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Below find an Excerpt from Erik Barnett, HSI, U.S. Department of Homeland SecurityVirtual currencies may offer decreased transaction costs and elimination of fees associated with normal bank accounts, practical benefits for most businesses and consumers. But law enforcement also recognizes that virtual currencies must play by the same rules that create trust in financial institutions. Because, ultimately to succeed, they will need to be seen by consumers and businesses as reliable and not as the backbone of an underground criminal economy.
To accomplish this, virtual currencies need to engage in self-policing through industry-proven anti-money laundering controls. They also need to eliminate anonymous transactions and should be regulated universally with harmonized rules.
Let me break these down briefly.
Anti-Money Laundering Controls
Self-policing against money laundering is a hallmark of the financial industry worldwide. Establishing appropriate anti-money laundering controls results in banking systems not plagued by criminal activity or terrorist financing.
But the track record on self-policing of crypto-currencies is poor. Between 2009 and 2013, only 70 suspicious transactions within crypto-currency systems were reported to U.S. regulators. Remember, in the same time period, all of the transactions of Silk Road used a crypto-currency. Now, admittedly, utilization of anti-money laundering controls is not voluntary for certain industries. In a case investigated by my agency last year, HSBC forfeited $1.25 billion dollars to the United States for failing to exercise due diligence and have in place appropriate anti-money laundering controls.
But the standard anti-money laundering controls are not going to be burdensome for virtual currencies, at least not now. A recent study found that since 2012, 40% of bitcoin transactions were for less than an entire coin and 20% were for a tenth of a bitcoin. Even at today’s bitcoin value, most suspicious activity reports, and certainly cash transaction reports, would apply to far larger transactions.
However, if the industry grows, as is anticipated, introducing these measures now will ensure proportionate efforts are in place later, when there may be significant, and potentially suspicious, transactions on a frequent basis.
The good news here is that Mt. Gox and some other recent enforcement activities seem to have stimulated dialogue within the crypto-currency community that adoption of these measures may well be necessary. Not to preclude government regulation, but as a means to establish greater public trust in the business model.
AnonymityLet me talk about the importance of purging anonymity from virtual currencies.
There has already been a determination by our society that some level of transparency is appropriate in financial transactions to prevent misuse by criminals and terrorist organizations. It is now common-place that you cannot spend more than $10,000 in cash, at a U.S. business for instance and in many other countries, and not have a report filed with the federal government.
You cannot cross most borders without declaring currency of amounts similar to this. Banks are regularly looking for suspicious activity as part of their obligations and making reports to law enforcement.
Now, let’s compare that to some crypto-currencies that have near complete anonymity during internal transactions within the system. Anonymity is not only built into the business model, but in some cases bragged about or sold as a feature.
A disturbing trend already observed within crypto-currencies is what I call an “auto-launder” service, which takes funds and washes them, giving back something not linked to the person or the chain of transactions at all.
Now, people can argue these virtual currencies are not truly anonymous because the transaction itself is visible to all users.
And further, they may argue that when the currency is removed from the system and exchanged into fiat currency, there may be an identity associated with that transaction.
The first argument fails because knowing of a transaction, but not who conducted it, is not transparency.
As to learning an identity when exchanged for value outside of the virtual currency system, we already know that some exchangers do not implement proper anti-money laundering controls or even register with regulators, who would evaluate these for reasonableness.
But even if the exchanges have the right controls in place, all law enforcement will see is the end of the chain, not the links in the middle or even the beginning. The oft-used phrase by police to “Follow the Money,” will be a hollow call.
Without seeming alarmist, the stakes are high if we get this wrong. If we’re not able to follow the money, criminal organizations will easily risk the loss of one conspirator and a certain sum of money to profit overall from a system that conceals their trail. Public safety will be jeopardized, for very little benefit.
Certainly eliminating the anonymity in virtual currencies is an appropriate balance to that concern.
Regulation
As to regulation, the financial industry is already highly regulated. FinCEN has recently made clear that virtual currencies fall under current regulations. So, no one is proposing special regulations for the internet that do not apply to brick and mortar banking facilities.
Now, innovators and entrepreneurs may recoil at the word regulation.
But, importantly, we’re not talking about new social networks or even business to consumer innovations. We’re watching fledgling companies engaging in significant financial transactions through a technology we have already seen exploited by criminals.
And with possibly large stakes. On November 22, 2013, $147 million worth of bitcoins was transferred, without being cashed out for fiat currency. This transaction, of only 1.6% of the bitcoins in existence, might have been an inter-company transfer by a bitcoin exchange as a housekeeping measure. But the exchange reportedly refused comment, leaving commentators to claim that the largest ever bitcoin transfer was, as are all Bitcoin transactions, anonymous.
And the cumulative value of bitcoins as of April 1 is around 4.36 billion euros or 6 billion dollars, quite a lure for organized crime.
Let’s get away from Bitcoin and talk about Litecoin for a moment.
Seemingly quiet in the shadow of its more well-known competitor, there were 11,593 separate Litecoin transactions last Wednesday. Litecoin had a value yesterday of 9.75 euros, making the existing litecoins worth 263 million euros or 364 million dollars.
We have historically regulated financial industries to protect them from criminal misuse but also to protect the financial institutions from becoming victims of crime themselves.
To be clear, the regulations must be universal, or nearly so. They should be harmonized with other countries so virtual currencies are not faced with contradictory guidelines that can harm international business development. This would avoid gaps in regulatory oversight and ensure that law enforcement has reciprocal money laundering laws internationally when we pursue criminals across borders.
Now, I want to be very clear, I am discussing law enforcement type regulation. I am not weighing in on whether crypto-currencies are even a “currency” by governmental standards, or are subject to tax or whether they are legal or illegal or should be in any particular jurisdiction. Those decisions are for other authorities and regulatory bodies.
I am also not opining at all whether crypto-currencies are practical or secure. This seems to be a very legitimate question based upon findings by researchers and open source material. But the public will eventually determine the value of this payment system. My point obviously is that trust and reliability will factor into the decision that is ultimately made.
Conclusions
The French poet and philosopher Paul Valery wrote, and I am paraphrasing, “the future is no longer what it used to be.”
Unfortunately, this is not true with the criminal’s exploitation of new technology. Too often, we see how quickly something innovative is manipulated for illicit purposes and the future usually is what it used to be with criminal organizations.
But that does not mean it has to be that way. We have a unique opportunity to get ahead of this, to see, based upon the past year or two, what the next five years will likely look like if we do not make some changes in how we look at this new technology to eliminate the criminal exploitation that will undoubtedly occur.
And as importantly, with an appropriate level of private and public cooperation, we can see a robust industry in virtual currencies with a strong reputation as appropriate intermediaries of online commerce.
I am happy to answer questions or just field comments. Thank you.
http://useu.usmission.gov/cryptocurrency.html 
