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HARSHAD MEHTA SCAM :This was one of the best engineered financial scam the country has witnessed.To understand the complete story :It requires the complete understanding of the whole mechanism, plotted very cleverly by a broker.A basic knowledge is required to understand the financial terms used ahead in order to catch the whole scenario.It is a long read. Go on and comprehend. It is indeed a very interesting story where there were faults in the system itself.I found this report from one of the projects by the students of IIMA. Here is the simplified version to read so that even a layman can grasp and correlate the chain of events happening around in the plot.The term "Securities Scam" refers to a diversion of funds to the tune of over Rs. 3500 crores from the banking system to various stockbrokers in a series of transactions (primarily in Government securities) during the period April 1991 to May 1992.The scam has for several months become a permanent feature of the front pages of the newspapers. Despite the massive media coverage of the scam, most readers found it hard to understand it particularly when they were confronted with difficult terms and acronyms like ready forward, double ready forward, SGL, PDO, BR, PMS etc.In April 1992, the first press report appeared indicating that there was a shortfall inthe Government Securities held by the State Bank of India. In a little over a month, investigations revealed that this was just the tip of an iceberg which came to be called the securities scam, involving misappropriation of funds to the tune of over Rs. 3500 crores ( about $ 1.2 billion). In an ever expanding ambit, the scam has engulfed top executives of large nationalised banks, foreign banks and financial institutions, brokers, bureaucrats and politicians. The functioning of the money market and the stock market has been thrown in disarray. The scam has generated such immense public interest that it has become a permanent feature on the front pages of newspapers.The scam was in essence a diversion of funds from the banking system (in particular the inter-bank market in government securities) to brokers for financing their operations in the stock market.A clear understanding of the government securities market and the stock (corporate securities) markets is a prerequisite for understanding the scam. A brief comparative description of these two markets is as follows:It is quite clear therefore that there were enormous profits to be had for anybody who could find a way of breaching the artificial wall separating the two markets and arbitrage between them. That in essence was what the scam was all about.To understand the motivation of different players involved in such diversion, it is necessary to examine the changes in the economic environment that preceded the discovery of the scam, and how these changes were affecting the the principal players in both markets.1. LIBERALISATION OF THE ECONOMY .After assuming office in June 1991, the new government accelerated the process of economic liberalisation under the auspices of the International Monetary Fund (IMF).The opening up of the Indian economy as a result of these measures promised an unprecedented growth and prosperity for the private corporate sector as new sectors of the economy were being allowed private participation and various administrative impediments were being removed. Anticipating the good tidings for the private sector, the stock market started booming - the Bombay Stock Exchange Sensitive Index (SENSEX) rose from around 1000 in February 1991 to a peak of 4500 in March 1992 just before the scam came to light. This meant an enormous increase in the scale of finance required by operators in the stock market. Heavy margins imposed by the Bombay Stock Exchange on settlement trading added to the funds requirement.At the same time, the new free market philosophy confronted the public sector with new challenges. There was immense pressure on the public sector to perform - to perform in financial terms. The nationalised banks too were under the same pressure to improve their bottom line. The proposed increase in capital adequacy requirement (mandated by the Narasimham Committee report) added to the pressure on the banks.Another innovation in the banking sector in the period preceding the scam was the Portfolio Management Scheme (PMS).PMS was simply a deposit which was not subject to interest rate ceilings or to reserve requirements. The scheme was designed to permit deployment of large amounts of surplus cash available with several public sector undertakings (PSUs) particularly in the oil sector. A large part of this surplus cash resulted from borrowings in the international markets (by PSUs, at the instance of the government) to bolster the country's precarious foreign exchange reserves.An intense competition developed among the banks for these funds as they were unfettered by reserve requirements.To compete for PMS funds from the PSUs as well as to enhance their own profitability, banks were forced to look for higher returns. This was happening at the same time when there was a growing need for funds in the informal money market to finance stock market operations at very high rates of interest. The time was therefore most appropriate for somebody to find innovative ways of diverting funds from the banking system to the stock market. Brokers who were operating in both the markets were ideally placed to do this, and thus the scam was born.2. THE READY FORWARD DEAL :(Don’t worry about the complex terms, read and understand , it’s simple.)The crucial mechanism through which the scam was effected was the ready forward (RF) deal.The RF is in essence a secured short term (typically 15 day) loan from one bank to another bank. The lending is done against government securities, exactly the way a pawnbroker lends against jewellery or other valuables.In form, however, the RF is not a loan at all. The borrowing bank (Bank 2) actually sells the securities to the lending bank (Bank 1) and buys them back at the end of the period of the loan at (typically) a slightly higher price. The price difference represents the interest on the loanThe RF in India serves two main purposes:• Like repo markets around the world the RF deals provide much needed liquidity to the government securities markets.• The RF deals are an important tool in the hands of the banks to manage their Statutory Liquidity Ratio (SLR) requirements. Banks in India were required to maintain 38.5% of their Demand and Time Liabilities (DTL) in government securities and certain approved securities which are collectively known as SLR securities.RF helps in managing this requirement in two ways :A bank which has a temporary surge in DTL may not want to buy SLR securities outright and then sell them when the DTL comes back to normal. Instead it can do an RF deal whereby it effectively borrows the securities from a bank which has surplus SLR securities. An RF in SLR securities can thus be seen either as lending of money or as borrowing of securities.An RF deal is not legally a loan. The amount borrowed by a bank under RF is not regarded as a part of the bank's liabilities. Therefore it is not a part of its DTL, and does not attract the SLR requirement. Had the bank borrowed outright, it would have had to maintain 38.5% of the borrowing in SLR securities.The Mechanics of the Scam As explained above, a ready forward deal is, in substance, a secured loan from one bank to another. To make the scam possible, the RF had to undergo a complete metamorphosis: it had to become an unsecured loan to a broker. How was this transformation brought about? The three crucial steps to effect the metamorphosis were:• The settlement process in the government securities market became broker intermediated, that is, delivery and payments started getting routed through a broker instead of being made directly between the transacting banks.