcanic eruption) or war, strike, riot, crime or anything of the like, prevents one or both parties from fulfilling their obligations under the contract. In practice, most force majeure clauses do not excuse a party’s non-performance entirely, but only suspend it for the duration of the force majeure. Generally speaking, for events to constitute force majeure, they must be unforeseeable, external to the parties of the contract, and unavoidable (irresistible). The International Chamber of Commerce has attempted to clarify the meaning of force majeure by applying a standard of “impracticability”, meaning that it would be – if not necessarily impossible – unreasonably burdensome and expensive to carry out the terms of the contract. The event that brings this situation about must be external to both parties, unforeseeable and unavoidable. It can be very difficult to prove these conditions, however, and most force majeure defenses fail in international tribunals. Under international law, it refers to an irresistible force or unforeseen event beyond the control of a state making it materially impossible to fulfill an international obligation, and is related to the concept of a state of emergency.

Smart contract• Smart contracts are self-executing contracts with the terms of the agreement

between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a decentralized blockchain network. They render transactions traceable, transparent, and irreversible.

• Smart contracts help you exchange money, property, shares, or anything of value while avoiding the services of a middleman, which saves time and conflict. The best way to describe smart contracts is to compare the technology to a vending machine. Ordinarily, you would go to a lawyer, pay them, and wait while you get the document. With smart contracts, you simply drop a bitcoin into the vending machine (ledger), and your desired document drops into your account. More so, smart contracts not only define the rules and penalties around an agreement in the same way that a traditional contract does, but also automatically enforce those obligations.

• Smart contracts were first proposed in 1994 by Nick Szabo, an American computer scientist who invented a virtual currency called “Bit Gold” in 1998, fully 10 years before the invention of Bitcoin. In fact, Szabo is often rumoured to be the real Satoshi Nakamoto, the anonymous inventor of Bitcoin, which he has denied. Szabo defined smart contracts as computerized transaction protocols that execute terms of a contract.

Adhesion contract

• A standard form contract (sometimes referred to as a contract of adhesion, a take-it-or-leave-it contract, or a boilerplate contract) is a contract between two parties, where the terms and conditions of the contract are set by one of the parties, and the other party has little or no ability to negotiate more favorable terms and is thus placed in a “take it or leave it” position. While these types of contracts are not illegal per se, there exists a very real possibility for unconscionability. Issues with adhesion contracts and why unjust terms might still be accepted by the receiving party: such contracts are rarely read; access to full terms difficult or impossible before acceptance (software license agreements), terms seem hard or unimportant to understand, social pressure to sign, exploitation of unequal power relations.

• An example of an adhesion contract is an insurance contract. In an insurance contract, the company and its agent has the power to draft the contract, while the potential policyholder only has the right of refusal; he or she cannot counter the offer or create a new contract to which the insurer can agree. Before signing an adhesion contract, it is imperative to read it over carefully, as all the information and rules have been written by the other party.

Regulatory law• In parliamentary systems and presidential systems of government, primary legislation (or statutory regulation)

and secondary legislation (or legal regulation) are two forms of law, created respectively by the legislative and executive branches of government. Primary legislation generally consists of statutes (or “acts”) that set out broad outlines and principles, but delegate specific authority to an executive branch to make more specific laws under the aegis of the principal act. The executive branch can then issue secondary legislation (mainly via its regulatory agencies), creating legally-enforceable regulations and the procedures for implementing them.

• Legal regulation (or delegated regulation) refers to law promulgated by an executive branch agency under a delegation from a legislature. In other words, legal regulation is made by a person or group that has been given special powers to do this by parliament: it allows the Government to make changes to a law without needing to push through a completely new Act of Parliament.

• Statutory regulation (or ensuring regulatory compliance) is the process of checking by a government organization that a business is following official rules: it exists to protect the public against the risk of poor practice. It works by setting agreed standards of practice and competence by registering those who are competent to practice and restricting the use of specified protected titles to those who are registered.

Regulatory law | simple

• Legal regulation – Responsible governments already legally regulate many risky activities and other drugs effectively, including alcohol, tobacco and pharmaceuticals. So, far from being ‘radical’, legal regulation is in fact the norm. In reality, it is prohibition that is the radical policy.

• Statutory regulation – When a financial market or industry is controlled by a government organization, such as the Securities and Exchange Commission in the US, rather than being allowed to control itself.

Formalities• The statute of frauds (formalities) refers to the requirement that certain kinds of contracts be memorialized in a writing,

signed by the party to be charged, with sufficient content to evidence the contract. The statute of frauds requires written contracts in the following circumstances:

1. Contracts in consideration of marriage. This provision covers prenuptial agreements.

2. Contracts that cannot be performed within one year.

3. Contracts for the transfer of an interest in land.

4. Contracts by the executor of a will to pay a debt of the estate with his own money.

5. Contracts for the sale of goods totaling $500.00 or more.

6. Contracts in which one party becomes a surety (acts as guarantor) for another party's debt or other obligation.

Remedies• The five basic remedies for breach of contract include the following:

1. Damages: a sum of money that is given as compensation for financial losses caused by a breach of contract. Compensatory damages compensate an injured victim or plaintiff, and punitive damages punish someone who because of fraud or intentional conduct, is deemed to deserve punishment.

2. Restitution: designed to restore the injured party to the position occupied prior to the formation of the contract. Parties seeking restitution may not request to be compensated for lost profits. Instead, restitution aims at returning to the plaintiff any money or property given to the defendant under the contract. Plaintiffs typically seek restitution when contracts they have entered are voided by courts due to a defendant’s incompetence or incapacity.

3. Rescission: terminates the contractual duties of both parties due to vitiating factors like duress and misrepresentation

4. Reformation: allows courts to change the substance of a contract to correct inequities that were suffered (rarely used).

5. Specific performance: an equitable remedy that compels one party to perform his or her duties specified by the contract. It is a type of injunction, an equitable remedy in the form of a court order that compels a party to do or refrain from specific acts. Specific performance is available only when money damages are inadequate to compensate the plaintiff for the breach. This ruling often happens when the subject matter of a contract is in dispute.

