The price of piracy

Arrr, you can’t keep a good pirate down. As we’ll learn below, the suppression of buccaneering in one area soon prompts piratical hot spots else where.

Indeed, one of the things the bitcoin community is quickly learning — as it goes through about 600 years worth of banking lessons at hyper speed — is that piracy, theft and fraud is a naturally occurring cost in any money system. Call it the unintended bitcoin risk premium that anyone carrying the currency must bear. (Something that doesn’t include the risk associated with the crypto currency’s volatility.)

The lesson the community is still to learn, however, is that most ordinary folk don’t like these sorts of risks and expect risk mitigation to be a demonstrable aspect of any currency system they use. In fact, one of the things people love about today’s banking system is precisely its ability to compensate or refund people if they ever do find themselves victim of fraud, theft, hacking or sub-quality service.

 

The reason the banking system can offer these services is because it’s had generations worth of experience figuring out how to manage that risk. For the most part this involves working out the overall cost (using probability and scaling to generate risk-premia calculations) which must be compensated for in other ways to keep the system balanced.

No doubt, while there is a lot of focus on prevention as well, the key thing to understand about risk management is that it depends mostly on being able to predict the portion of wealth that will inevitably be defrauded, destroyed or lost in any particular period, and to compensate for it. Usually by making loans to prudent and ingenious folk who can make nice innovative machines or organisations that can make even more stuff, so it’s like the thieves never hurt us at all.

Which brings us to the topic of piracy, the oldest example of a risk premium charge applied to functional civilisations through the ages, which — to be countered — had to be understood, contained and accounted for by the realisation that if you can’t beat them, you can at least try to anticipate them.

And on that note, ICAP’s latest shipping research clocks the fact that physical piracy of the “we’ll have you ship, thank you very much” variety has significantly declined these past two to three years:

The total number of attempted and actual attacks on commercial vessels by pirates has dropped from almost 350 between January and September 2011 to less than 180 in the same period for 2013. This global trend was led mainly by a significant decrease in Somali attacks (from 130 in 2011 to almost none in 2014 to date), as well as a fall in Caribbean and notoriously violent West African piracy activity.

But, as the following chart shows, what’s really interesting is how the decline in West African and Somali incidents is now being offset to an ever greater degree by a clear rise in South East Asian pirate incidents instead:

Some indication as to why this shift is happening, meanwhile, comes by way of the sort of vessels that are being seized by pirates today as opposed to in 2009:

So, whereas pirates mainly focused their efforts on seizing bulk carriers — used mainly to transport grains, coal and ores — in 2009, they’re now much more interested in product tankers that carry fuel.

We also like this graphic illustrating the current pirating hotspots as they stand:

As ICAP notes regarding the rapid spread of piracy in South East Asia:

A major concern for international trade however has been the rapid spread of piracy in South East Asia, particularly off the coasts of Indonesia and Malaysia, where small local vessels carrying petroleum products are increasingly targeted by armed groups who siphon cargoes and fuel oil for resale on the black market (over 100 attacks this year for the first time). This shift of focus from ransom piracy to commercial theft has changed the typical targets for criminals, and as a result bulk carriers, container vessels and general cargo carriers are now less likely to be victims of piracy all else being equal. This particular region has flourished due to its advantageous features for pirates, namely:

- Geographical, the island chains and creeks constitute ideal hiding places.
- Economical, 20% of world maritime trade passes through the region, and large numbers of small inter-island vessels operate in the basin.
- Political, territorial disputes render maritime enforcement difficult.

Nevertheless, the overall trend is clear. The cooperation of a multitude of national navies (including NATO-led fleets) has dramatically decreased piracy in regions known for their dangerous waters.

Another key aspect behind the fall, says ICAP, has also been the avoidance of slow-streaming, meaning there are fewer ships going below 18 knots, better communications and technology, as well as the addition of on-board security measures.

Overall that means the global economic cost of piracy has fallen from $6.9bn in 2011 to $3.2bn in 2013 and should decrease further this year. Which, of course is pittance, compared to the economic cost of cybercrime, which according to this year’s Mcafee report amounted to more than $400bn.

Nevertheless, as ICAP concludes about the decline in physical piracy:

This does seem seem to follow a natural course of evolution, as piracy should in theory be adversely affected by new technology, trade transparency, and the increased international cooperation that comes with globalisation.

Though, who needs to go to the effort of pirating an actual ship when with a little coding academy initiative you can learn the skills to pirate someone’s computer and demand a bitcoin ransom instead?

Related links:
Osborne deals with the pirate threat – FT Alphaville