Virtual Currency (a/k/a digital currency, cryptocurrency, virtual assets, and "value that substitutes for currency")

I have written, spoken, taught, and developed course material regarding virtual currency, especially as it pertains to cybercrime, money laundering, anti-money laundering (AML), law enforcement, and regulation. As I do so, I often refer to various sources of information, and decided to compile them here. This will help me develop my next talk, and get you started with your own research.

First, remember that virtual currency is privately created currency, it is not an official currency like “fiat currency” issued by a government (e.g. U.S. Dollars or Euros). I used to call them “digital currencies” before there was any regulation, but the term “virtual currency” came into vogue, and was what the Financial Crimes Enforcement Network (FinCEN), New York State Department of Financial Services, and Financial Action Task Force (FATF) migrated to. The term “virtual currency” makes sense when you consider that the term “currency” means official currency of a government, thus if a private party issues something that seems like “currency” it cannot be a “real” currency but instead a “virtual currency.”

Recently, FATF migrated to the term “virtual asset,” which makes sense if you consider that the lines between a currency, commodity, investment, and property are blurred with these virtual products. Also, FinCEN made use of the phrase “value that substitutes for currency” which cuts to the heart of the issue and what needs to be focused on for AML purposes. Of course, this space is evolving, different people and organizations use different words to describe the same things, and the definitions to be watched most closely are those in the laws and regulations that apply to you or your organization.

"Cryptocurrencies" such as Bitcoin are one type of virtual currency.

As you will see from some of my articles, I had an amazing opportunity to learn about virtual currencies in the early days, in a stellar prosecutor's office with a fantastic team that included the Secret Service and their resources. I have an opinion and perspective, and my focus is the risks and threats. I'm not saying virtual currency is per se evil and we should recognize that all forms of value and value transfer (cash, banks, etc.) are used by criminals, used for money laundering, and for investor fraud. That said, I leave it to others to expound on the benefits of virtual currencies.

Let me leave you with a few points on virtual currencies.

  1. The first virtual currency was invented in 1996. So virtual currency is not as new as many think.
  2. Since then, we have learned many lessons about how criminals will abuse virtual currency.
  3. Bitcoin (the first "cryptocurrency" virtual currency), and others created in its likeness, add new dimensions to virtual currency.
  4. "Decentralized" cryptocurrencies like Bitcoin create AML, regulatory, and law enforcement challenges. But not every "cryptocurrency" is truly and fully decentralized.
  5. The use of virtual currencies as an "investment" creates a new challenge. There will be highly sophisticated investors, including those who can create and move the markets, and there will be unsophisticated investors. Criminals will establish Ponzi-type schemes.

Here are some resources:

My articles

John Bandler, (2018) Investigations: Money Laundering. In: Shapiro L., Maras MH. (eds) Encyclopedia of Security and Emergency Management. Springer, Cham, https://doi.org/10.1007/978-3-319-69891-5_26-1

John Bandler, Lawyers, Drugs and Money: AML in Popular Media, ACAMS Today, March 20, 2018, Vol 17 No. 2. https://www.acamstoday.org/lawyers-drugs-and-money-aml-in-popular-media/

John Bandler, Stemming the Flow of Cybercrime Payments and Money Laundering, ACAMS TODAY, June-August 2017, Vol. 16 No 3, available at https://www.acamstoday.org/stemming-the-flow-of-cybercrime-payments/https://www.acamstoday.org/stemming-the-flow-of-cybercrime-payments/

John Bandler, Cybercrime and Digital Currency, ABA Information Law Journal, Autumn 2016, Volume 7, Issue 4, https://www.americanbar.org/content/dam/aba/administrative/science_technology/2016/ilj_volume7_issue4.authcheckdam.pdf