• The broker through whom the payment passed on its way from one bank to another found a way of crediting the money into his account though the account payee cheque was drawn in favour of a bank.• While the above two steps transformed an RF deal from a loan to a bank into a loan to a broker, it would still be a secured loan. However, the brokers soon found a way of persuading the lending bank to dispense with security for the loan or to accept worthless security.Now elaboration on each of these steps is required , in order to clearly understand the modus operandi used in the scam.3. SETTLEMENT PROCESSThe normal settlement process in government securities is that the transacting banks make payments and deliver the securities directly to each other.The broker's only function is to bring the buyer and seller together and help them negotiate the terms, for which he earns a commission from both the parties. He does not handle either the cash or the securities.During the scam, however, the banks or at least some banks adopted an alternative settlement process which was similar to the process used for settling transactions in the stock market.In this settlement process, deliveries of securities and payments are made through the broker. That is, the seller hands over the securities to the broker who passes them on to the buyer, while the buyer gives the cheque to the broker who then makes the payment to the seller. In this settlement process, the buyer and the seller may not even know whom they have traded with, both being known only to the broker.There were two important reasons why the broker intermediated settlement began to be used in the government securities markets:The brokers instead of merely bringing buyers and sellers together started taking positions in the market. In other words, they started trading on their own account, and in a sense became market makers in some securities thereby imparting greater liquidity to the markets.When a bank wanted to conceal the fact that it was doing an RF deal, the broker came in handy. The broker provided contract notes for this purpose with fictitious counterparties, but arranged for the actual settlement to take place with the correct counterparty.4. ACCOUNT PAYEE CHEQUESA broker intermediated settlement allowed the broker to lay his hands on the cheque as it went from one bank to another through him.The hurdle now was to find a way of crediting the cheque to his account though it was drawn in favour of a bank and was crossed account payee.As it happens, it is purely a matter of banking custom, that an account payee cheque is paid only to the payee mentioned on the cheque.In fact, exceptions were being made to this norm, well before the scam came to light. Privileged (corporate) customers were routinely allowed to credit account payee cheques in favour of a bank into their own accounts to avoid clearing delays, thereby reducing the interest lost on the amount.Normally, if a customer obtains a cheque in his own favour and deposits it into his own account, it may take a day or two for the cheque to be cleared and for the funds to become available to the customer. At 15% interest, the interest loss on a clearing delay of two days for a Rs. 100 crore cheque is about Rs. 8 lacs.On the other hand, when banks make payments to each other by writing cheques on their account with the RBI, these cheques are cleared on the same day.The practice which thus emerged was that a customer would obtain a cheque drawn on the RBI favouring not himself but his bank. The bank would get the money and credit his account the same day. This was the practice which the brokers in the money market exploited to their benefit.5. DISPENSING WITH THE SECURITY.The brokers thus found a way of getting hold of the cheques as they went from one bank to another and crediting the amounts to their accounts.This effectively transformed an RF Into a loan to a broker rather than to a bank. But this, by itself, would not have led to the scam because the RF after all is a secured loan, and a secured loan to a broker is still secured. What was necessary now was to find a way of eliminating the security itself!Three routes adopted for this purpose were:Some banks (or rather their officials) were persuaded to part with cheques without actually receiving securities in return. A simple explanation of this is that the officials concerned were bribed and/or negligent. A more intriguing possibility is that the banks' senior/top management were aware of this and turned a Nelson's eye to it to benefit from higher returns the brokers could offer by diverting the funds to the stock market. One must recognise that as long as the scam lasted, the banks benefited from such an arrangement. The management of banks might have been sorely tempted to adopt this route to higher profitability.The second route was to replace the actual securities by a worthless piece of paper - a fake Bank Receipt (BR). This is discussed in greater detail in the next section.The third method was simply to forge the securities themselves. In many cases, PSU bonds were represented only by allotment letters rather than certificates on security paper. And it is easier to forge an allotment letter for Rs. 100 crores worth of securities than it is to forge a 100 rupee note! Outright forgery of this kind however accounted for only a very small part of the total funds misappropriated.6. BANK RECEIPTIn an RF deal, as we have discussed it so far, the borrowing bank delivers the actual securities to the lender and takes them back on repayment of the loan. In practice, however, this is not usually done. Instead, the borrower gives a Bank Receipt (BR) which serves three functions:The BR confirms the sale of securities.It acts as a receipt for the money received by the selling bank. Hence the name - bank receipt.It promises to deliver the securities to the buyer. It also states that in the meantime the seller holds the securities in trust for the buyer.In short, a BR is something like an IOU (I owe you securities!), and the use of the BR de facto converts an RF deal into an unsecured loan. The lending bank no longer has the securities; it has only the borrower's assurance that the borrower has the securities which can/will be delivered if/when the need arises.Advantages of using BRs. There were several reasons why BRs came to be used in lieu of the actual securities:BRs were very convenient for RF deals because delivery was not needed. BRs could simply be cancelled and returned when the deals were reversed.In case of PSU bonds, actual delivery was almost impossible because of a variety of reasons, such as non-existence of certificates, or a single certificate for investment of several hundreds of crores of rupees.In case of government securities, the RBI had issued a directive that BRs should not be used. The reason was that, for these securities, the RBI, through its Public Debt Office (PDO), acts as the custodian. Physical securities are never issued, and the holding of these securities is represented by book entries at the PDO.The ledger in which the PDO maintains these accounts is called the Subsidiary General Ledger (SGL), and these securities are referred to as SGL securities.When a holder of these securities sells them and wishes to transfer them to the buyer, he fills up an SGL transfer form and gives it to the buyer.This SGL form can be compared to a cheque: the buyer deposits it into his SGL account at the PDO, and the PDO makes a book entry reducing the holding of the seller and increasing that of the buyer. Because of this facility, the RBI does not permit use of BRs for these securities. Had the PDO functioned efficiently and carried out its bookkeeping without delays, RBI would have