Freedom of contract• Freedom of contract is the freedom of private or public individuals and groups (of any legal entity) to form

contracts without government restrictions. This is opposed to government restrictions such as minimum wage, competition law, or price fixing. The freedom to contract is the underpinning of laissez-faire economics and is a cornerstone of free-market libertarianism. Through freedom of contract, individuals possess a general freedom to choose with whom to contract, whether to contract or not, and on which terms to contract. The case law underpinning freedom of contract focuses on labor laws such as government-imposed maximum work hours (Lochner vs New York).

• Henry James Sumner Maine proposed that social structures evolve from roles derived from social status to those based on contractual freedom. A status system establishes obligations and relationships by birth, but a contract presumes that the individuals are free and equal. Modern libertarianism, such as that advanced by Robert Nozick, sees freedom of contract as the expression of the independent decisions of separate individuals pursuing their own interests under a minimal state.

• Link: laissez-faire

Sanctity of contract

• Sanctity of contract is a general idea that once parties duly enter into a contract, they must honor their obligations under that contract. In contrast, efficient breach theory is that parties should feel free to breach a contract and pay damages, so long as this result is more economically efficient than performing under the contract.

• For example, sanctity of contract is applied to the concept that U.S. agricultural products already contracted to be exported should not be subject to government cancellation because of short supply, national security, or foreign policy reasons. The 1990 farm bill provides for contract sanctity by prohibiting the President from restricting the export of any agricultural commodity already under contract to be delivered within 270 days from the date an embargo is imposed, except during national emergency or war.

Negligence

• Negligence is a failure to exercise appropriate and or ethical ruled care expected to be exercised amongst specified circumstances. The core concept of negligence is that people should exercise reasonable care in their actions, by taking account of the potential harm that they might foreseeably cause to other people or property (link: implied social contract). Someone who suffers loss caused by another’s negligence may be able to sue for damages (element of remedies) to compensate for their harm.

• These are what are called the four elements of negligence:

1. duty of care: the defendant has a duty to exercise reasonable care

2. breach: the defendant breaches that duty through an act or culpable omission

3. damages: as a result of that act or omission, the plaintiff suffers an injury

4. causation: the injury to the plaintiff is a reasonably foreseeable consequence of the defendant’s act or omission, can be actual or just proximate (legal)

Black Markets | introduction• A black market, underground economy, or shadow economy is a clandestine market or transaction that

has some aspect of illegality or is characterized by some form of noncompliant behavior with regulation.

• Because tax evasion or participation in a black market activity is illegal, participants will attempt to hide their

behavior from the government or regulatory authority. Cash usage is the preferred medium of exchange in illegal

transactions since cash usage does not leave a footprint. Common motives for operating in black markets are to

trade contraband, avoid taxes and regulations, or skirt price controls or rationing. Typically the totality of such

activity is referred to as a complement to the official economy of a good or service, e.g. “the black market in bush

meat”.

Black Markets | types• Those engaged in underground activities circumvent, escape or are excluded from the institutional system of rules, rights,

regulations and enforcement penalties that govern formal agents engaged in production and exchange.

1. illegal economy: consists of the income produced by economic activities pursued in violation of legal statutes defining the scope of legitimate forms of commerce. Illegal economy participants engage in the production and distribution of prohibited goods and services, such as drug trafficking, arms trafficking, and prostitution.

2. unreported economy: consists of those economic activities that circumvent the tax code. A summary measure of the unreported economy is the amount of income that should be reported to the tax authority but is not so reported. A complementary measure of the unreported economy is the tax gap, namely the difference between the amount of tax revenues due the fiscal authority and the amount of tax revenue actually collected.

3. unrecorded economy: consists of those economic activities that circumvent the reporting requirements of government statistical agencies. A summary measure of the unrecorded economy is the amount of unrecorded income, namely the amount of income that should be recorded in national accounting systems but is not. Unrecorded income is a particular problem in transition countries that switched from a socialist accounting system to UN standard national accounting.

4. informal economy: comprises those economic activities that circumvent the costs and are excluded from the benefits and rights incorporated in the laws and administrative rules covering property relationships, commercial licensing, labor contracts, financial credit and social security systems. The informal sector is defined as the part of an economy that is not taxed, monitored by any form of government, or included in any gross national product (GNP), unlike the formal economy. In developed countries the informal sector is characterized by unreported employment. This is hidden from the state for tax, social security or labor law purposes but is legal in all other aspects. On the other hand, the term black market can be used in reference to a specific part of the economy in which contraband is traded.

Grey Market• A grey market refers to the trade of a commodity through distribution channels that are legal but unintended by the

original manufacturer or trade mark proprietor. Grey market products (grey goods) are products sold by a manufacturer or their authorized agent outside the terms of the agreement between the reseller and the manufacturer.

• Manufacturers that produce products including computer, telecom, and technology equipment very often sell those products through distributors. Most distribution agreements require the distributor to resell the products strictly to end users. However, some distributors choose to resell those products to other resellers. Manufacturers created the term “grey market” to instill fear in customers that buying such equipment was somehow illegal in an effort to assure manufacturers that customers would only buy directly from them. The term “grey market” was chosen because of its similarity to the old term “black market” which refers to stolen and illegal products.

• The US Supreme Court has upheld the idea that grey market products are legal for resale in the United States regardless of where they were produced or originally sold. The EU Supreme Court has similarly ruled that grey market products are legal for resale in the EU, provided that the equipment was originally sold by the manufacturer inside the EU. The Court of Appeal of England and Wales confirmed a ruling that the sale of grey goods can be met by criminal sanctions under section 92 of the UK Trade Marks Act 1994 with up to 10 years imprisonment.

Grey Market• Grey market goods are legal, non-counterfeit goods sold outside normal distribution channels by entities which may have no

relationship with the producer of the goods. This form of parallel import frequently occurs when the price of an item is

significantly higher in one country than another. Entrepreneurs buy the product where it is available cheaply, often at retail but

sometimes at wholesale, and import it legally to the target market. They then sell it at a price high enough to provide a profit but

below the normal market price. Grey market goods are often new, but some grey market goods are used goods. A market in used

goods is sometimes nicknamed a green market.

• The two main types of grey markets are those of imported manufactured goods that would normally be unavailable or more

expensive in a certain country and unissued securities that are not yet traded in official markets. Sometimes the term dark market is used to describe secretive, unregulated (though legal) trading in commodity futures, notably crude oil in 2008.

