Author: Nyman Gibson Miralis
Subject: Digital Currency
Keywords: Bitcoin, finance terrorist activity, money laundering, digital currencies, recover proceeds of crime, anti-money laundering regime, fiat currency.
As global reliance on technology and connectivity increases, Bitcoin and other digital currencies are growing in popularity. Due to their semi-anonymous nature and the obvious advantages of not being fixed to geographical locations, there is potential for digital currencies to be used for criminal purposes, including money laundering and terrorism funding.
In March 2015, the Senate Economics References Committee conducted an inquiry into digital currency. The purpose of the inquiry was to explore how to regulate digital currencies in a way that supports innovation while monitoring associated risks. In this article, we outline the views expressed in the inquiry and the committee’s recommendation.
How does Bitcoin operate?
Bitcoin is a digital currency based on a decentralised peer-to-peer network. Transactions take effect between users directly, without a trusted third party intermediary. Instead trust is established through a protocol called the “blockchain”.
The blockchain is a distributed public online ledger that records and publishes all Bitcoin transactions. The blockchain can only be altered by consensus of the network of peers. Users have to agree on the authenticity of transactions. This provides for cheaper transaction costs, greater security and independence from central banking institutions.
Because a Bitcoin account does not require a name to be attached to it, users can remain partly anonymous. This anonymity makes it difficult for law enforcement to recover proceeds of crime. Bitcoin can be converted to and from real currency, and has been used to purchase and supply illicit drugs, finance terrorist activity and launder money.
Does Bitcoin come under the current AML framework?
Bitcoin is not covered by Australia’s anti-money laundering regime, the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act).
The AML/CTF Act only covers e-currency that is backed by bullion or fiat currency – Bitcoin is backed by mathematical formulas. Consequently, digital currency businesses are not obliged to meet the requirements under the AML/CTF Act.
Banking involvement in the use of digital currencies
Digital currency businesses are concerned about the banking industry’s approach to digital currencies. Banks exaggerate the risks and overlook the avenues of innovation. Because digital currencies are not regulated by the AML/CTF Act a number of banks have refused to serve businesses that trade or transact in Bitcoin.
Westpac contends that digital currency businesses should implement the same level of due diligence required of banks or foreign exchange brokers. Westpac supports bringing digital currency businesses under the AML/CTF Act.
This will ensure banks can be confident that they have taken all necessary steps under the legislation to understand the nature of the transactions they are dealing with.
Under the current AML/CTF Act, businesses are required to obtain information about their customer’s identity and financial activities. These ‘know your customer’ requirements help businesses identify and limit criminal activity.
Westpac believes that bringing digital currencies under the AML/CTF Act in regards to the ‘know your customer’ requirements would help banks detect suspicious activity in the process of exchanging Bitcoin to real currency.
Utilisation of the document verification service
The unclear regulatory status of digital currency under the AML/CTF Act means that digital currency businesses do not have access to the Document Verification Service (DVS). The DVS is a secure, electronic system used to verify and identity documents. It is managed by the Attorney-General’s Department.
Regulatory concerns raised in the inquiry
The Attorney-General’s Department raised the question of whether the definition of digital currency exchanges should be limited to businesses that trade in digital currency or include businesses that facilitate peer-to-peer exchanges.
Regulation of direct peer-to-peer exchanges poses a distinct challenge. In comparison to exchanges that intersect with banks or digital currency businesses, these types of exchanges lack visibility.
The Department of Foreign Affairs and Trade raised concerns about excessively regulating small-value digital currency transactions, made by those in poverty, which could lead people to use black-market providers.
Digital currency businesses support regulatory reform and are proponents for ensuring the security and legitimacy of digital currencies.
The committee supports applying the AML/CTF Act to digital currency exchanges. Given the support from an array of stakeholders and the committee’s recommendation, it is likely Bitcoin will eventually be regulated by the anti-money laundering regime.
Nyman Gibson Miralis specialise in all aspects of Bitcoin and digital currency & encryption law, assisting companies and individuals who are the subject of investigations by AUSTRAC, the AFP, ATO and ACIC. If you require assistance, contact one of our expert criminal defence lawyers