been justified in not permitting use of BRs for government securities.Unfortunately, the PDO was very inefficient and laggardly in its functioning. This was a very serious matter because, like a cheque, an SGL form can also bounce if the seller does not have sufficient holding of securities in his SGL account. The buyer needs to be informed about this promptly; else, he may resell the same securities by issuing his own SGL forms in the belief that he has sufficient balance in his account. The inefficiency of the PDO made the SGL form an inconvenient and unreliable instrument, and banks preferred to use BRs even for the SGL securities, in violation of the RBI's directiveBRs Issued without Backing of Securities As stated earlier, a BR is supposed to imply that the issuer actually has the securities and holds them in trust for the buyer. But in reality the issuer may not have the securities at all. There are two reasons why a bank may issue a BR which is not backed by actual securities:A bank may short sell securities, that is, it sells securities it does not have. This would be done if the bank thinks that the prices of these securities would decrease. Since this would be an outright sale (not an RF!), the bank issues a BR. When the securities do fall in value, the bank buys them at lower prices and discharges the BR by delivering the securities sold. Short selling in some form is an integral part of most bond markets in the world. It can be argued that some amount of short selling subject to some degree of regulation is a desirable feature of a bond market. In our opinion, an outright sale using a BR which is not backed by securities is not harmful per se though it violates the RBI guidelines.The second reason is that the bank may simply want an unsecured loan. It may then do an RF deal issuing a "fake" BR which is a BR without any securities to back them. The lending bank would be under a mistaken impression that it is making a secured loan when it is actually advancing an unsecured loan. Obviously, lenders should have taken measures to protect themselves from such a possibility. This aspect will be examined later when we discuss the banks' control system in general and counterparty limits in particular.During the scam, the brokers perfected the art of using fake BRs to obtain unsecured loans from the banking system. They persuaded some small and little known banks - the Bank of Karad (BOK) and the Metropolitan Cooperative Bank (MCB) - to issue BRs as and when required. These BRs could then be used to do RF deals with other banks. The cheques in favour of BOK were, of course, credited into the brokers' accounts. In effect, several large banks made huge unsecured loans to the BOK/MCB which in turn made the money available to the brokers.7. CONTROL SYSTEMSThe scam was made possible by a complete breakdown of the control system both within the commercial banks as well as the control system of the RBI itself. We shall examine these control systems to understand how these failed to function effectively and what lessons can be learnt to prevent failure of control systems in the future. The internal control system of the commercial banks involves the following features:Separation of Functions: The different aspects of securities transactions of a bank, namely dealing, custody and accounting are carried out by different persons. Dealing refers to the decision about which transactions are to be entered into with which parties. Custody involves receiving and delivering securities/substitute instruments and cheques for the transactions done. Accounting involves maintenance of the investment account of the bank and its reconciliation with the SGL account of the bank maintained by the PDO of the RBI. Closely related to separation of functions is the notion of double custody. Just as the currency chests in the banks are under double custody where two people have to collaborate to open it, the securities too are usually under double custody. The assumption underlying double custody is that two individuals are unlikely to have a criminal intent at the same time!Counterparty Limits: The moment an RF deal is done on the basis of a BR rather than actual securities, the lending bank has to contend with the possibility that the BR received may not be backed by any/adequate securities. In effect, therefore, it may be making an unsecured loan, and it must do the RF only if it is prepared to make an unsecured loan. This requires assessing the creditworthiness of the borrower and assigning him a "credit limit" up to which the bank is prepared to lend. Technically, this is known as a counterparty limit. Strictly, a counterparty limit is required even if an RF is done against actual securities because the securities may decline in value and the RF may end up becoming only partly secured though it was fully secured to begin with.Most of the foreign banks with the exception of the Standard Chartered Bank had very strict counterparty limits and were thus protected from lending too much against fake BRs. For a bank like the Bank of Karad, a reasonable counterparty limit may have been Rs. 50 lacs so that an RF for several hundred crores would be flatly refused. The Standard Chartered Bank either did not have or did not adhere to such limits and agreed to do these RFs.These simple control mechanisms were not being operated by the PDO.What is more surprising is that even when discrepancies were discovered, such as when some SGL forms sent to the PDO bounced because of inadequate inventory of securities in the seller's account, the intimation regarding the inadequacy of securities was communicated to the buyer leisurely, may be through a letter by ordinary post, which could take days to reach. In the mean time, if the buyer sells the same securities on the strength of the SGL sent to the PDO, it could start an ever expanding chain of bounced SGLs! It appears that the PDO was not particularly perturbed by such possibilities.The RBI is expected to carry out site inspections and other audits of the investment accounts and procedures of the banks. These were not quite comprehensive and even when some irregularities were detected, the RBI did not act decisively against the erring banks.8. WINDOW DRESSING THE BALANCE SHEETS.Most banks carry investments in their books at their cost of acquisition and do not mark it down to market. This creates serious distortions during a period when, as shown in the preceding section, the prices of securities are falling.If one assumes that prices of government securities fell by about 5% over the last year, then on an aggregate holding of these securities by the banking system of Rs. 70,000 crores, the paper loss of the banks would be Rs. 3,500 crores. A 10% fall in the prices of PSU bonds would imply a further paper loss of about Rs. 800 crores to the banks (based on the assessment that banks hold about Rs. 8000 crores worth of PSU bonds).Under the current system of accounting, these losses are recognized only when the securities are sold. This means that a bank would be reluctant to sell these securities and show the loss in its books. It was in this context that the banks and the brokers resorted to innovative methods of window dressing the bank balance sheet.The basic idea is as follows:The bank sells the securities trading at a discount to a broker at face value or at a price which is much higher than the prevailing market prices. The broker incurs a huge loss in this transaction as he will have to resell the securities to some other bank at market prices.The bank then buys some other securities from the same broker at prices well above market prices. The broker therefore makes a huge profit in the second transaction which compensates him for the loss incurred in transaction (a).Thus, the net result of the two transactions is that neither the bank nor