• The import of legally restricted or prohibited items such as prescription drugs or firearms, on the other hand, is considered black

market, as is the smuggling of goods into a target country to avoid import duties. A related concept is bootlegging; the smuggling

or transport of highly regulated goods, especially alcoholic beverages.

• Grey markets sometimes develop for video games whose demand temporarily exceeds their supply causing authorized local

suppliers to run out of stock. In such situations, the grey market price may be considerably higher than the manufacturer's

suggested retail price, with unscrupulous sellers buying items in bulk for the express purpose of inflating the prices during resale,

a practice called scalping. Online auction sites such as eBay have contributed to the emergence of such grey markets.

White Market

• The white market, is the formal market for goods and services. It is distinct from the black market of illegally trafficked goods and the grey market, in which commodities are distributed through channels which, while legal, are unauthorized by the original manufacturer. It is also sometimes distinguished from the pink market of state-sanctioned, but immoral activities, such as wars of aggression, and the red market of immoral activities banned by the state. The white market in some goods, such as adoption of children, has been criticized as being inefficient due to government regulation.

import cycle | fluid supply

• Import cycle – An import cycle refers to the events that lead up to the completion of goods and products being moved from one country to another. It can be very complex as the the linked Global Trade Import Cycle shows.

• Fluid supply – Supply is “the willingness and ability to offer goods and services for sale at a specific price.” The fluidity indicates how quickly goods or services can be supplied, high fluidity indicating very quickly.

compounding crime | commission-free

• Compounding a felony – Offense of accepting or agreeing to accept money or other consideration for not disclosing information that may result in the prosecution of a perpetrator. It was an offence under the common law of England and was classified as a misdemeanor (now felony or statutory offense). It consisted of a prosecutor or victim of an offence accepting anything of value under an agreement not to pursue prosecution. To “compound”, in this context, means to come to a settlement or agreement. It is not compounding for the victim to accept an offer to return stolen property, or to make restitution, as long as there is no agreement not to prosecute.

• Commission-free – are motif trades (baskets of securities), single stock trades or exchange-traded funds (ETF) that carry no commission fees when executed.

Counterfeiting• Intentional and calculated reproduction of a genuine article (such as money or trademark) for the purpose of misleading

the recipient or buyer into believing he or she is receiving or buying the genuine article itself. Counterfeit products are fakes or unauthorized replicas of the real product. Counterfeit products are often produced with the intent to take advantage of the superior value of the imitated product. The word counterfeit frequently describes both the forgeries of currency and documents, as well as the imitations of items (rip-offs). Counterfeit products tend to have fake company logos and brands (resulting in patent or trademark infringement in the case of goods), have a reputation for being lower quality (sometimes not working at all).

• The counterfeiting of money is usually attacked aggressively by governments worldwide. Paper money is the most popular product counterfeited. The United States Secret Service, mostly known for its guarding-of-officials task, was initially organized primarily to combat the counterfeiting of American money.

Smuggling

• Smuggling is the illegal transportation of objects, substances, information or people into a prison, or across an international border, in violation of applicable laws or other regulations.

• There are various motivations to smuggle. These include the participation in illegal trade, such as in the drug trade, illegal weapons trade, exotic wildlife trade, illegal immigration or illegal emigration, tax evasion, providing contraband to a prison inmate, or the theft of the items being smuggled. Examples of non-financial motivations include bringing banned items past a security checkpoint (such as airline security) or the removal of classified documents from a government or corporate office.

• The verb smuggle, from Low German smuggeln or Dutch smokkelen (="to transport (goods) illegally"), apparently a frequentative formation of a word meaning "to sneak", most likely entered the English language during the 1600s–1700s.

black money | money laundering• Black money is the proceeds of an illegal transaction, on which income and other taxes have not been paid, and which

can only be legitimized by some form of money laundering. It caused an economic crisis in India due to its contribution to the tax gap, where money is transferred and laundered through the underground banking system of implied contractual hawala.

• Money laundering is the process of “laundering” black money into clean, legal assets. It involves 3 steps: placement, layering and integration. Placement refers to the act of introducing black money into the financial system. Layering is the act of concealing the source of that money by using series of complex transactions and bookkeeping tricks. Integration refers to the act of acquiring that money in purportedly legitimate means. One of the most common ways to launder money is through legal cash-based business owned by criminal organizations. For instance, if the organization owns a restaurant, it might inflate the daily cash receipts to funnel black money through the restaurant and into the bank. Then they can distribute funds out of the restaurant’s bank account. These types of businesses are often referred to as “fronts”. Another common form of money laundering is called smurfing, where a person breaks up large chunks of cash into multiple small deposits across different accounts to avoid detection. Money laundering can also be done through currency exchanges and “mules” or cash smugglers, who smuggle large amounts of cash across borders to deposit them in offshore accounts where money-laundering enforcement is less strict. Other money-laundering methods involve investing in commodities such as gems and gold that can be easily moved to other jurisdictions, discretely investing in and selling valuable assets such as real estate, gambling, counterfeiting and creating shell companies. In recent years, the new frontier of money laundering lays around cryptocurrencies like bitcoin and other online banking services like peer-to-peer transfers, which provide anonymity to criminals.

Money laundering | history• Laws against money laundering were created to use against organized crime during the period of Prohibition in the

United States during the 1930s. Organized crime received a major boost from Prohibition due to funds obtained from illegal sales of alcohol. The successful prosecution of Al Capone on tax evasion brought in a new emphasis by the state and law enforcement agencies to track and confiscate money, but existing laws against tax evasion could not be used once gangsters started paying their taxes.

• In the 1980s, the war on drugs led governments again to turn to money-laundering rules in an attempt to seize proceeds of drug crimes in order to catch the organizers and individuals running drug empires. It also had the benefit from a law enforcement point of view of turning rules of evidence upside down. Law enforcers normally have to prove an individual is guilty to get a conviction. But with money laundering laws, money can be confiscated and it is up to the individual to prove that the source of funds is legitimate if they want the funds back. This makes it much easier for law enforcement agencies and provides for much lower burdens of proof.

