On 27 June 2014, the Financial Action Task Force (FATF) published a report which suggests a conceptual framework for understanding and addressing the anti-money laundering (AML) and countering the financing of terrorism (CFT) risks associated with virtual currencies.
The report proposes some common definitions that clarify what virtual currency is and classify the various types of virtual currency, based on their different business models and methods of operation. The report also applies risk factors to specific types of virtual currencies to identify potential risks; describes some recent investigations and enforcement efforts involving virtual currency; and presents a sample of jurisdictions’ current regulatory approaches to virtual currency.
What this means for you
Many clients have heard the arguments for and against virtual currencies on numerous occasions. While the legitimate use of virtual currencies offers many benefits, such as increased payment efficiency and lower transaction costs, other characteristics present potential AML and CFT risks, including the anonymity provided by the trade in virtual currencies on the internet and the lack of regulation which leads to money laundering concerns and the losses such as the case of Mt Gox Bitcoin exchange.
There are plenty of new players in the market facing real challenges around how they position themselves in relation to virtual currencies. For virtual currencies to have real credibility the participants will have to ‘stand by’ losses such as Mount Gox - will consumers ever truly trust a virtual currency that allows theft to go unrecompensed? If there is going to be a financial guarantee behind virtual currencies, then that has a cost which will increase transactional costs.
Is it therefore the case that the parties who self-regulate what is, after all, in respect of AML and KYC simply best business practice, will be able to keep costs down, and therefore have a better chance to become market leaders?