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Fraud and money-laundering

What are the potential risks of virtual currencies in terms of fraud? How would these be addressed in your jurisdiction? Have any specific instances emerged in which virtual currencies have been used for money-laundering or other fraudulent purposes?

The pseudonymous nature of bitcoin transactions has raised concerns that Bitcoin could become the currency of choice for criminals. In 2013 FinCEN issued guidance requiring all virtual currency exchanges and administrators to collect information about users and comply with the requirements of the Bank Secrecy Act. However, many exchanges, electronic wallets and other third parties engaged in the exchange or storage of virtual currencies are now required to comply with know your customer and anti-money laundering intake and reporting requirements. These standards should help to alleviate the use of virtual currencies for illicit activities. Of course, some currencies are designed to be completely anonymous (as opposed to just ‘private’) – as long as such currencies operate outside regulatory environments, their use in illegal activities will continue.

Virtual currencies have attracted users that engage in fraud and other illegal transactions. All of the traditional improper activities exist with this new technology. Examples include pyramid schemes, money laundering (see www.blockchain-council.org/blockchain/how-bitcoin-money-laundering-works/), market manipulation (Twitter has banned most advertising of initial coin offerings and token sales) and regulatory violations (see www.wsj.com/articles/cftc-alleges-fraud-in-three-virtual-currency-cases-1516338060 and www.sec.gov/news/public-statement/joint-statement-sec-and-cftc-enforcement-directors). Virtual currencies lend themselves to these risks because of their anonymity, lack of central regulatory authorities and – perhaps most importantly – their reliance on trust among participants.

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