• The September 11 attacks in 2001, which led to the Patriot Act in the US and similar legislation worldwide, led to a new emphasis on money laundering laws to combat terrorism financing. The Group of Seven (G7) nations used the Financial Action Task Force on Money Laundering to put pressure on governments around the world to increase surveillance of financial transactions and share this information between countries. Starting in 2002, governments around the world upgraded their enforcement of money laundering laws. This included HSBC, which was fined $1.9 billion in December 2012 for their lack of oversight on money laundering by Mexican drug cartels. Many countries introduced or strengthened border controls on the amount of cash that can be carried.

Price ceiling• A price ceiling is the maximum price a seller is allowed to charge for a product or service. Price ceilings are

usually set by law to protect low-income consumers from expensive important resources caused by investment bubbles, high inflation, or monopoly conditions. Price ceilings are often set for essential expenses; for example, rent ceilings have been set in New York and Finland to protect renters from climbing rent prices. However, many economists question their efficacy. For example, price ceilings have no effect if the equilibrium price of the good is below the ceiling. In contrast, if the ceiling is set below the equilibrium level, dead-weight loss is created.

• Price ceilings, while advantageous for many reasons, can also carry disadvantages. For example, in the 1970s, when the government imposed a price ceiling on gasoline prices, the price of gas was relatively low. To take advantage of those low prices, consumers waited in long lines to buy gas, which also caused shortages because sellers were unwilling to sell at low prices. Arguably, if the government had simply let prices increase, consumers would have been forced to conserve. To understand how price ceilings cause shortages, imagine an area has been devastated by natural disaster. As the community rebuilds, there is high demand for plywood, and to boost profits, businesses increase the price of plywood. However, the community protests this increase and demands a price ceiling. The city complies and forbids retailers from charging over a certain amount for plywood. In turn, as prices fall, suppliers become less willing to sell plywood to the stores in the area due to their diminishing profit margin, and a shortage ensues.

market failure | contraband• Market failure is the economic situation defined by an inefficient distribution of goods and services in the free market,

leading to net loss in social welfare. Furthermore, the individual incentives for rational behavior do not lead to rational outcomes for the group. Market failures can be viewed as scenarios where individuals’ pursuit of pure self-interest leads to results that are not efficient on the macro-societal level e.g. information asymmetry, monopoly, negative externalities. Possible solutions: minimum wage laws, subsidies.

• The word contraband, from Medieval French contrebande, denotes any item possessed or distributed for sale illegally. It is used for goods that by their nature are considered too dangerous or offensive in the eyes of the legislator (termed contraband in se) and forbidden. Derivative contraband refers to goods that may normally be owned, but are liable to be seized because they were used in committing an unlawful act such as fraud e.g. smuggled goods, stolen goods, counterfeited goods. In international law, contraband means goods that are destined for enemy territory and may be used in armed conflict. Contraband is classified into two categories, absolute contraband and conditional contraband. Absolute contraband includes arms, munitions, chemicals and certain types of machinery that may be used directly to wage war or be converted into instruments of war. Conditional contraband, formerly known as occasional contraband, consists of materials like provisions and livestock feed. Cargo of that kind, presumably innocent in character, is subject to seizure if the supplies are destined for the armed forces of the enemy rather than for civilian use and consumption. During the American Civil War, Confederate-owned slaves who sought refuge from the Union were declared contraband of war. The policy was first articulated by General Benjamin F. Butler in the Fort Monroe Doctrine, and formed the basis for many former/freed slave colonies.

black market in organs• According to the World Health Organization (WHO), illegal organ trade occurs when organs are removed from the body

for the purpose of commercial transactions. The WHO has stated that “payment for organs is likely to take unfair advantage of the poorest and most vulnerable groups, undermines altruistic donation and leads to profiteering and human trafficking.”

Should we be allowed to sell our organs?

• Yes

1. It would boost the supply of organs helping to solve the national shortage

2. It would end the existing black market in organs, making it safer for people to donate

3. It would mean donors were paid like everyone else – e.g. doctors, nurses– involved in transplantation.

• No

1. Encouraging people to sell parts of their bodies is morally wrong and would almost certainly lead to exploitation of the poor.

2. Potential donors would be more likely to conceal conditions or illnesses that might rule them out.

3. It would undermine the existing altruistic donor system.

black market in gold

• There is no one reason why the black market for gold exists, but there are several influencing factors. The black market crops up all over the globe, but is most overt in developing countries. As taxes are imposed more and more, miners turn to off-record mines, and selling to smugglers and illegal agents, in order to pocket more profit. Furthermore, places like Hong Kong allow for tax-free import of undocumented gold. This provides an incredibly easy market to penetrate with black market gold. Once there, the material can move about more freely and even end up in finished goods.

• In Mongolia and the Philippines, so called ‘ninja miners’ (small-scale miners) use crude methods to avoid government tax, mining and smuggling gold across the border to China and gold duty-free places like Hong Kong. Gold smuggling in Sierra Leone became so problematic that the government finally had to capitulate, slashing its mining tax in half for small-scale producers. It’s certainly an important lesson that governments should heed, further proof that obtrusive attempts to impose heavy taxes only push economic activity into the black market.

black market in art• No auction houses or dealers admit openly to participating in the black market, but exposés suggest widespread

problems in the field. Because demand for art objects is high, and security in many parts of the world is low, thriving trade in ancient art acquired through looting exists. Warfare is correlated with such looting, as is demonstrated by the recent archaeological looting in Iraq (the black market in ancient art is ISIS’ second largest source of income after oil, where they claim to blow up places like Palmyra but loot them instead). Possible solutions: public registry of stolen artworks, lower duties and regulation on art possession and transaction

• Italy’s rich Renaissance heritage attracts, for its greatest misfortune, the concupiscent eye of traffickers. The Italian mafias like La Cosa Nostra have vested interests in this very lucrative market. Works of art ensure social prestige as well as economic prestige. The mafia do not like the beautiful but the appearances. They belong to the oligarchy of the wealthy and want to adopt the codes of it. [The works of art were] first expressions of a social power before being, more recently, ones of economic power.