John Bandler, Dirty Digital Dollars, Fraud Magazine, a publication of the Association of Certified Fraud Examiners, July/August 2016. Hosted here at: https://johnbandler.com/wp-content/uploads/2019/01/Bandler-Dirty-digital-dollars-ACFE-Fraud-Magazine-2016-7.pdf, and at the ACFE behind a memberwall here: https://www.fraud-magazine.com/article.aspx?id=4294993652

John Bandler, Virtual Currency (including cryptocurrency), Feb 2019, Medium, https://medium.com/@johnbandler/virtual-currency-including-cryptocurrency-252d1173bf25

Government resources

FinCEN

FinCEN, FIN-2019-A003, Advisory on Illicit Activity Involving Convertible Virtual Currency, May 9, 2019, https://www.fincen.gov/sites/default/files/advisory/2019-05-10/FinCEN%20Advisory%20CVC%20FINAL%20508.pdf

FinCEN, FIN-2019-G001, Guidance on Application of FinCEN’s Regulations to Certain Business Models
Involving Convertible Virtual Currencies, May 9, 2019, https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf

FinCEN, FIN-2013-G001, Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies, March 18, 2013, https://www.fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf

FATF

FATF: The FATF Recommendations, Adopted 2012, updated June 2019, http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%202012.pdf

FATF: Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers, June 2019, http://www.fatf-gafi.org/media/fatf/documents/recommendations/RBA-VA-VASPs.pdf

FATF: Guidance for a Risk-Based Approach to Virtual Currencies, June 2015, http://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-RBA-Virtual-Currencies.pdf (Older, but discusses the Western Express case, one of the earliest virtual currency cybercrime money laundering cases.)

FATF: Regulation of virtual assets, October 19, 2018,  http://www.fatf-gafi.org/publications/fatfrecommendations/documents/regulation-virtual-assets.html

FATF: Virtual Currencies, Key Definitions and Potential AML/CFT Risks June 2014, http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf

FATF: Public Statement – Mitigating Risks from Virtual Assets, February 22, 2019, http://www.fatf-gafi.org/publications/fatfrecommendations/documents/regulation-virtual-assets-interpretive-note.html

Statutes

18 U.S. Code § 1956, Laundering of Monetary Instruments

18 U.S. Code § 1957, Engaging in monetary transactions in property derived from specified unlawful activity

New York State Penal Law Article 470, Money Laundering

18 U.S. Code § 1960, Prohibition of unlicensed money transmitting businesses

New York State Banking Law § 650, Unlicensed Money Transmitter

Misc. Regulators

NYS Department of Financial Services Rule 200 on Virtual Currencies, 23 NYCRR 200, Virtual Currencies, and related webpages.

https://www.dfs.ny.gov/apps_and_licensing/virtual_currency_businesses/bitlicense_faqs

https://www.dfs.ny.gov/apps_and_licensing/virtual_currency_businesses

https://www.dfs.ny.gov/docs/legal/regulations/adoptions/dfsp200t.pdf

Securities and Exchange Commission (SEC). The SEC protects investment risk, they assert jurisdiction over virtual currencies used as investment vehicles. They offer guidance relating to initial coin offerings (ICO) and other use of virtual currencies as an investment vehicle:  https://www.sec.gov/ICO

Commodities and Futures Trading Commission (CFTC). The CFTC regulates commodities and currency trading, they offer guidance on virtual currencies, and assert jurisdiction over them as commodities subject to the Commodity Exchange Act: https://www.cftc.gov/Bitcoin/index.htm

Internal Revenue Service (IRS). The IRS manages our federal tax system. They treat virtual currency as property, virtual currency income as a capital gain, and remind people to report such income and pay taxes on it. https://www.irs.gov/newsroom/irs-reminds-taxpayers-to-report-virtual-currency-transactions, https://www.irs.gov/pub/irs-drop/n-14-21.pdf

New York State Attorney General, Virtual Markets Integrity Initiative Report, Sept 18, 2018, https://ag.ny.gov/sites/default/files/vmii_report.pdf

Page updated 8/15/2019.