Bitcoin keeps on turning, AML standards body pays attention

And we’re rolling, rolling, rolling on a river… OK so, it doesn’t scan brilliantly, but any fans of crypto currency and/or Tina Turner will get the joke.

FCA - BitcoinThe Financial Action Task Force (FATF) has produced a study on the financial crime risks associated with crypto or digital currencies, a clear indicator that it is taking the newcomers seriously. The FATF is placing the risks associated with digital currency use and its potential policy responses as a priority for the 2014/15 presidency, expanding on the mention of Bitcoin (BTC) in the 2013 report on financial crime risks in new payments products and services (NPPS) report which grazed the surface of digital currency’s potential.

The report leads with a glossary of terms that the FATF has agreed upon to let readers know what they are referring to and it has adopted ‘virtual currency’ as the common denominator. Financial Crime Asia takes issue with the use of virtual to describe these new currencies that are taking the world by storm. They are, after all as real as a national debt or any fiat currencies governed by central banks; what started off as an algorithm is now worth USD615 per unit. Whether we like it or not, virtual will be the term used by the financial sector when referring to crypto and digital currencies.

The FATF weighs in from the US regulations’ angle, defining convertible and non-convertible ‘virtual currency’; briefly, convertible is something that can be exchanged for fiat currency, such as BTC or Linden Dollars used on the Second Life role playing game. Non-convertible currencies cannot be exchanged – think Q Coins or World of Warcraft Coins. Aligning BTC with currencies used in role playing games is a little confusing, given their increasing use in commerce (Expedia has started accepting BTC and pretty soon Financial Crime Asia will too) and, as pioneered by the States of Jersey last week, in investments. However, the FATF is taking notice and its report will permeate the banking sector nonetheless.

The vast majority of bankers and regulators are interested in BTC at the time of exchange into fiat currency. This is where the FATF sees the potential risks and the opportunity to offer guidance  in terms of anti-money laundering and counter-terrorist financing. That said, the power of BTC lies in its exchange for goods and services and not in whether or not you cash it in for fiat at a favourable exchange rate. Although there are some BTC speculators out there who make money on the exchange rate, the vast majority of users are trading BTC outside of the fiat system. In June, US Marshalls made a sale of USD18m worth of BTC last month and the buyer plans to use them as they are to fund the development of BTC use.

FCA -Emperors new clothesUsefully, the FATF does assess the risks posed decentralised systems of exchange. Although BTC addresses contain the information on every transaction the coin has made, unlike fiat currency, there is some concern that the user’s identifying information is not held on file. This would make monitoring suspicious transactions extremely difficult and would confound law enforcement’s attempts to investigate the malicious use of digital currency. The report looks at Liberty Reserve as an example of this, but let’s face it, LR was practically set up to launder money for crooks. Bitcoin was not. Customers on the Silk Road anonymous market place were restricted to using BTC when buying innumerable goods and services, both legitimate and illegitimate and that is a classic example of how criminals can exploit a financial system, bitcoin is simply the launderer’s new clothes.

The qualities that make BTC brilliant are also those that pose the greatest risks when held up against the fiat monetary systems and AML/CTF. BTC and other Altcoins (Litecoin, Peercoin, Ripple) using the BTC protocol are exchanging without Silk Road. They are transparent, are not bound by central governing body, some are limited by geography – see Auroracoin and Mazacoin – but most are not. We are starting to see some regulators tackle this (Germany has done so, the US is talking about it and a few countries have banned the use of BTC) but more importantly, we are stargting to see more jurisdictions adopting crypto-currency.

The FATF’s report is worth reading as an indicator of where the FATF, OECD and national governments are thinking. In the meantime, BTC keeps on trading.

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