The use of digital currency has exploded in popularity, providing individuals and businesses with a convenient way to conduct international transactions, regardless of their location. But despite the many advantages of an essentially cash-free system, there is also significant potential for digital currency to be used for illegal purposes.
In two reports from the Australian Transaction Reports and Analysis Centre (AUSTRAC), Money Laundering in Australia and Terrorism Financing in Australia 2014, the federal government has expressed a concern that the use of digital currency may result in increased criminal activity.
This is mainly due to the ready anonymity of most digital currencies, and the difficulty of tracing perpetrators or protecting victims, especially given different treatments of offenders in different jurisdictions. According to AUSTRAC, of greatest current concern is the potential for digital currency to be used in money laundering or terrorism-financing operations.
In light of this, should there be a global, broadly uniform regulatory regime, or should individual countries develop protocols based on their own requirements?
What is the current regulatory framework?
At present, there is nothing even resembling a global regulatory framework for tackling issues arising from digital currencies.
As set out in the Attorney-General’s Department’s submission to the Senate Economics References Committee Inquiry into Digital Currencies in December 2014, Australia has taken some steps towards regulation, but these steps are only minimal.
Essentially, Australia’s legislative regime relies on a very limited type of currencies being defined and captured under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) – specifically, currencies backed either by precious metals or bullion.
These represent only a very small proportion of digital currencies in use today. However, the majority of digital currency-related crimes would still fall within the purview of the Australian legal system.
This is because, at the current state of technological play, almost all digital currencies either need to originate in actual cash or “real” money, or will need to return to “hard” currency in order to provide a financial benefit.
It is at this stage that Australia’s usual banking laws and regulatory regime will come into play to deal with those committing digital currency-related crimes.
However, as technology improves, the submission suggests it is only a matter of time before conversions to and from hard currency are no longer required – meaning that regulations must play catch-up to avoid cyber criminals falling through loopholes.
Outside Australia, there is enormous divergence in the way digital currency is being treated. The US and Canada have released clarifying guidelines and enacted legislation clearly identifying that dealers in digital currencies will face the same scrutiny and consequences as those operating in a more traditional financial framework.
By contrast, however, Europe and the United Kingdom have done little more than suggest that the use of digital currencies ought to be regulated.
Is global regulation of digital currency possible?
The submission notes that there has been the creation of various intergovernmental task forces which could address the regulation of digital currencies:
- Financial Action Task Force, which requires member countries to identify and make an assessment of the risks of money laundering and terrorism funding, particularly with a focus on new technologies. However, there is no specified purview for this taskforce to deal with digital currencies.
- Egmont Group of Financial Intelligence Units, which has commenced a working group focused on better understanding of digital currency technologies and a consideration of risks and opportunities for law enforcement to deal with those identified areas of concern.
These and future taskforces with a similar intent are certainly a step in the right direction. It is undeniable that the misuse of digital currency can have widespread implications for all countries, as it is possible for both perpetrators and victims to emerge from anywhere in the world, without the physical geographical constraints formerly imposed on criminals.
However, it is unlikely that any truly uniform system for dealing with digital currencies is feasible. Primarily, this is because international law cannot force sovereign states to adopt the recommendations or attitudes of another state.
Similarly, the resources available to tackle cyber crimes or to deal with law enforcement in general are hugely disparate between different countries. Differing legal and political systems worldwide mean that there is unlikely to be any quick consensus as to how exactly digital currencies should be dealt with. Certainly any part-way uniform regulatory approach will take far too long to implement and will not deal with the risks posed by improving technology quickly enough.
In practical terms, a global approach for dealing with digital currencies is unlikely to ever be wholly implemented. A much more pragmatic approach may be to focus on joint international taskforces, such as those referred to above, with a view to encouraging intergovernmental information sharing and evidence-gathering cooperation.
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