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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?

As virtual currencies can, at least to some extent be held and spent outside the existing financial services frameworks, information on the payer and payee and the amounts held or transferred may not be easily available to the authorities. In addition, wallets holding virtual currencies can be decentralised smart wallets (ie, not a wallet controlled by an exchange or custodian). This makes investigating and tackling fraud difficult where criminals hack wallets or use virtual currencies to accept payments in respect of extortion and ransomware attacks.

However, the above factors could mistakenly be described as making virtual currencies anonymous. There are a number of tools available to identify links between wallets and transactions on the relevant blockchains – these tools can be helpful for the authorities when looking for criminal activities and syndicates. In addition, virtual currency transactions take place on an immutable public ledger. This means that there are also opportunities for law enforcement agencies to trace transactions that are not easily available for some other monetary transactions, such as cash and physical commodities.

In order to try to tackle some aspects of this issue, the government announced on March 18 2015 that it will apply anti-money laundering regulations to virtual currency exchanges in the United Kingdom. In addition, HMRC announced that it “intends to apply anti-money laundering regulation to digital currency exchanges, to support innovation and prevent criminal use”.

In addition, some work has been done by public policy think tanks in the education of police authorities in respect of the use and seizure of virtual currencies involved in criminal activity.

Virtual currencies have been used in a number of high-profile fraud and criminal cases. The notorious Silk Road marketplace – involving the use of virtual currencies to pay for illegal goods and services – and the collapse of Mt Gox with serious implications of fraud, have given rise to successful prosecutions in a number of countries, particularly the United States.

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