Virtual Currencies Potential AML/CFT Risks
LEGITIMATE USES
Like other new payment methods, virtual currency has legitimate uses, with prominent venture capital firms investing in virtual currency start-ups. The virtual currency has the potential to improve payment efficiency and reduce transaction costs for payments and fund transfers. For example, Bitcoin functions as a global currency that can avoid exchange fees, is currently processed with lower fees/charges than traditional credit and debit cards, and may potentially provide benefits to existing online payment systems, like Paypal. Virtual currency may also facilitate micro-payments, allowing businesses to monetize very low-cost goods or services sold on the Internet, such as one-time games or music downloads. At present, as a practical matter, such items cannot be sold at an appropriately low per/unit cost because of the higher transaction costs associated with e.g., traditional credit and debit. Virtual currency may also facilitate international remittances and support financial inclusion in other ways, as new virtual currency-based products and services are developed that may potentially serve the under and un-banked.
Virtual currency
- notably,
Bitcoin
may also be held for investment. These potential benefits need to be
carefully analyzed, including whether claimed cost advantages will remain
if the
virtual currency
becomes subject to regulatory requirements similar to those that apply to
other
payments methods, and/or if exchange fees for cashing out into fiat currency are factored
in, and whether volatility, consumer protection, and other factors17 limit
their potential for financial inclusion.
Convertible virtual currencies that can be exchanged for real money or other virtual currencies are potentially vulnerable to money laundering and terrorist financing abuse for many of the reasons identified in the 2013 NPPS Guidance. First, they may allow greater anonymity than traditional noncash payment methods. Virtual currency systems can be traded on the Internet, are generally characterized by non-face-to-face customer relationships, and may permit anonymous funding (cash funding or third-party funding through virtual exchangers that do not properly identify the funding source). They may also permit anonymous transfers if the sender and recipient are not adequately identified.
Decentralized systems are particularly vulnerable to anonymity risks. For example, by design, Bitcoin addresses, which function as accounts, have no names or other customer identification attached, and the system has no central server or service provider. The Bitcoin protocol does not require or provide identification and verification of participants or generate historical records of transactions that are necessarily associated with a real-world identity. There is no central oversight body, and no AML software currently available to monitor and identify suspicious transaction patterns. Law enforcement cannot target one central location or entity (administrator) for investigative or asset seizure purposes (although authorities can target individual exchangers for client information that the exchanger may collect). It thus offers a level of potential anonymity impossible with traditional credit and debit cards or older online payment systems, such as PayPal.
Virtual currency’s global reach likewise increases its potential AML/CFT risks. Virtual currency systems can be accessed via the Internet (including via mobile phones) and can be used to make cross-border payments and fund transfers.
In addition, virtual currencies commonly rely on complex infrastructures that involve several entities, often spread across several countries, to transfer funds or execute payments. This segmentation of services means that responsibility for AML/CFT compliance and supervision/enforcement may be unclear. Moreover, customer and transaction records may be held by different entities, often in different jurisdictions, making it more difficult for law enforcement and regulators to access them. This problem is exacerbated by the rapidly evolving nature of decentralized virtual currency technology and business models, including the changing number and types/roles of participants providing services in virtual currency payment systems. And importantly, components of a virtual currency system may be located in jurisdictions that do not have adequate AML/CFT controls. Centralized virtual currency systems could be complicit in money laundering and could deliberately seek out jurisdictions with weak AML/CFT regimes. Decentralized convertible virtual currencies allowing anonymous person-to-person transactions may seem to exist in a digital universe entirely outside the reach of any particular country.
POTENTIAL RISKS
Convertible virtual currencies that can be exchanged for real money or other virtual currencies are potentially vulnerable to money laundering and terrorist financing abuse for many of the reasons identified in the 2013 NPPS Guidance. First, they may allow greater anonymity than traditional noncash payment methods. Virtual currency systems can be traded on the Internet, are generally characterized by non-face-to-face customer relationships, and may permit anonymous funding (cash funding or third-party funding through virtual exchangers that do not properly identify the funding source). They may also permit anonymous transfers if the sender and recipient are not adequately identified.
Decentralized systems are particularly vulnerable to anonymity risks. For example, by design, Bitcoin addresses, which function as accounts, have no names or other customer identification attached, and the system has no central server or service provider. The Bitcoin protocol does not require or provide identification and verification of participants or generate historical records of transactions that are necessarily associated with a real-world identity. There is no central oversight body, and no AML software currently available to monitor and identify suspicious transaction patterns. Law enforcement cannot target one central location or entity (administrator) for investigative or asset seizure purposes (although authorities can target individual exchangers for client information that the exchanger may collect). It thus offers a level of potential anonymity impossible with traditional credit and debit cards or older online payment systems, such as PayPal.
Virtual currency’s global reach likewise increases its potential AML/CFT risks. Virtual currency systems can be accessed via the Internet (including via mobile phones) and can be used to make cross-border payments and fund transfers.
In addition, virtual currencies commonly rely on complex infrastructures that involve several entities, often spread across several countries, to transfer funds or execute payments. This segmentation of services means that responsibility for AML/CFT compliance and supervision/enforcement may be unclear. Moreover, customer and transaction records may be held by different entities, often in different jurisdictions, making it more difficult for law enforcement and regulators to access them. This problem is exacerbated by the rapidly evolving nature of decentralized virtual currency technology and business models, including the changing number and types/roles of participants providing services in virtual currency payment systems. And importantly, components of a virtual currency system may be located in jurisdictions that do not have adequate AML/CFT controls. Centralized virtual currency systems could be complicit in money laundering and could deliberately seek out jurisdictions with weak AML/CFT regimes. Decentralized convertible virtual currencies allowing anonymous person-to-person transactions may seem to exist in a digital universe entirely outside the reach of any particular country.
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