the broker make any profit or loss. Then why would these transactions be done? The reason is that while the profit earned through transaction(a) would improve the bottom line (profit) for the bank, the loss suffered by the bank in transaction(b) would not be reflected in its profit and loss account at all. The securities bought would simply appear in the bank's balance sheet at inflated values!It is a most ingenious way of creating paper profits. As far the broker is concerned, the price in transaction (a) can be as high as the bank wants so long as he gets a correspondingly higher price in transaction (b).What the scam investigations have revealed is that window dressing of this kind was rampant. Instances have been recorded of the same broker selling the same security on the same day to different banks at vastly different prices.This makes it very difficult to fathom the motives for a single transaction in isolation from other transactions done by a bank.Unless one can put together the entire series of transactions, it is impossible to know whether the banks or the brokers have been the net gainers through all the manipulative transactions. It is conceivable that some brokers were willing to absorb a part of the losses as a quid pro quo for other "services" which the banks provided them.It is interesting to note that even the pure RF deal involves an element of window dressing.The lending bank shows the interest received as an income in its profit and loss account.But the borrowing bank does not show the interest paid as an expense, because it simply carries the investment in its books at the higher repurchase price.It is, in fact, quite likely that the enormous increases in the profits that some of the banks reported in 1992 over the previous year, can at least in part be explained by use of such "creative" accounting practices.Where has all the money gone?It is becoming increasingly clear that despite the intensive efforts by several investigating agencies, it would be impossible to trace all the money swindled from the banks. At this stage we can only conjecture about where the money has gone and what part of the misappropriated amount would be recovered. Based on the result of investigations and reporting so far, the following appear to be the possibilities:A large amount of the money was perhaps invested in shares. However, since the share prices have dropped steeply from the peak they reached towards end of March 1992, the important question is what are the shares worth today? Till February 1992, the Bombay Sensitive Index was below 2000; thereafter, it rose sharply to peak at 4500 by end of March 1992. In the aftermath of the scam it fell to about 2500 before recovering to around 3000 by August 1992. Going by newspaper reports, it appears likely that the bulk of Harshad Mehta's purchases were made at low prices, so that the average cost of his portfolio corresponds to an index well below 2500 or perhaps even below 2000. Therefore, Mehta's claim that he can clear all his dues if he were allowed to do so cannot be dismissed without a serious consideration. Whether these shares are in fact traceable is another question.It is well known that while Harshad Mehta was the "big bull" in the stock market, there was an equally powerful "bear cartel", represented by Hiten Dalal, A.D. Narottam and others, operating in the market with money cheated out of the banks.Since the stock prices rose steeply during the period of the scam, it is likely that a considerable part of the money swindled by this group would have been spent on financing the losses in the stock markets.It is rumoured that a part of the money was sent out of India through the havala racket, converted into dollars/pounds, and brought back as India Development Bonds. These bonds are redeemable in dollars/pounds and the holders cannot be asked to disclose the source of their holdings. Thus, this money is beyond the reach of any of the investigating agencies.A part of the money must have been spent as bribes and kickbacks to the various accomplices in the banks and possibly in the bureaucracy and in the political system.As stated earlier, a part of the money might have been used to finance the losses taken by the brokers to window-dress various banks' balance sheets. In other words, part of the money that went out of the banking system came back to it. In sum, it appears that only a small fraction of the funds swindled is recoverable.This sort of chain to chain connection laid out as a master plan for the “Big Bull” to cheat and manipulative the stock prices with loads of money acquired with fraudulent activities for fulfilling his own pockets and his filthy intentions.“Kaam karne ki pehli shart imaandari hoti hai” ,But these big bulls were just stupid and did not have either the brain nor any morals to understand the basics.

I love the concept of Bitcoin. I believe the Internet will redefine currency as we know it. Nevertheless, I see at least 4 major ways (technical, legal, competition, community) the Bitcoin network could either be hacked by stealing BTCs, or shocked to death triggering panic and drops in BTC value. I hope this helps the Bitcoin community to develop a currency that's really resilient to attacks.1) TechnicalI outline here 6 attack scenarios and 4 ways to double-spend BTCs, for a total of 24 possible different attacks. Since I don’t have complete knowledge of the Bitcoin platform some of them might not be feasible in practice. Still, if just one of them is feasible, it means the Bitcoin network can be hacked right now. Also, these attack scenarios involve the ROI of such attacks to be positive. Please remember that even if the ROI of an attack was negative but the attack feasible, the scenario would be as scary: any BTC opponent/competitor such as a law enforcement agency could use their resources to exploit the Bitcoin network and steal BTCs from rightful owners. Not exactly what you expect from a “digital gold”.BITCOIN’S WEAK SPOT, ACCORDING TO ITS CREATORAccording to its own creator, the Bitcoin p2p network is resilient to attacks only:"As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network" (Satoshi Nakamoto, "Bitcoin: A Peer-to-Peer Electronic Cash System" at http://www.bitcoin.org/sites/default/files/bitcoin.pdf).In the same paper Nakamoto writes:"The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.""If a majority of CPU power is controlled by honest nodes, the honest chain will grow the fastest and outpace any competing chains. ""If a greedy attacker is able to assemble more CPU power than all the honest nodes, he would have to choose between using it to defraud people by stealing back his payments, or using it to generate new coins.""we proposed a peer-to-peer network using proof-of-work to record a public history of transactions that quickly becomes computationally impractical for an attacker to change if honest nodes control a majority of CPU power. "If Nakamoto is right, this means the Bitcoin network has a very clear weak spot in plain sight. In the very words of its creator, there's no doubt: Bitcoin can be hacked.Other than being hackable by politically-driven attackers (e.g. law enforcement entities, tax collectors, anti-laundering entities, central banks, keynesian entities, etc), my fear is that any profit-driven malicious entity could soon choose to attack Bitcoin. As the FRN("USD")/BTC exchange ratio (e.g. price) grows, it becomes more and more convenient to buy computing power with FRN("USD") and then use it to hack the block chain. Buying computing power using FRN("USD") to outnumber the majority of the honest Bitcoin nodes with malicious nodes could reap a positive ROI in terms of FRN("USD").At the current stage there are ~5M BTC out there worth ~2M FRN ("USD"), distributed among ~3,000 nodes, while ~160 new blocks justify the minting of ~8,000 new BTCs every day. Around 1500 transactions take place every day.PREPARING THE ATTACKThe first step of the attack should be for the attacker to buy 400 BTC from moneychangers. At current market prices this should cost ~160 FRN("USD").The attacker will wait to find in advance the goods/services to buy from the providers (the specific targets of the attack) and make sure the aforementioned future recipients are ready to accept BTCs in exchange for those goods/services. Only then, when all the providers are "warm" and ready to sell, should the attack start. The providers should be 80 different ones, and they shouldn't be Bitcoin ubergeeks: they should be normal people not paying much attention to the sudden rise of total number of nodes in the network and they should not follow much the community forums/alerts, or at least not check them every time they accept a BTC payment. Responsible moneychangers should therefore not be chosen as targets, as they're likely to be closely-watching forums and the like. The attacker should choose sellers who ship goods immediately (immaterial goods deliverable over the internet such as music, movies, ebooks, virtual goods, or material goods delivered immediately or picked-up face-to-face) and possibly goods that are easy to resale. The attacker should alsa leverage professional pickup services, or people picking up stuff in his name, so that he is sure of the exact time of delivery of the good. With time, the more the Bitcoin network grows, the more stuff to be stolen will be available.The attacker should target users who are enthusiast about Bitcoin's two main purposed strengths: anonymity and immediate p2p transactions. These targets will be happy to deliver goods/services to an anonymous party, and they will trust their Bitcoin balance without waiting too much time to verify the ''stability'' of their own balance.Transactions should be small enough (under 500 BTC) so not to sound too suspicious to sellers.An attacker should gather the majority of CPU power with 4,000 CPUs. Such power should outnumber the honest nodes' computing power by producing (faster) a malicious block chain where the BTCs spent by the attacker are immediately sent back to him by the recipient and then double-spent among multiple recipients. The malicious subnet should be spread across a variety of IP ranges, so that it can infect the Bitcoin network most effectively. The malicious subnet should close ~8 blocks containing ~80 transactions. The attacker should own 4000 CPUs for 1h, representing now 2/3 of the nodes, and - reasonably speaking - way more than 51% of the network's computing power.The attack should last 1h, spending those 400 BTC for 80 times instead of just 1, paying attention to pay 80 different not-so-geek providers as mentioned above. At the current value of 1 BTC = 0.40 FRN("USD"), this would mean buying 32,000 FRN ("USD) worth of goods and services. On the other hand the cost of compromising the Bitcoin network for 1h with 4000 malicious CPUs would be, at a current price of FRN("USD") 2.10/CPU/hour (Amazon Quadruple Extra Large Cluster Compute Instances), 8,400 FRN("USD"), plus the initial 160 FRN("USD"), for a total of FRN("USD") 8,560. Considering harvesting FRN("USD") 32,000 worth of goods and services that's a pretty good +220% ROI in just 1h. Pretty good compared to your average investment.When the attack is finished, the malicious CPUs will disappear from the network, and the community will be left alone with a hacked block chain, where only the last 80th of the 80 payees actually owns the BTCs, while the first 79 are effectively defrauded of BTCs that were double-spent just after being received by the recipient.OTHER ATTACKSA 2nd attack scenario involves less transactions, with a higher amount of BTC per transaction. Ideally the attacker could even target just 2 providers, closing 2 transactions with amount of 11,250 BTC each. This will harvest, at current ratios, FRN (“USD”) 9000 worth of goods/services, with a +5% ROI in just one hour. Obviously the attacker should target more than just 2 providers if he needs transactions to be smaller in amount. A “few but big transactions” attack is useful when the merchants need lots of confirmations from the Bitcoin network.And that's not considering the additional ~300 BTCs minted during the 1h of the attack, which - if properly double-spent - could greatly increase the ROI of the attack.If such computing power (4000 quad xl) were to be allocated for honest Bitcoin mining, it would have yielded ~300 BTC, equivalent now to ~120 FRN("USD"), thus the ROI would have been -98.8% in 1h, instead of +220%.In a 3rd attack scenario, the attack could last 24h-48h, close hundreds of blocks, target thousands of users, and reap a much higher ROI (up to +5,000%). On the other hand, delivery times must be properly planned in advance: the longer the delivery time, the more the attacker has to wait before double-spending. Also, care should be taken so that panic and ''currency run'' (people running to convert BTCs into something else as soon as they hear of the attack) are triggered just after the attack is completed. The other pro of a slower attack would be that providers are less likely to notice the fraud. The con of such an attack would be that providers are more likely to stumble upon alerts on the forum. You can have a fast attack "low" ROI scenario targeting fast-shipping goods and services, and a slow attack high ROI scenario targeting slow-shipping goods and services. A slow attack can target slow-shipping goods/services coming from isolated community-unaware sellers. A fast attack can target immediate-delivery goods/services making sure the interval of being alerted is smaller than the duration of the attack, so that the alert always arrives too late, after the good/service has been delivered.4th attack scenario: like the 3rd, but targeting way less victims, with higher-value transactions. A “few but big transactions” attack is useful when the merchants need lots of confirmations from the Bitcoin network.A 5th attack scenario involves a discontinuous use of the malicious subnet, turned on and off at phases during the attack, in order to minimize expenses leveraging the flexibility of cloud computing platforms like Amazon. In this scenario the attacker doesn’t need to control the majority of CPUs for the entire duration of the attack, but instead only when a double-spend is about to happen. This allows also for slower deliverables to be targeted by an attacker. As soon as the double-spend is about to happen the attacker turns on his malicious cloud, computes the older blocks plus the new blocks, thus creating the longest block chain. Obviously to close previous blocks lots of computing power will be needed: the attacker should balance on the one hand the bigger computing power needed, and on the other hand the smaller time of computing power needed plus the advantage to target slow-delivery goods.6th attack scenario: like the 5th, but targeting few victims with big transactions. A “few but big transactions” attack is useful when the merchants need lots of confirmations from the Bitcoin network.Obviously a rational attacker would try all the possible attacks, just to make sure to exploit the Bitcoin economy as much as possible.HOW THE ATTACK WORKSSo in summary the attack works like this: the first BTCs spend happens in, say, block 105000. After the merchant acknowledges it and delivers the good/service to the attacker, the attacker's malicious network releases a new 105000 and as many blocks after it as needed to make it the longest chain. Now the whole network (honest clients included) acknowledges that the attacker holds the coin because there is no record of first the transaction according to the majority of CPUs. In this scenario the BTCs are spent but then the transaction is lost