INSIGHT: Digital Currencies should no longer reside in the “Wild West”
- 08 January, 2015 07:20
Digital currencies like Bitcoin have the potential to revolutionise the global payment system.
But they also present new challenges for the financial services industry and regulators around the world who are concerned about taxation, lack of control over the currency, and how to prevent Bitcoin from becoming the currency of choice for money launderers and organized crime.
Bitcoin investments and trading remain largely unregulated across the globe.
In March 2013, the United States extended some anti-money laundering rules to virtual currency and is considering whether to regulate Bitcoin trading, but the currency is not regulated in many other countries including the UK where the FCA recently confirmed its position of: keeping an eye on Bitcoin developments.
Bitcoin also provides anonymity, which is highly attractive to money launderers and criminals, presenting greater challenges for government agencies following the money trail.
Over the past couple of years, there have been various examples of how Bitcoins are exploited by money launderers and criminals.
Events such as the failure of Mt. Gox, once the largest Bitcoin exchange operator, the seizure of the dark web marketplace Silk Road, and the arrest of the CEO of BitInstant, a Bitcoin exchanger, all highlighted the challenges facing this virtual currency.
The use of Bitcoin on Silk Road was a typical case in mind. Silk Road was a “dark web” e-commerce site only accessible through “Tor”, an anonymising program that is often synonymous with the “dark web” and favoured by organised crime gangs and terrorist groups.
Items for sales on the site included drugs, weapons, illegal services such as computer hacking, stolen identification information, and hitmen. Silk Road consumers were able to provide payment for these goods and services in Bitcoin.
To enhance anonymity and assist with laundering illicit proceeds, the site used a ‘tumbler’ to process Bitcoin transactions in a manner designed to frustrate the tracking of individual transactions through the block chain.
The tumbler obscured any link between a buyer’s Bitcoin address and the vendor’s Bitcoin address where the Bitcoins end up; thus, eliminating the benefit of the block chain as a traceable record of the transaction.
Online currencies such as Bitcoins are attractive to criminals because they offer additional “layering” in the money laundering cycle and governments around the world should not underestimate the depth and breadth of bigger money laundering and funding of terrorism threats.
Criminals can exchange one digital currency for another before converting them into real-world currency. Such activity leaves little or no trail for investigators in pursuit of Bitcoin money launderers.
The use and movement of digital currencies such as Bitcoin is a global, and decidedly not a local, issue. That said, the regulation and oversight of Bitcoin must start at the national government level.
Recognition that digital currency movements should be monitored, regulated and controlled, first at the national level, then on a global basis, is the first, best and must do, for governments worldwide.
Implementing robust AML systems and controls that promote transparency and address the issues associated with anonymity is necessary and these must remain fit for purpose to deal with digital currencies like Bitcoin.
The US requirements can be used as a best practice here. Virtual currency exchangers in the U.S. are required to know their customers, monitor for suspicious transactions, and file suspicious transaction reports (STRs), where applicable.
This is no small task as customer identification for virtual currency exchanges poses a unique challenge since, by its nature, the ecosystem wants to maintain some degree of anonymity.
And while this increases the cost of compliance, this is the only way Bitcoin and other virtual currencies to gain broader acceptance.
A large number of Bitcoin businesses have come to this realisation. Even in countries such as the UK where AML/CTF regulations are not required, many exchanges already have such policies in place in order to build trust and attract customers.
At the same time, Bitcoin organisations should maintain a strong culture of business ethics and compliance as part of their corporate values.
The more such a tone is developed and practised the better chance that fraud risks will be reduced.
By Craig Richardson - CEO, Wynyard Group