Digital currencies like Bitcoin have the potential to revolutionise the global payment system.
But they also present new challenges for the financial services industry and regulators around the world who are concerned about taxation, lack of control over the currency, and how to prevent Bitcoin from becoming the currency of choice for money launderers and organized crime.
Bitcoin investments and trading remain largely unregulated across the globe.
In March 2013, the United States extended some anti-money laundering rules to virtual currency and is considering whether to regulate Bitcoin trading, but the currency is not regulated in many other countries including the UK where the FCA recently confirmed its position of: keeping an eye on Bitcoin developments.
Bitcoin also provides anonymity, which is highly attractive to money launderers and criminals, presenting greater challenges for government agencies following the money trail.
Over the past couple of years, there have been various examples of how Bitcoins are exploited by money launderers and criminals.
Events such as the failure of Mt. Gox, once the largest Bitcoin exchange operator, the seizure of the dark web marketplace Silk Road, and the arrest of the CEO of BitInstant, a Bitcoin exchanger, all highlighted the challenges facing this virtual currency.
The use of Bitcoin on Silk Road was a typical case in mind. Silk Road was a “dark web” e-commerce site only accessible through “Tor”, an anonymising program that is often synonymous with the “dark web” and favoured by organised crime gangs and terrorist groups.
Items for sales on the site included drugs, weapons, illegal services such as computer hacking, stolen identification information, and hitmen. Silk Road consumers were able to provide payment for these goods and services in Bitcoin.
To enhance anonymity and assist with laundering illicit proceeds, the site used a ‘tumbler’ to process Bitcoin transactions in a manner designed to frustrate the tracking of individual transactions through the block chain.
The tumbler obscured any link between a buyer’s Bitcoin address and the vendor’s Bitcoin address where the Bitcoins end up; thus, eliminating the benefit of the block chain as a traceable record of the transaction.