New York’s Department of Financial Services (DFS) has issued subpoenas to 22 of the largest investors and major companies involved in the digital cryptocurrency Bitcoin. Cryptocurrency is a form of digital currency (in essence just a file of code) which is generated and whose movements are authenticated using cryptography. While a subpoena is not in itself an indication of illegal activity, it shows that regulators are taking an interest in a system which is currently free of regulation. This lack of regulation and perceived anonymity creates an environment for Bitcoin to act as a medium for money launderers and those who would trade in contraband (it has been linked to drugs, weapons and child pornography).
However, while agencies such as the FBI and the DEA have begun to target the latter group, financial regulators are now showing interest in the currency’s potential for money laundering. As part of an ongoing SEC prosecution for running a Ponzi scheme based on Bitcoins, a US federal judge ruled in July 2013 that the digital currency was, in fact, money. This follows the May 2013 shutdown of Liberty Reserve (a digital currency exchange based in Costa Rica) and arrest of its founder, for facilitating money laundering of $6 billion.
In a rapidly evolving marketplace where there is no central bank or clearing house and transactions can take place peer-to-peer, the main targets for regulators are likely to be exchanges (on which Bitcoin can be bought and sold for conventional currency), investment entities and services such as Bitcoinlaundry (which openly offer to launder Bitcoin by a process of mixing and redistribution). Pre-empting this, Mt. Gox, based in Tokyo and currently the world’s largest Bitcoin exchange, has since May required identity verification for all trades involving conventional currency. This may have been prompted by the earlier seizure of the accounts of its US intermediary by Homeland Security Investigations for failing to register as a money transmitter.
It is clear from this latest round of subpoenas that regulators are trying to get their heads around this new concept, and the threats and opportunities it presents. However, it looks like Bitcoin is, for now, viewed like any other currency, so companies dealing with it should ensure they have in place appropriate anti-money laundering systems and controls.