Virtual Currencies and Financial Crime: Challenges and Opportunities

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The rapid rise of Bitcoin has prompted extensive discussion about the nexus between virtual currencies and financial crime. This paper examines the financial crime risks involving virtual currencies, the challenges that come with attempting to address those risks, and considers the implications for key stakeholders.

The general public has typically reacted with mystification to Bitcoin and other virtual currencies (VCs). Press reporting often focuses on instances of criminals using VCs, adding concern to the confusion. Some governments have gone as far as to ban all dealings in VCs.

VCs pose a number of financial crime risks. In particular, they offer rapid international transaction settlement and a greater degree of anonymity around users’ identities than many other established electronic payment methods; and they do so without involving banks or other powerful intermediaries in payment processing. A payment method that affords secrecy, operates outside the established financial system and facilitates speedy international payments provides obvious attractions to global criminals.

However, the story of VCs is not one of unhindered criminality. Far from it. VCs have a number of legitimate and beneficial applications. Speedier, more cost-efficient transaction settlement could create a nimbler financial system better suited to today’s global economy. VCs and related technology could help to deliver dynamic, mobile financial services to a greater number of people – such as those in developing countries who have limited or no access to banks.

This paper examines the financial crime risks involving VCs (with a particular focus on decentralised cryptocurrencies), the challenges that come with attempting to address those risks, and considers the implications for key stakeholders. It recommends the following high-level principles for governments, the VC industry and established financial sector participants:

  • Forward-looking, adaptive approach: Governments must avoid the temptation to over-react and mis-regulate. They should not rely on an outdated set of anti-money laundering/counter-terrorist finance (AML/CTF) approaches. Rather, governments should study VCs to understand how to combat future financial crimes, while also allowing the technology room to evolve so that its potential benefits may be explored fully.

  • Global view: Because cryptocurrencies and related technology offer decentralised transaction platforms, the international community should, with time, harmonise its approach if the benefits of VCs are to be realised and the risks managed in a proportionate manner. International efforts should include sharing information and developing detailed typologies of the use of VCs in financial crime schemes to enable better understanding of risks.

  • Partnership and exchange: To achieve the previous aim, governments, the VC industry and the established financial sector should collaborate closely. Stakeholders should leverage their strengths for mutual benefit: governments can provide the private sector with information on criminal typologies; the VC industry can provide detailed analysis of trends they observe; and banks can offer valuable lessons learned from their experience in AML/CTF compliance.

  • Innovative solutions: All stakeholders, and the VC industry in particular, should harness the potential of this new technology to combat financial crime. Start-ups should continue to apply their entrepreneurial mindset to developing sophisticated tools for detecting illicit activity involving VCs, while also addressing legitimate privacy concerns. Public–private partnerships can enable funding of these efforts.

About the Author

David Carlisle is an independent consultant who previously worked with the US Department of the Treasury's Office of Terrorism and Financial Intelligence. He has conducted research for RUSI's Centre for Financial Crime and Security Studies (CFCS) on improving financial intelligence. David has lived and worked in London since 2012.


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