• Trafficking in artworks has many advantages for traffickers who see this as long-term investment, as artworks are gaining value over the years. Today, art is the main channel for recycling dirty money. Because Caravaggio paintings leave fewer traces than mountains of silver, it can be moved easily and makes for relatively safe investment.

black market in endangered animals

• Very poor survival rate of smuggled animals (<1%) e.g. chameleons from Madagascar; while tribal peoples are falsely accused of causing wildlife decline when they are reliant upon hunting for food and efficient at regulating animal populations – rich poachers and colonialists truly at fault for driving demand

• Interpol has estimated illegal wildlife trade to be $10-20 billion per year. While the trade is global, the worst offending region is Southeast Asia. Lax law enforcement; weak border controls; and the perception of high profit and low risk contribute to wildlife trafficking. Notable trade hubs of the wildlife trade include Suvarnabhumi International Airport and the Chatuchak weekend market in Bangkok. Trade routes connecting in Southeast Asia link Madagascar to the United States (for the sale of turtles, lemurs, and other primates), Cambodia to Japan (for the sale of slow lorises as pets), and the sale of many species to China. The trade also includes demand for exotic pets, and consumption of wildlife for meat. Large volumes of fresh water tortoises and turtles, snakes, pangolins (scales) and monitor lizards (tongue and liver as aphrodisiac, oil and fat as medicine, as pets) are consumed as gourmet dining experiences in Asia. Captive wildlife are held in sanctuaries which have been involved in illegal wildlife trade. In Thailand the Tiger Temple was closed in 2016 accused of clandestine exchange of tigers.

black market in endangered animals• Charismatic mega-fauna are among commonly traded species native to the African continent including African

elephants, pangolin, rhinoceros, leopards, and lions. Other animals such as vultures are involved as well (bushmeat, belief use, poaching alerts). Morocco has been identified as a transit country for wildlife moving from Africa to Europe due to its porous borders (exclave) with Spain. Large numbers of reptiles are sold in the markets, especially spur-thighed tortoises. Although leopards have most likely been extirpated from Morocco, their skins can regularly be seen sold openly as medicinal products or decoration in the markets.

• In open air Amazon markets in Iquitos (Peru) and Manaus (Brazil), rainforest animals are sold openly as meat, such as agoutis, peccaries, turtles, turtle eggs, walking catfish, etc. In addition, many species are sold as pets. Capturing the baby tamarins, marmosets, spider monkeys, saki monkeys, etc., in order to sell them, often requires shooting the mother primate out of a treetop with her clinging child; the youngster may or may not survive the fall. In Venezuela more than 400 animal species are involved in subsistence hunting, domestic and international (illegal) trade.

black market in oil• Between the Republic of Ireland and Northern Ireland, there has often been a black market

in petrol and diesel. The direction of smuggling can change depending on the variation of the taxes and the exchange rate between the Euro and Pound Sterling; indeed sometimes diesel will be smuggled in one direction and petrol the other.

• In some countries, diesel fuel for agricultural vehicles is taxed at a much lower rate than that for other vehicles. This is known as dyed fuel, because a colored dye is added so it can be detected if used in other vehicles. Nevertheless, the saving is attractive enough to make a black market in agricultural diesel. In 2007, the UK lost tax profits worth £350 million due to this phenomenon.

• In countries like India and Nepal, the price of fuel is set by the government, and it is illegal to sell the fuel over the set price. Due to the petrol crisis in Nepal, black marketing in fuel has been a common trend, especially during mass petrol shortage. At times, people need to queue for hours or even sometimes overnight to get the fuel. On the other hand, the petrol pump operators are alleged to hoarding the fuel, and selling it to black marketers. Black marketing in vehicle/cooking fuel became widespread during the 2015 economic blockade imposed on Nepal.

black market in oil• Leads to: loss of corporate profits, loss of government revenues, funds terrorism, funds cartels and organized

crime, environmental damage, leads to higher gas prices for consumers

• There are two methods that authorities have been using to slow down and eventually eliminate fuel theft:

1. Fuel dyes are used to color petroleum products a specific tint, so as to allow for easy identification and prevent

fraud. However, some dyes can be replicated by criminals – such as those in Ireland who “launder” the fuel.

2. Molecular markers, which are used in tiny concentrations of just a few parts per million, are invisible and can

also be used to identify fuels. In Tanzania, a fuel marking program using molecular markers led to significant

increases of imported high standard petrol and diesel for the local market, and a decrease of kerosene

adulteration.

black market in oil | oil theft• Tapping Pipelines: by installing illicit taps, thieves can divert oil or other refined products from pipelines. Mexican

drug gangs, for example, can earn $90,000 in just seven minutes from illegal pipeline tapping.

• Illegal Bunkering: oil acquired by thieves is pumped to small barges, which deliver the product to tankers. In Nigeria, for example, the Niger Delta’s infamous labyrinth of creeks is the perfect place for bunkering to go undetected.

• Ship-to-Ship Transfers: involves the transfer of illegal fuel to more reputable ships to pass off as legal import. Refined crude from Libya gets transferred from ship-to-ship in the middle of the Mediterranean for EU import.

• Armed Theft (Piracy): involves using the threat of violence to command a truck or ship and steal its cargo. It is the Gulf of Guinea near Nigeria that ships need to be worried about.

• Bribing Corrupt Officials: in some countries – as long as the right person gets cut of profits, hydrocarbon theft is ignored. In fact, E&Y says an astonishing 57.1% of all fraud in the oil an gas sector relates to corruption schemes.

• Smuggling and Laundering: smuggling oil products into another jurisdiction can help enable profitable and less traceable sales. ISIS is famous for this – they can’t sell oil to international markets directly, so they smuggle oil to Turkey, where it sells the oil at heavy discount.

• Adulteration: unwanted additives are put in oil or refined products, but sold at full price. In Tanzania, for example, adding cheap kerosene and lubricants to gasoline or diesel is an easy way to increase profit margins, while remaining undetected. Solution: fuel marking program

black market in cigarettes• The black market in tobacco involves criminal gangs producing counterfeit cigarettes, smuggling across borders and

engaging in large-scale tax evasion. With weak penalties for perpetrators, poor border controls, low arrest rates and tobacco taxes creating disparity between neighboring countries, it’s a problem that’s set to grow.

• It has been reported that smuggling one truckload of cigarettes from a low-tax US state to a high-tax state can lead to $2 million profits. The low-tax states are generally the major tobacco producers, and have come under enormous criticism for their reluctance to increase taxes. North Carolina eventually agreed to raise its taxes from 5 cents to 35 cents per 20 pack, although this remains far below the national average. But South Carolina has so far refused to follow suit and raise taxes from 7 cents per pack (the lowest in the USA).

