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virtual currencies Diane Bugeja (KPMG Malta) explains how virtual currencies can be an ideal tool which criminals can exploit to the full.


As virtual currencies continue to offer money launderers and sanctions-busters a tremendous opportunity to conceal details of their nefarious activities outside of the mainstream banking system, regulators around the world are responding to the challenges in different ways. In some respects, the regulators sit on the horns of a dilemma. They are required to protect their country’s reputation in the fight against criminals, yet at the same time they do not want to stand accused of stifling innovation in the financial services sector.


The 2012 European Central Bank (‘ECB’) Report defined a virtual currency as a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community. Virtual currency differs from electronic money, insofar as the currency being used as the unit of account has no physical counterpart with legal tender status.

The Financial Crimes Enforcement Network (FinCEN) in the US has identified those who operate in the virtual currency world as falling under one of three categories: Users, Exchangers, or Administrators.” Users” are defined as those who buy or use the virtual currency while “Exchangers” are those who operate in the business of exchanging virtual currencies for real or other virtual currencies. Lastly, “Administrators” are those that have the authority to issue, withdraw or redeem the virtual currencies.

As virtual currencies, in contrast to traditional legal tender and payment systems, are not regulated, the legal uncertainty surrounding these currencies might constitute a challenge for the government authorities. Regulators have not yet developed a consistent approach tailored to the distinctive aspects of virtual currencies; whilst regulation has traditionally been developed in a localised manner, virtual currencies call for macro-regulation given that they are embedded within a global network. The anonymity afforded by the virtual currency world gives rise to inherent risks associated with the lack of screening of parties behind a transaction, which in turn gives rise to the possibility of virtual currency firms enabling transactions to and from sanctioned individuals and jurisdictions.

CNBC reported that the Financial Conduct Authority (‘FCA’) seems to have downplayed the importance of virtual currency regulation by stating that it is “keeping an eye” on virtual currency developments rather than actively pursuing regulation. It had also previously declared that it does not consider virtual currency to fall within its oversight remit given that the currency was not used widely enough to be considered legal tender. US and German regulators, on the other hand, seem to have taken a tougher stand on this front, by issuing specific guidance in this area, with the latter considering issuing a specific licence for businesses that conduct transactions in virtual currencies. Virtual currency operators are being given a hard time in the US: in October 2013, Silk Road, an online marketplace, had to cease operations due to allegations that it allowed more than $1 billion of illegal drugs and illicit services to be bought using virtual currencies. Prior to that, in May 2013, the U.S. Department of Homeland Security began seizing US bank accounts belonging to Mt. Gox, a Japan-based bitcoin exchange, citing that it had not properly registered itself as a money transmission business.

More recently, the People’s Bank of China (‘PBOC’), together with other Chinese authorities, issued a notice on virtual currency, barring financial and payment institutions from trading in such digital currency. It was the first step taken by the Chinese authorities towards regulating virtual currency and led to a drop in its value on trading platforms.

The European Banking Authority (EBA) has warned consumers on the potential risks associated with virtual currencies, such as the lack of protection afforded by regulation. Furthermore, the EBA stated that such digital currency is vulnerable to hackers, might lose its value and any misuse could prompt law enforcement agencies to close exchange platforms and keep consumers from accessing their investment. The EBA added it would be looking into whether such currencies could and should be regulated. The EBA also warned of tax implications associated with holding virtual currency; to this end, Norway and Germany have declared that they will treat digital currency as an asset and charge capital gains tax on the buying and selling of such currency.

Authorities face a double-edged sword in dealing with virtual currencies – on the one hand, they need to protect their country’s reputation in the fight against criminals; on the other hand, they would not want to seem as if they are stifling innovation in the financial services space at the expense of seeing financial services operators siphoning off their operations to countries with a more relaxed regime. This notwithstanding, the use of virtual currency amongst the general public is proliferating and there is no concrete action which authorities can take to stop this from growing even further. Against this backdrop, the establishment of a regulatory framework within which virtual currency firms can operate becomes even more crucial as a means of controlling and managing the risks associated with the digital currency world.

It is critical for companies exposed to money laundering risks to come to terms with the concept of virtual currencies and understand the threats this could pose to their business. Therefore, personnel need to be made aware of red flags in this space, and systems need to be tested for robustness and effectiveness, particularly against security breaches through the use of virtual currency. As the EBA discusses whether the regulation of virtual currency is warranted, the general sentiment amongst European regulators is that digital currency poses a real threat in terms of a heightened exposure towards the risk of money laundering. The recent high profile cases in the virtual currency industry involving account seizures and money laundering indictments imply that regulators are moving virtual currencies closer to the top of their agenda and will continue to monitor this industry going forward.

The views expressed in this article represent those of the author and not Bright Line Law.

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