in the new malicious block chain. Then the BTCs are spent again, and the process is repeated many times. Obviously the first 79 payees watched their balances plummet before their eyes, but there's nothing they can do other than alerting other people through forums/emails/etc. As noted above, the victims of the attack are not paying attention to the forum in those 60 minutes.OTHER WAYS TO DOUBLE-SPENDA 2nd way to double-spend is, after the spend happened, for the malicious block chain to acknowledge the transaction, but have a different address for its recipient: instead of the victim’s address it will be one of the attacker’s addresses.A 3rd way to double-spend is, after the spend happened, for the malicious block chain to substitute the victim’s address with the next victim’s address. So the transaction is acknowledged but its recipient is not the first victim, but the second victim. This process could be repeated just once or, if possible, multiple times.A 4th way to double-spend is, instead of leaving no trace of the spend in the malicious block chain, to add an opposite spend, from the victim to the attacker, with the same amount. The advantage of this way to double-spend is that it will work even with a future version of Bitcoin that could let the second recipient recognize a double-spend.HOW DOUBLE SPENDING WORKSIn summary, the steps involved in this kind of double-spending are:Spend the BTCs.Wait for recipient’s acknowledgement and delivery of goods/services.Secretly work on another version of the block chain where the BTCs, adulterating the original transaction in one of the 4 aforementioned ways. This block chain should be longer than the honest network's chain, and since the attacker controls the majority of the CPUs it is reasonable to predict he will generate it before such a long chain is generated by the honest network.Repeat.AFTERMATHWhen the community realizes Bitcoin has been hacked, they could now revert the block chain to before the attack took place, but 32,000 FRN ("USD") worth of goods and services are now gone, so either the providers have been defrauded, or the community decides to devalue the Bitcoin purchasing power by inflating ~80,000 new BTCs (equivalent of the amount of the fraud) out of thin air and give them to the victims of the fraud.In either cases, as soon as the news of the attack is made public, the value of BTC would quickly plummet as people start to panic: even though a panic is not the most rational response (more rational would be to wait and follow Satoshi's advices about what to do) it is reasonable to assume that people would like to convert BTCs into something real that's not hackable (e.g. gold) "before it's too late". The amount of FRN("USD") that 1 BTC can buy would plummet, so if you worked hard to earn 10,000 BTC that could buy - say - FRN ("USD") 4000 worth of goods and services, now with those same BTCs you can buy - let's say - only FRN ("USD") 2000 worth of goods and services.Obviously as the FRN("USD")/BTC exchange ratio grows faster than the number of nodes, such attack is more likely to happen with time. If the ROI of an attack is positive now, it will be positive at any given time, since minting is not involved in such an attack scenario. Instead, given the FRN/BTC ratio is growing exponentially, the likelihood of such an attack would grow exponentially with time.An attacker could basically play god until the payees realize they've been defrauded: they realize too late that the BTCs the anonymous/pseudonymous attacker paid them in exchange for their goods/services/FRN("USD") are now gone.The attacker may do this even without hiding from law enforcement agencies, given I'm not sure such attacks on the Bitcoin network would be considered illegal in every legislation of the world. In fact, many legislations could morally approve and cheer such an attacker, as soon as they realize Bitcoin is a threat to them.The strength of the Bitcoin concept are that it's anonymous, and transactions are immediate: unfortunately this can render the attacker untraceable, and the purposed speed and resilience of transactions could actually harm merchants.Am I missing something ?Is the relatively low amount of FRN("USD") needed to hack the Bitcoin network at this stage the reason why Nakamoto suggested against advertising Bitcoin too much at this stage ?Is accepting little BTCs or no BTCs at all the only way to prevent such attacks ?2) LegalBitcoin is a perfect tool for so-called "money laundering", given its pseudonymous nature. Also, Bitcoin makes the core business of a national government near to impossible, because psudonymous transactions mean the national tax agency is unable to know how much taxes a citizen has to pay. It is reasonable to assume that BTC will represent a deadly threat for a national state, and that they would react accordingly first exploiting Bitcoin's point of failure to bring it down (see question 1 above), and then - if still needed - using their full moral, legal, judiciary, police, military, PR, press powers to shut down such a threat. This has already happened in China when people started to migrate from using PBOC RMB notes towards using Tencent's QQ coins. It is reasonable that it will become illegal to download BTC, install it, have it on a computer, run it, and in a very short time. It will become illegal to accept it in exchange for your own goods and services. The entire Bitcoin economy would suffer incredibly: moneychangers not able to operate, Bitcoin banks and brokers not being able to serve people not running a client, law-abiding providers of goods and services not being able to accept it. Hackers and crypto-activists would still continue to use it, but how much would this legal challenges affect the value of 1 BTC in terms of FRN("USD") ? -10%, -30%, -50% ?If I now accept Bitcoins in exchange for my work, how much of the purchasing power of my hard-earned Bitcoins will evaporate overnight, and how much will be saved ?Can Bitcoin be considered a reliable store of value ("digital gold") then ?3) CompetitionGiven there's no redeemable good/service backing the emission of BTC, BTC is redeemable only as long as people accept it in exchange of their goods/services (like central banks' currencies). Unfortunately it has no intrinsic value either (unlike precious metals, and like central banks' currencies), and no violent entity forcing you to accept it in exchange for your goods/services (like precious metals and unlike central banks' currencies). This said, the lock-in power of such network is extremely low, and the entry barrier for competitors is also very low given Bitcoin is an open source software project, and there are more than 230K projects just on Sourceforge. Look at the history of P2P after Napster. What will happen to the value of someone's BTCs when a new, better, P2P currency comes along ? A powerful hook could be a P2P currency where “mining” (CPU-work) is rewarded way more than in Bitcoin, making it actually profitable to buy computing power in order to mine (in this scenario the computing power could be the backing of the currency: it’s got an intrinsic value when it is used for real-world purposes). What happens to the value of your BTCs if people stop accepting BTC and start accepting the new currency instead ? Would this create a sort of “currency run" similar to a bank run, where every individual - driven by fear more than reason - is trying to be the first to convert the old currency into the new one, instead of watching value evaporate in his hands ? Obviously competition is good, but is it also good to keep the value of my work in BTC, or will it evaporate ? -10%, -30%, -50% ?Can Bitcoin be considered a reliable store of value ("digital gold") then ?4) CommunityGiven the project is open-source, what would prevent central banks, governments, keynesians, and other BTC competitors/enemies to infiltrate the community of developers in order to push their own agendas ? One of the possible infiltration attacks could be to push for minting more than 21M BTC and stop the deflationary process built-in in the concept of BTC: lots of economical and political arguments could be used to support this idea in a very rational fashion. Many other infiltration attacks are possible and just up to your imagination.