• The global black market in tobacco is estimated to supply 11.6% of the world’s consumption: 650 billion cigarettes a year. And there are two components to this market that have drawn the scrutiny of law enforcement: fake cigarettes and tax avoidance…Some of the tax avoidance is conducted via off-shore suppliers who take orders over the Internet. However, there is a simpler way for criminals to evade cigarette taxes which requires neither a shipper nor an Internet connection: Buy them in bulk in a low tax jurisdiction and physically transport them to a high tax jurisdiction. For example, the tax difference between Virginia and New York State cigarettes is just over $4 a pack, and even more in New York City where further taxes are applied. An individual who throws two cases of legally-purchased cigarettes in his car trunk and drives from Richmond to Brooklyn can make a thousand dollars re-selling them illegally; someone driving a loaded tractor trailer truck can make over a million.

black market in housing• In places where there is rent control there may be a black market for housing. For instance, in the UK there is

illegal subletting of social housing homes where the tenant illegally rents out the home at a higher rent. In Sweden, rental contracts with regulated rent can be bought on the black market, either from the current tenant or sometimes directly from the property owner. In India, metropolitan areas where students are coming from all over India, getting high rented PG (paying guests) or other forms of rented apartments without any taxation or regulations.

black market in currency• Money itself is traded on the black market. This may happen for one or more of several reasons:

1. The government pegs the local currency at some arbitrary level to another currency that does not reflect its true market value.

2. A government makes it difficult or illegal for its citizens to own much or any foreign currency.

3. The government taxes exchanging the local currency with other currencies.

4. The currency is counterfeit.

5. The currency has been acquired illegally and needs to be laundered before the money can be used.

• A government may officially set the rate of exchange of its currency with that of other currencies, typically the US dollar. When it does, the peg often overvalues the local currency relative to what its market value would be if it were a floating currency. Those in possession of the “harder” currency, for example expatriate workers, may be able to use the black market to buy the local currency at better exchange rates than they can get officially.

• In situations of financial instability and inflation, citizens may substitute a foreign currency for the local currency. The U.S. dollar is viewed as a relatively stable and safe currency and is often used abroad as a second currency. The unofficial substitution of U.S. currency for local currency is known as de facto dollarization, and has been observed in transition countries such as Cambodia and Vietnam, and in some Latin American countries. Some countries, such as Ecuador, abandoned their local currency and now use US dollars, essentially for this reason, a process known as de jure dollarization. See also the example of the Ghanaian cedi from the 1970s and 1980s (overvaluation leading to price inflation).

• If foreign currency is difficult or illegal for local citizens to acquire, they will pay a premium to acquire it. More recently cryptocurrencies such as bitcoin have been used as medium of exchange in black market transactions. Cryptocurrencies are favored over centralized currency due to their anonymous nature and their ability to be traded over the internet.

black market in medicine• Counterfeit medicine is a growing problem across the world, and is related to pharma fraud. The black market

composed of counterfeit medicine is controlled by violent criminal gangs who are exploiting the high costs of genuine medicines, endangering the lives of the most vulnerable.

• Counterfeiting medications can apply to both brand name and generic products, where the identity of the source is mislabeled in a way that suggests that it is the authentic approved product. Counterfeit products may include products with wrong quantities of active ingredient, with the wrong active ingredient, or with fake packaging.

• Counterfeit medications kill at least 700,000 people a year, mostly in undeveloped countries where over 30% of pharmaceuticals are fake. According to The Economist, between 15%-30% of antibiotic drugs in Africa and Southeast Asia are fake, while the UN estimates that roughly half of the antimalarial drugs sold in Africa—worth some $438m a year—are counterfeit. Pfizer Pharmaceuticals has found fake versions of at least 20 of its products, such as Viagra, in the legitimate supply chains of at least 44 countries. Pfizer also found that nearly 20% of Europeans had obtained medicines through illicit channels, amounting to $12.8 billion in sales.

Silk Road 1.0-3.1• Silk Road was an online black market and the first modern darknet market, best known as a platform for selling illegal

drugs and sometimes fake driver’s licenses (child pornography, weapons, contract killers, stolen credit cards were banned). As part of the dark web, it was operated as a Tor hidden service, such that online users were able to browse it anonymously and securely without traffic monitoring – all transactions were conducted in Bitcoin.

• In June 2011, Gawker published an article about the site, which led to Internet buzz and an increase in website traffic.This in turn led to political pressure from Senator Chuck Schumer to shut it down. In October 2013, the Federal Bureau of Investigation (FBI) shut down the website and arrested Ross William Ulbricht under charges of being the site’s pseudonymous founder “Dread Pirate Roberts”. Ulbricht was convicted of eight charges related to Silk Road in the U.S. Federal Court in Manhattan and was sentenced to life in prison without parole. In November 2013, Silk Road 2.0 came online, run by former administrators of Silk Road (Inigo & Libertas). It too was shut down, and the alleged operator (Blake Benthall or “Defcon”) was arrested on 6 November 2014 as part of the so-called Operation Onymous (crackdown on darknet markets).

• Following the closure of Silk Road 2.0 in November 2014, Diabolus Market renamed itself to ‘Silk Road 3 Reloaded’ in order to capitalize on the brand. Silk Road 3.0 went offline in 2017 due to loss of funds.

Darknet• A darknet is a portion of routed, allocated IP space not running any services. Traffic arriving to such IP dark space is

undesired since it has no active hosts. The term dark net has been mistakenly conflated with the Dark web which is an overlay network that can be accessed only with specific software, configurations, or authorization, often using non-standard communication protocols and ports. Two typical darknet types are usually peer-to-peer or privacy networks such as Tor. “Darknet” was coined in the 1970s to designate networks isolated from ARPANET (which evolved into the Internet), for security purposes. Darknet addresses could receive data from ARPANET but did not appear in the network lists and would not answer pings or other inquiries.

• Darknets in general may be used for various reasons, such as:

1. Computer crime (cracking, file corruption etc.)

2. Protecting dissidents from political reprisal

3. File sharing

4. To better protect the privacy rights of citizens from targeted and mass surveillance

5. Sale of restricted goods on darknet markets

6. Whistleblowing

7. Circumvent network censorship and content-filtering systems or firewalls

Acropolis

• Acropolis is a multisig darknet market that allows the sale of recreational drugs, e-books, bitcoin security solutions, and services. It is not as big as other major dark web markets but it offers a well-designed and fast site. It also has a referral program – see referral-only market.

