While many see virtual currencies such as Bitcoin as the way of the future, others see them as the currency of choice for criminals. In a 2014 report, the Financial Action Task Force (FATF) identified some of the key Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) risks of virtual currencies. The report also identifies some of the legitimate uses of virtual currencies, and the key players in the virtual currency ecosystem.
What are some benefits of virtual currencies?
Virtual currency has the potential to:
- Improve payment efficiency and reduce transaction costs for payments and fund transfers
- Facilitate micro-payments – at present, low cost goods/services (e.g. a one-time game or music download) often cannot be sold online at an appropriately low per/unit cost due to the high associated transaction costs (e.g. credit card fees)
- Facilitate international remittances
- Be held for investment
What are some potential risks of using virtual currencies?
Convertible virtual currencies that that can be exchanged for real money or other virtual currencies are potentially vulnerable to money laundering and terrorist financing abuse.
One of the key risks relates to the relative level of anonymity afforded. This particularly applies to decentralised virtual currencies such as Bitcoin, where there is no central administrating authority, and no central monitoring or oversight.
Bitcoin addresses, which function as accounts, have no names or other customer identification attached, and there is no customer verification process. There is also no AML software to monitor and identify suspicious transaction patterns.
The potential risks are increased further due to the global reach of virtual currency. With cross-border payments and fund transfers often involving complex infrastructures, and multiple entities which may be spread out across various jurisdictions, enforcement is complex and challenging.
Who are the key players in a virtual currency system?
There are a number of participants in virtual currency systems. These roles can be fulfilled either by an individual or a business.
Exchanges/Virtual Currency Exchange
Exchanges virtual currency for real or other forms of virtual currency, for a fee.
Issues (puts into circulation) a centralised virtual currency, establishes the rules for its use, maintains a central payment ledger, and has the authority to redeem (withdraw from circulation) the virtual currency.
Obtains virtual currency (e.g. through purchase, receiving payment or ‘mining’) and uses it to purchase goods or services, transfer it to another person or hold as an investment.
Runs special software to solve complex algorithms in a distributed proof-of-work system, used to validate transactions in a decentralised digital currency system. Once the currency is obtained, the miner may then act as a user or as an exchanger.
Provides a virtual currency wallet (e.g. software application or other mechanism) to hold, store and transfer virtual currency. Transaction security is also typically provided, such as encryption and multi-key signature protection.
A virtual currency system is complex and involves multiple players. While virtual currencies do have legitimate uses and benefits, the level of anonymity afforded and global reach introduce the potential for misuse by criminals in money laundering and terrorism financing activities.
Nyman Gibson Miralis are experts in defending criminal matters that involve multiple jurisdictional investigations, specialising in all aspects of digital currency and anti-money laundering law. If you require assistance, contact one of our expert criminal defence lawyers.