Virtual currencies are attracting more and more attention. Last week the FATF released a report on virtual currencies. Since we receive queries on virtual currencies regularly this report will be off interest other visitors of our site as well.
Over the last years virtual currencies (with Bitcoin attracting the most attention recently) have developed into a payment method with ever growing global acceptance. Virtual currencies offer an innovative, cheap and flexible method of payment. As with all innovations in the financial industry, the virtual currencies pose a challenge to regulators and tax departments (for example see Notice 2014-21 issued by the IRS) around the world, not sure on how to deal with this new payment method. Responses to the virtual currency vary, where some countries embracing this new technology and others limiting or restricting its legitimate use.
We receive most questions on the AML impact of accepting / investing in virtual currencies and clearly so did the FATF. Consequently the FATF conducted research into the characteristics of virtual currencies to make a preliminary assessment of the ML/TF risk associated with this payment method. An important step in assessing the risks and developing an appropriate response, is to have a clear understanding of the various types of virtual currencies and how they are controlled and used.
The FATF released a their report: Virtual Currencies; Key Definitions and Potential AML/CFT Risks
The FATF also recognize the benefits of virtual currencies such as:
- increased payment efficiency and lower transaction costs
- facilitate international payments (regardless of opening hours of financial institutions)
- have the potential to provide payment services to populations that do not have access or limited access to regular banking services
At the same time the FATF identifies potential AML risks associated with virtual currencies:
- the anonymity provided by the trade in virtual currencies on the internet
- the limited identification and verification of participants
- the lack of clarity regarding the responsibility for AML compliance / supervision / enforcement for transactions
- the lack of a central oversight body
The report provides a (i) brief introduction to virtual currencies (ii) explanation of the difference between convertible / non-convertible currencies (iii) explanation of centralized / non-centralized currencies and the second part of the report contains law enforcement examples of money laundering offences involving virtual currencies to demonstrate how this payment method has already been abused for money laundering purposes.
For those of you wondering what virtual currencies are all about and want to understand the risks a bit better the report makes interesting reading. We are following the development with great interest as we are of the opinion the virtual currencies are here to stay. We are all faced with the challenges that come with new technology and innovation in this area.