• Its main products are books and digital services, unlike other markets where drugs are the target items. The books listed for sale are mainly related to fraud, security, and hacking; although there are those instructing readers on how to earn easy money – e.g. How to make $1000 per day.

Cryptocurrency and blockchain

blockchain | decentralized | mining• A blockchain is a digitized, decentralized, public ledger of all cryptocurrency transactions. Constantly growing as

‘completed’ blocks (the most recent transactions) are recorded and added to it in chronological order, it allows market participants to keep track of digital currency transactions without central recordkeeping. Each block typically contains a cryptographic hash of the previous block, a timestamp, and transaction data. Each node (a computer connected to the network) gets a copy of the blockchain, which is downloaded automatically. The blockchain was designed so these transactions are immutable, meaning they cannot be deleted. The blocks are added through cryptography, ensuring that they remain meddle-proof: The data can be distributed, but not copied. A blockchain can assign title rights because, when properly set up to detail the exchange agreement, it provides a record that compels offer and acceptance.

• Peer-to-peer blockchain networks lack centralized points of vulnerability that computer crackers can exploit so they have no central point of failure. While centralized data is more easily controlled, information and data manipulation are possible. By decentralizing data on an accessible ledger, public blockchains make block-level data transparent to everyone involved. Every node in a decentralized system has a copy of the blockchain. Data quality is maintained by massive database replication and computational trust. No centralized “official” copy exists and no user is “trusted” more than any other. Mining nodes validate transactions, add them to the block they are building, and then broadcast the completed block containing transaction data to other nodes – mining decreases transaction fees paid to middlemen in a centralized system.

hard vs soft forks• A hard fork is a permanent divergence from the previous version of the blockchain, and nodes running previous

versions will no longer be accepted by the newest version. This creates a fork in the blockchain: one path follows the new, upgraded blockchain, and the other path continues along the old path. For example, Ethereum has hard-forked to “make whole” the investors in The DAO, which had been hacked by exploiting a vulnerability in its code. In this case, the fork resulted in a split creating Ethereum and Ethereum Classic chains.

• A soft fork is a change of rules that creates blocks recognized as valid by the old software, i.e. backwards-compatible (property that allows interoperability with older system). Unlike hard forks, it doesn’t require consensus.

Private keys• A public key is an address on the blockchain. Value tokens (cryptocurrency units) sent across the network are recorded

as belonging to that address. A private key (or password) is composed of 51 alphanumeric characters that allow users to access their cryptocurrency. When dealing with cryptocurrency, users are usually given a public address (cryptographic hash of public key) and a private key to send and receive value tokens. The public address is where the funds are deposited and received. But even though a user has value tokens deposited into his address, he won’t be able to withdraw them without the unique private key. The public key is created from the private key through a complicated mathematical algorithm. With the private key, it is possible to write in the public ledger, effectively spending the associated cryptocurrency. With the public key, it is possible for others to send currency to the wallet.

• Think of a public address as a mail box, and the private key as the key to the box. Anyone can insert documents into the mailbox. However, the only person that can retrieve the contents of the mailbox is the one that has the unique private key. It is therefore, important to keep the key safe.

• A digital wallet stores the private key of a user. The wallet software creates a digital signature by processing the transaction with the private key. This upholds a secure system since the only way to generate a valid signature for any given transaction is to use the private key. The signature is used to confirm that a transaction has come from a particular user, and ensures that the transaction cannot be changed once broadcasted.

Bitcoin• Bitcoin (�) is the first decentralized digital currency, as the peer-to-peer payment system works without a central

bank or single administrator. Bitcoin transactions are verified by network nodes through the use of cryptography and recorded in a public distributed ledger called a blockchain. Bitcoin was invented by an unknown person or group of people under the name Satoshi Nakamoto and released as open-source software in 2009. Bitcoins are created as a reward for a process known as mining. The University of Cambridge estimates that in 2017, there were 2.9 to 5.8 million unique users using a cryptocurrency wallet, most of them using bitcoin.

• Nakamoto implemented the bitcoin software as open source code and released it on SourceForge after publishing a paper on it the year before. In January 2009, the bitcoin network came into existence after Satoshi Nakamoto mined the first ever block on the chain, known as the genesis block. Embedded in the coinbase of this block was the following text, which has been interpreted as both a timestamp of the genesis date and a derisive comment on the instability caused by fractional-reserve banking:

“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”

• The receiver of the first bitcoin transaction was cypherpunk Hal Finney, who created the first reusable proof-of-work system (basis for mining) in 2004. Finney downloaded the bitcoin software the day it was released, and received 10 bitcoins from Nakamoto. In the early days, Nakamoto is estimated to have mined 1 million bitcoins. In 2010, Nakamoto handed the network alert key and control of the Bitcoin Core code repository over to Gavin Andresen, who later became lead developer at the Bitcoin Foundation. Nakamoto subsequently disappeared from any involvement in bitcoin.

Bitcoin Cash

• In August 2017 a group of developers not content with the Segregated Witness feature which had recently been added to Bitcoin, implemented a change which hard forked the Bitcoin code. At the time of the fork anyone owning Bitcoin was also in possession of the same number of Bitcoin Cash units. Bitcoin Cash has a larger block size limit and had an identical blockchain at the time of fork. On 12 November another hard fork, Bitcoin Gold, was created. Bitcoin Gold changes the proof-of-work algorithm used in mining.

Ethereum• Ethereum is an open-source, public, blockchain-based distributed computing platform and operating

system featuring smart contract (scripting) functionality. Ether is a cryptocurrency whose blockchain is generated by the Ethereum platform. Ether can be transferred between accounts and used to compensate participant mining nodes for computations performed. It is also used to pay for “Gas”, an internal transaction pricing mechanism used to mitigate spam and allocate resources on the network. Ethereum was proposed in late 2013 by Vitalik Buterin, a cryptocurrency researcher and programmer. In 2016, as a result of the collapse of The DAO project, Ethereum was hard forked into two separate blockchains – the new separate version became Ethereum (ETH), and the original continued as Ethereum Classic (ETC). The value of the Ethereum currency grew over 13,000 percent in 2017. Its block time is 14 to 15 seconds, compared with 10 minutes for bitcoin. Mining of ether generates new coins at constant rate, occasionally changing during hard forks, while for bitcoin the rate halves every 4 years.

• Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference. These apps run on a custom built blockchain, an enormously powerful shared global infrastructure that can move value around and represent the ownership of property. This enables developers to create markets, registry of debts, move funds in accordance with instructions given long in the past (like a will or a futures contract) without a middleman or counterparty risk. The project was bootstrapped via an ether presale in August 2014. It is developed by a Swiss nonprofit, the Ethereum Foundation.

Ripple

• Ripple is a real-time gross settlement system (without waiting period for transactions to take place), currency exchange and remittance network created by the Ripple company. Also called the Ripple Transaction Protocol (RTXP), it is built upon distributed open source internet protocol, consensus ledger and native cryptocurrency abbreviated as XRP (ripples). Released in 2012, Ripple purports to enable “secure, instantly and nearly free global financial transactions of any size with no chargebacks”. It supports tokens representing fiat currency, cryptocurrency, commodity or any other unit of value such as frequent flier miles or mobile minutes. At its core, Ripple is based around a publicly shared database or ledger, which uses a consensus process that allows for payments, exchanges and remittance in a distributed process. The network can operate without the Ripple company. Among its validators are companies, internet service providers, and the Massachusetts Institute of Technology. Ripple has been increasingly adopted by banks and payment networks as settlement infrastructure technology – from banks’ perspective, distributed ledgers like the Ripple system have a number of advantages over cryptocurrencies like bitcoin. As of the first week of March 2018, XRP is the third largest coin by market capitalization.

Ripple• Ripple’s website describes the open-source protocol as “basic infrastructure technology for interbank transactions –

neutral utility for financial institutions and systems.” The protocol allows banks and non-bank financial services companies to incorporate the Ripple protocol into their own systems, and therefore allow their customers to use the service. Currently, Ripple requires two parties for a transaction to occur: first, a regulated financial institution holds funds and issues balances on behalf of customers. Second, “market makers” such as hedge funds or currency trading desks provide liquidity in the currency they want to trade in. In addition to balances, the ledger holds information about offers to buy or sell currencies and assets, creating the first distributed exchange. Ripple does for payments what SMTP did for email, which is enable the systems of different financial institutions to communicate directly.

• In Ripple, users make payments between each other by using cryptographically signed transactions denominated in either fiat currencies or Ripple's internal currency (XRP). For XRP-denominated transactions Ripple can make use of its internal ledger, while for payments denominated in other assets, the Ripple ledger only records the amounts owed, with assets represented as debt obligations. As originally Ripple only kept records in its ledger and has no real-world enforcement power, trust was required. However, Ripple is now integrated with various user verification protocols and bank services. Users have to specify which other users they trust and to what amount. In order to send assets between users that have not directly established a trust relationship, the system tries to find a path between the two users such that each link of the path is between two users that do have a trust relationship. This mechanism of making payments through a network of trusted associates is named ‘rippling’. It has similarities to the age-old hawala system.

Stellar • Stellar is an open-source protocol for value exchange founded in early 2014 by Jed McCaleb (creator of eDonkey) and

Joyce Kim. The Stellar protocol is supported by a nonprofit, the Stellar Development Foundation. Stellar is an open-source protocol for exchanging money using blockchain technology. The platform’s source code is hosted on Github. The Stellar network can quickly exchange government-based currencies with 2 to 5 second processing times. The platform is a distributed ledger maintained by a consensus algorithm, which allows for decentralized control, flexible trust, low latency, and asymptotic security. Before the official launch, McCaleb formed a website called “Secret Bitcoin Project” seeing alpha testers. The nonprofit Stellar Development Foundation was created in collaboration with Stripe CEO Patrick Collison for seed funding.

• Servers run a software implementation of the protocol, and use the Internet to connect to and communicate with other Stellar servers, forming a global value exchange network. Each server stores a record of all “accounts” on the network. These records are stored in a database called the “ledger”. Servers propose changes to the ledger by proposing “transactions”, which move accounts from one state to another by spending the account’s balance or changing a property of the account. All of the servers come to agreement on which set of transactions to apply to the current ledger through a process called “consensus”. The consensus process happens at a regular interval, typically every 2 to 4 seconds. This keeps each server’s copy of the ledger in sync and identical.

Dogecoin• Dogecoin (symbol: Ð) is a cryptocurrency featuring a likeness of the Shiba Inu dog from the famous Internet meme as its logo.

Compared with other cryptocurrencies, Dogecoin had a fast coin production schedule: 100 billion coins were in circulation by mid-2015. As of 30 June 2015, the 100 billionth Dogecoin had been mined. While there are few mainstream commercial applications, the currency has gained traction as an Internet tipping system, in which social media users grant Dogecoin tips to other users for providing interesting or noteworthy content. In January 2018, Dogecoin reached $2 billion market cap. The Dogecoin community is well-known to fundraise for several notable causes, including but not limited to: Jamaican bobsled team in the 2014 Sochi Winter Olympics, Josh Wise in NASCAR, Doge4Water Kenya.

• Dogecoin was created in 2013 by programmer Billy Markus from Portland, Oregon, who hoped to create a fun cryptocurrency that could avoid the controversial nature of bitcoin to reach a broader demographic. At the same time, Jackson Palmer, a member of Adobe Systems’ marketing department in Sydney, was encouraged on Twitter by a student to make this a reality. After receiving several mentions on Twitter, Palmer purchased the domain dogecoin.com and added a splash screen, which featured the coin's logo and scattered Comic Sans text. Markus saw the site linked in an IRC chat room, and started efforts to create the currency after reaching out to Palmer. Markus based Dogecoin on an existing cryptocurrency, Luckycoin (based on Litecoin), which featured randomized reward for mining blocks, though this feature was later changed to static rewards only.

• Unlike deflationary cryptocurrencies which have a limit on the number of coins that can be produced, there is no limit to how many Dogecoins can be produced, which makes it an inflationary coin. Dogecoin was initially to have a limit of 100 billion coins, which would already have been far more coins than the top digital currencies were allowing. In February 2014, Dogecoin founder Jackson Palmer announced that that limit would be removed and there would be no cap, which should have the result of constant reduction of its inflation rate over a long time.