bitcoin on microchip background

AML and Other Regulatory Concerns

Virtual currency is gaining momentum by the day. There are many tax, compliance and regulatory issues still to be resolved around virtual currency, making it a controversial form of tender. However, if the issues are to be handled through a global initiative, this innovative financial tool may be helpful to developing societies globally.

Virtual currency – the most widespread one being bitcoins – was introduced several years ago and has been evolving somewhat rapidly ever since. To this extent, it has been debated by many economists whether virtual currency is “a return to the dark ages[1]” or indeed an innovative financial solution. However, as controversial as it is, it seems virtual currency is here to stay. Therefore, in order to tackle some regulatory and compliance concerns, it is necessary to introduce legal and compliance measures.

The main issue concerning virtual currency is that it is merely an open-source protocol and does not belong to any state; hence, there is no central bank involved in the issuance and regulation thereof. Moreover, the “role” of bitcoin is still not crystal clear. For example, in a judgement in 2015, the European Court of Justice ruled that bitcoin was to be classified as a type of currency. On the other hand, U.S. courts have generally ruled that virtual currency is “intangible personal property” or “means of payment.” Likewise, the U.S. Securities and Exchange Commission (SEC) considers bitcoins as “security.” Nevertheless, in 2013, Financial Crimes Investment Network (FinCEN) identified bitcoins as “convertible virtual currency.” However, the U.S. Internal Revenue Service (IRS) treats virtual currency as “property” for tax purposes.

A crucial concern pertaining to virtual currency is anti-money laundering (AML). Virtual currency in essence is pseudonymous, meaning that the transactions and accounts may not be linked to real-world identities. Therefore, tracing the transactions and the persons involved may be very tricky at times. Furthermore, due to the complexity of infrastructure, it is difficult to pinpoint a central administrator.

Several jurisdictions have extended AML measures to virtual currency. To this extent, the European Union has adopted a draft for the amendment of the AML directive which will extend to virtual currency[2]. The said draft amendments intend to monitor activities realized through virtual currency. However, it only targets exchanges and wallet providers, not individual users. Therefore, it will not ultimately be sufficient to control fraudulent activities. On the other hand, FinCEN has also extended AML and know-your-customer (KYC) rules to virtual currency users who are administrators or exchangers. Thus, individual users are also not covered under FinCEN regulations.

Apart from AML, taxation, consumer protection and exchange regulations are also major regulatory and compliance issues concerning virtual currency. Although the U.S., U.K. and some European jurisdictions have tax policies in place, because virtual currency is not regulated globally, it may give rise to “tax haven” activities, especially in cross-border transactions. In terms of consumer protection, virtual currency transactions are may be used for fraud and unethical sales.

Nevertheless, virtual currency has some advantages. Virtual currency is a fast and global financial solution. Moreover, it is cost efficient, enabling users to utilize financial transactions with minimal or zero costs. Another advantage is that due to encrypted private keys, virtual currency is a means to avoid identity theft, which is a major problem in the finance industry nowadays.

Above all, virtual currency may be a solution for developing countries where there is a lack of banking infrastructure. In this sense, I believe it can be even used as a tool to further realize the sustainable development goals of the United Nations.

In terms of utilizing the benefits of virtual currency, there are still many regulatory and compliance issues that need to be tackled on a global scale. A global set of rules is a necessity, as virtual currency is not a central currency pertaining to any state and is, therefore, frequently used in cross-border transactions.

Unfortunately, the main obstacle for global regulations is that virtual currency is restricted or banned in some jurisdictions. However, I am optimistic that a global initiative for regulating virtual currency may give rise to acceptance of it in the jurisdictions that initially banned virtual currency, mainly due to concerns arising from monitoring transactions.

To that extent, I believe the primary problem to be tackled is the “role” of virtual currency. There should be a global mutual understanding as to whether virtual currency is a commodity or currency. This will – at the least – enable national legislators to further regulate on compliance and tax regimes concerning virtual currency.

Furthermore, another crucial issue to tackle is global licensing or a global authority overseeing and monitoring the activities for which virtual currency is used. Although there are several jurisdictions (for example, Luxembourg, the U.K., the state of New York) that have granted licenses for virtual currency, it is still primitive. I believe it is a necessity that such licensing is effectuated at a global level in order to provide for a set of rules as regards AML and for adopting at least a minimum global standard for KYC. Moreover, global monitoring supported by states will enable the adoption of exchange regulations to prevent volatility. Such an approach will be a major step for preventing suspicious financial activities and ensuring that virtual currency is indeed an innovative solution and functions as an accelerator in cross-border transactions.

In summary, if an appropriate system is implemented at a global scale, virtual currency will become a global financial instrument that will benefit societies worldwide, especially those that lack financial infrastructure.



Gizem Alper

Gizem AlperGizem Alper is a corporate lawyer registered to the Istanbul Bar Association. She is currently a visiting scholar at The New School, Milano School of International Affairs, Management and Urban Policy in NYC. Gizem holds a Ph.D. Law from Istanbul University and an LL.M. from Leiden University and has amassed extensive experience in corporate and transactional law and compliance with multinational companies and in the banking industry.

Related Post

Got Compliance News?

We do!  Sign up for CCI’s free weekly eBlast to get GRC news, views, jobs & events delivered to your inbox once a week.  Cancel anytime.

Click to Subscribe.