Why do people only look at his faults? Because he is a typical large-scale developer: unkind to those who oppose him, brash and not P.C., but capable of getting things done (much to the chagrin of The Swamp). Below is a partial list of President Trump’s accomplishments during his first year. He accomplished many of his promises and the next 6 years will see many more. One need only to look at the markets, GDP, and business and consumer confidence to see he is keeping his main promise to make America great again.The President traveled to Saudi Arabia (where he demanded that the Arab world do its share to stop terrorism); Israel (where he was the first U.S. president to visit the Western Wall); and the Vatican. He also traveled to Warsaw, Poland where he spoke proudly and passionately about the virtues of western civilization.In the Trump White House, there are 110 fewer employees on staff than under Obama, to the tune of $5.1 million in savings: currently, five staffers for Melania Trump vs. 24 staffers for Michelle Obama.The President donated his first-quarter salary of approx. $78,000 to the National Parks Service.The President also did the following:Created the Office of American Innovation to streamline and improve the Government for future generations.Signed Executive Orders:to “Buy American and Hire American” and to make it easier for businesses to start and expand apprenticeship programs;to mandate that for every one new regulation, two old regulations must be eliminated, which can potentially reduce costs by $70 billion, according to The American Action Forum.to control regulatory costs that will dramatically reduce permit approvals for projects from 10 years to 2 years, spurring investment and job creation.The Dow Jones Industrial Average has increased 17 percent since Election Day, hitting new highs 25 times this year already.Since January, the economy added almost a million new jobs, including in the private sector.The President signed 14 Congressional Review Act resolutions into law, ending burdensome Obama-era rules and regulations, more than all other Presidents combined.By withdrawing from the Paris Climate Accord, President Trump protected America from a bad deal that would have harmed our economy, cost the U.S. nearly $3 trillion, and lost 6.5 million industrial-sector jobs and 3.1 million manufacturing-sector jobs.The President increased exports of our energy resources to a global market, updated guidance from the Treasury Department to allow the United States to export coal, and expedited the permitting and approval processes of Liquefied Natural Gas (LNG) terminals and exports, including the approval of the Lake Charles LNG terminal in Louisiana.He unleashed oil and gas development in the United States by expanding access to resources and the infrastructure needed to get them to market; he approved the Keystone XL and Dakota Access pipelines, creating over 42,000 jobs and $2 billion in earnings.He signed Executive Orders mandating (1) future pipeline work to be done by American workers and with American steel, and he expedited new pipeline approval and production, such as the New Burgos Pipeline to Mexico, and (2) the extension of offshore oil and gas drilling and he reissued a leasing program to develop offshore resources.The President also boosted oil and gas development on Federal lands.Now, President Trump is reconsidering the Obama-era Environmental Protection Agency rule on greenhouse gas emissions that is estimated to cost oil and natural gas operators as much as $530 million annually.President Trump rolled back Obama’s “Stream Protection Rule,” which targeted the beleaguered coal industry with estimated costs of at least $81 million a year.He also withdrew from the Trans-Pacific Partnership, which failed to protect American workers, and he promised to renegotiate the North American Free Trade Agreement (NAFTA) to better reflect our modern economy while benefitting all parties involved.The President began the process of renegotiating the United States-Korea Free Trade Agreement. In addition, negotiations started with China on economic cooperation have already produced results for American businesses. For the first time in 14 years, American beef imports have returned to China and China is now welcome to negotiate contracts to import American liquefied natural gas.The President rolled back the Obama Administration’s bad deal with Cuba that benefitted the Cuban regime at the expense of the Cuban people.The President instituted tough immigration policies that have reduced illegal border crossings by 53 percent compared to the same time last year.President Trump ordered the hiring of 10,000 new Immigration and Customs Enforcement (ICE) officers, including 5,000 additional border patrol agents. Within the first 100 days, ICE conducted nearly 40 percent more Enforcement and Removal Operations compared to the same time last year, and arrests of convicted criminal aliens climbed by nearly 20 percent in this time compared to the same time last year. In fiscal year 2017, ICE has removed over 2,700 criminal gang members, compared to 2,057 criminal gang members in all of fiscal year 2016. ICE has specifically targeted MS-13 criminal gang members for removal on immigration violations. Since January, 66,000 illegal immigrants have been arrested, more than 70% of them having criminal records.According to journalist and former NY City Police Chief Jim Kouri, in July, two major law enforcement operations led by the FBI, DEA and the Dutch National Police, shut down the infrastructure of an underground criminal economy and two huge crime outfits, AlphaBay and Hansa, responsible for the trading of over 350 000 illicit commodities including drugs, firearms and cybercrime malware.The President ordered the Department of Homeland Security to use $100 million of unspent appropriations in its account for border security, fencing and infrastructure.He ordered the creation of the Victims of Immigration Crime Engagement (VOICE) office at DHS, ensuring that our Government can no longer ignore the victims of criminal acts by illegal aliens.Under President Trump, Department of Veterans Affairs fired over 500 employees, suspended 200, demoted 33, and disciplined 22 senior leaders as part of the effort to restore integrity and accountability to a department charged with supporting our nation’s heroes.President Trump signed the Veterans Accountability and Whistleblower Protection Act, enabling senior Veterans Affairs officials to fire failing employees while establishing important safeguards to protect whistleblowers.The President is now starting the process of shifting veterans’ electronic medical records to the same system used by the Defense Department, ending a decades-old rift in sharing information between the two agencies.President Trump signed into law a bill providing over $2 billion to open new Veterans Affairs department medical facilities and fund care for veterans seeking medical care outside the government system.President Trump brokered a ceasefire in southwest Syria as part of the U.S. commitment to end the conflict, reduce human suffering, and defeat ISIS.He supported the opening of a new “Global Center for Combating Extremist Ideology” in Saudi Arabia, created to empower Muslim-majority countries to more effectively combat radicalization.30.The President increased pressure on Iran to end its destructive