Advantages of using Chatgpt

 Virtual Currencies Key Definitions and Potential AML/CFT Risks NOTES

NOTES Virtual Currencies

1- “Bitcoin” (capitalised) refers to both the open source software used to create the virtual currency and the peer-topeer (P2P) network formed as a result; “bitcoin” (lowercase) refers to the individual units of the virtual currency.

2- It should also be noted that some observers, including former US Federal Reserve Chairman Alan Greenspan, Nout Wellink, a former President of the Dutch Central Bank, and Nobel Laureate economist Robert Shiller, maintain that virtual currency is a passing fad or bubble, akin to Tulipmania in 17th Century Netherlands.

3- Virtual currency is a complex subject that implicates not only AML/CFT issues, but also other regulatory matters, including consumer protection, prudential safety, tax and soundness regulation, and network IT security standards. The proposed vocabulary is thus relevant across a number of complementary regulatory jurisdictions. Adoption of consistent terms and a common conceptual understanding of virtual currency by all relevant government entities is important to avoid duplicating efforts and/or working at unintended cross purposes, and facilitates the capacity of governmental authorities to leverage their various perspectives and areas of expertise in order to most effectively identify and address relating to virtual currencies.

4- Digital representation is a representation of something in the form of digital data—i.e., computerised data that is represented using discrete (discontinuous) values to embody information, as contrasted with continuous, or analog signals that behave in a continuous manner or represent information using a continuous function. A physical object, such as a flash drive or a bitcoin, may contain a digital representation of virtual currency, but ultimately, the currency only functions as such if it is linked digitally, via the Internet, to the virtual currency system.

5- Legal tender status does not necessarily require an entity or individual to accept payment in a particular type of legal tender. For example, in many jurisdictions, a private business, person, or organisation is free to develop internal policies on whether or not to accept the jurisdiction’s physical currency or coins (cash) as payment for goods and/or services.


6- This definition differs from that offered in 2012 by the European Central Bank (ECB), which defined virtual currency “as a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community” ECB, Virtual Currency Schemes (October 2012), p. 6. The ECB recognised on p.13 of its report that its “definition may need to be adapted in future if fundamental characteristics change.“ Its definition now appears too limited, since math-based, decentralised virtual currencies like Bitcoin are not issued and controlled by a central developer, and some jurisdictions (e.g., the United States, Sweden, and Thailand) now regulate virtual currencies.

7- This categorisation differs from the ECB’s three-part classification, which divides virtual currencies into three types: 

“Type 1 . . . refer[s] to closed virtual currency schemes . . . used in an online game. 

Type 2 . . . [refers to] schemes [that] have a unidirectional flow (usually an inflow), i.e. there is a conversion rate for purchasing the virtual currency, which can … be used to buy virtual goods and services . . . (and exceptionally also … real goods and services) 

Type 3 [refers to] schemes . . .[with] bidirectional flows, i.e. the virtual currency . . . acts like any . . . convertible [real] currency, with . . . [buy and sell] exchange rates . . . [and] can . . . be used to buy [both] virtual . . . [and] real goods and services.” ECB Virtual Currency Schemes, p. 6. This discussion paper adopts a simpler, bifurcated classification because at , only (fully) convertible virtual currencies that can be used to move value into and out of the formal financial sector present significant AML/CFT risks. This is because money laundering requires: Conversion or transfer (of illicit funds); concealment or disguise of the source/origin (of illicit funds); or acquisition/possession/use (of illicit funds).


8- Some convertible virtual currencies can be exchanged directly through the issuing administrator (directly exchanged); others must be exchanged through a virtual currency exchanger (third-party exchanged).


9- For example, WebMoney is a virtual currency because “valuables” (assets) are transferred and stored in the form of a non-fiat currency, The units of measurement of the valuables' property rights stored by the guarantor are WebMoney Title Units (WM) of the corresponding type. 

10- For example, despite such deterrence measures, several exchanges allow blackmarket conversion of World of Warcraft Gold.


11- A third-party is an individual or entity that is involved in a transaction but is not one of the principals and is not affiliated with the other two participants in the transaction—i.e., a third party functions as a neutral entity between the principals (e.g., sender and receiver, buyer and seller) in a business or financial transaction. The third party's involvement varies with the type of business or financial transaction. For example, an online payment portal, such as PayPal, acts as a third party in a retail transaction. A seller offers a good or service; a buyer uses a credit or debit card entered through the PayPal payment service; and the trusted third party completes the financial transfer. Similarly, in a real estate transaction, a third-party escrow company acts as a neutral agent between the buyer and seller, collecting the documents from the seller and money from the buyer that the two principals need to exchange to complete the transaction.

12- Distributed is a term of art that refers to an essential feature of decentralised math-based virtual currencies: transactions are validated by a distributed proof-of-work system. Each transaction is distributed among a network of participants who run the algorithm to validate the transaction.

13- Apart from the initial creation and issuance of ripple coins (RXP), Ripple operates as a decentralised virtual currency. Ripple’s founders created all 100 billion ripple coins and retained 20 billion of them, with the remainder to be distributed by a separate entity, Ripple Labs. However, all transactions are verified by a decentralised computer network, using Ripple’s open source protocol, and recorded in a shared ledger that is a constantly updated database of Ripple accounts and transactions.

14- In 2140, the block award will cease to be available and miners will be rewarded only by transaction fees.

15- For example, PayPal is actively looking at accepting and clearing bitcoins on the PayPal platform, and JP Morgan Chase has filed a US patent application for an online electronic payments system using a math-based virtual currency protocol that would enable users to make anonymous payments without providing an account number or name, with the virtual currency to be stored on JPMC computers and verified through a shared log, much like the ‘block chain’ in the bitcoin system.
17 For instance, it remains to be seen whether virtual currency systems can provide a pathway to other financial services, like credit and insurance.

17- The Liberty Reserve investigation and takedown involved law enforcement action in 18 countries and jurisdictions, including Costa Rica; the Netherlands; Spain; Morocco; Sweden; Switzerland; Cyprus; Australia; China; Hong Kong, China; Norway; Latvia; Luxembourg; the United Kingdom; Russia; Canada; and the United States to restrain criminal proceeds, forfeit domain names, and seize servers.


18- The Silk Road investigation involved multiple US law enforcement agencies, led the Federal Bureau of Investigation’s (FBI’)s New York Special Operations and Cyber Division, and the Drug Enforcement Administration’s (DEA’s) New York Organized Crime Drug Enforcement Strike Force (comprised of agents and officers of DEA, the Internal Revenue Service (IRS), the New York City Police Department, US Immigration and Customs Enforcement’s (ICE) Homeland Security Investigations (HSI), the New York State Police, the Bureau of Alcohol, Tobacco, Firearms and Explosives, the US Secret Service, the US Marshals Service, Office of Foreign Assets Control (OFAC), and NY Department of Taxation), with assistance and support of the ICE-HIS Chicago field office, the Department of Justice’s Computer Crime and Intellectual Property and Asset Forfeiture and Money Laundering Sections, the United States Attorney’s Office for the Southern District of New York, and foreign law enforcement partners, particularly the Reykjavik Metropolitan Police of the Republic of Iceland and the French Republic’s Central Office for the Fight Against Crime Linked to Information Technology and Communication.