and destabilizing actions in the Middle East, including its continued ballistic missile research.The Department of the Treasury sanctioned over 25 entities and individuals involved in Iran’s ballistic missile program, ensuring our ability to monitor potentially malicious actors while preventing future acts of terrorism.This week, the United States sanctioned sixteen entities and individuals that have supported Iran’s military and Revolutionary Guard Corps in the development of drones, fast attack boats, and other military equipment.In his first six months, President Trump worked with our partners and allies in the Middle East to defeat ISIS, leading to Iraqi forces recapturing Mosul.After the Syrian regime used chemical weapons against civilians, President Trump authorized strikes against the airbase that launched the chemical attacks, demonstrating our national commitment to preventing further atrocities.President Trump has lifted restrictions that had prevented the Secretary of Defense and our commanders in the field from fully using their judgement and expertise.President Trump cut $600 million from United Nations’ laughable peacekeeping budget.President Trump signed two resolutions, one encouraging women at NASA and another promoting women in entrepreneurship.Further, according to both The Gateway Pundit and Joel B. Pollak, Senior Editor-at-Large at Breitbart News:In President Trump’s first six months, the U.S. Stock Markets are at record highs and millions of Americans are benefitting in their retirement savings accounts.The DOW daily closing stock market average has risen 18% since the election on November 8th. (On November 9th the DOW closed at 18,332 ‚Äì the other day it closed at over 22,000).The S&P 500 and the NASDAQ have both set new all-time highs during this period: the U.S. Stock Market gained $4 trillion in wealth since Trump was elected and the S&P 500 also broke $20 Trillion for the first time in its history.According to Bloomberg News, U.S. corporate profits in the second quarter “have beaten estimates at more than three-quarters of the Standard & Poor’s 500 member companies. In every sector, at least half of the companies have surpassed or met expectations, with many also getting a boost from a sinking U.S. dollar.”U.S. Debt has decreased under President Trump since his inauguration by (-$103) Billion. (President Obama increased the US debt in his first 6 months more than $974 Billion or nearly $1 Trillion.)According to the Bureau of Labor Statistics, President Trump added a projected 1,027,000 jobs in his first six months (January through June 2017.) President Obama on the other hand lost more than 3,826,000 million jobs in his first six months.Also according to the Bureau of Labor Statistics the unemployment rate since President Trump’s inauguration decreased from 4.8% to 4.4% (January through June 2017). Unemployment under President Obama’s first six months in office, the unemployment rate increased each month from 7.8% in January 2009 to 9.5% by June of 2009.According to the U.S. Bureau of Labor Statistics, the U.S. inflation rate decreased to an eight month low in June to 1.6%.In 2011, houses for sale were on the market an average 84 days. This year, it’s just 45 days.The U.S. Manufacturing Index soared to a 33-year high in President Trump’s first six months, which was the best number since 1983 under President Reagan.The Federal Reserve has increased interest rates three times since President Trump was elected into office in November. The Fed increased interest rates only once in Obama’s 8 Years prior to the increase after President Trump’s winning the election in November.Illegal immigration is down almost 70% under President Trump.Since President Trump took office in January 2017, according to the latest U.S. Department of Agriculture (USDA) statistics on food stamp enrollment, more than 1.1 million Americans dropped off the food stamp rolls.NATO announced Allied spending is up $10 billion because of President Trump.After being nominated by President Trump, Constitutionalist Judge Neil Gorsuch was confirmed and sworn in as Supreme Court Justice in early April.The President has signed around 150 executive orders, memoranda and proclamations as of July 19th, including (to name but a few): dismantling Obama’s climate change initiatives; travel bans for individuals from a select number of countries embroiled in terrorist atrocities; enforcing regulatory reform; protecting law enforcement; rebuilding the military; cutting funding for sanctuary cities.President Trump launched his Voter Fraud Commission, officially thePresidential Advisory Commission on Election Integrity.President Trump announcedon Twitter on July 26: “After consultation with my Generals and military experts, please be advised that the United States Government will not accept or allow Transgender individuals to serve in any capacity in the U.S. Military.”President Trump continued to shut Democrats out in special elections, which the media expected them to win on a supposed wave of anti-Trump sentiment. In Montana, Republican Greg Gianforte won even after being arrested for assaulting a Guardian reporter, and in Georgia, Karen Handel won the most expensive congressional race in history after her Democratic challenger, Jon Ossoff, had looked like a heavy favorite just days before.Last week, President Trump joined Sens. Tom Cotton (R-Ark.) and David Perdue (R-Ga.) to announce legislation about changes to our immigration laws for the first time in more than half a century. The RAISE Act (Reforming American Immigration for Strong Employment), instead of admitting immigrants on the basis of often specious “family” ties, would choose the immigrants based on merit, with points granted for skills, English proficiency, advanced degrees, actual job offers, et al.About 30 percent of the territory the American-led coalition has retaken from the Islamic State (ISIS/ISIL) in Iraq and Syria since 2014 has been liberated under U.S. President Donald Trump’s watch, according to a senior State Department official. In total, the U.S.-led coalition has re-conquered 27,000 square miles (about 78 percent) of the 35,000 square miles ISIS is believed to have controlled at its peak in Iraq and Syria in early 2015.According to writer Larry Schweikart, President Trump “is advancing his Greatness Agenda through court appointments like wildfire.” To date, he “has outpaced Barack Obama and Bill Clinton with his judicial appointees.”According to political operative Roger Stone:President Trump signed a bill into law to reduce the backlog of families of fallen police officers waiting to receive benefits due to their status.Under President Trump, Attorney General Jeff Sessions rescinded an Obama Administration memo that directed the Bureau of Prisons to begin phasing out private prisons.Again, under President Trump, the Justice Department prosecuted two doctors and one other for the subhuman practice of female genital mutilation—the first such prosecutions under a federal law passed by Congress in 1996 prohibiting the practice.Despite historic Democrat obstructionism, President Trump has worked with Congress to pass more legislation in his first 100 days than any President since Truman!In June, the Trump Administration sent 20 ATF agents to Chicago to help the city fight gun violence. The local U.S. Attorney said the same day that his office had already prosecuted more Chicago gun cases in 2017 than it had done throughout the entire 2016.President Trump, in “another critical step to restoring local control,” signed an Executive Order for Secretary of Education Betsy De Vos to review Dept. of Education regulations, with the intention of returning power to the states and local governments and to review, modify and possibly repeal any regulations and guidelines that are not consistent with federal law.