Virtual Currency (including cryptocurrency, virtual assets, and "value that substitutes for currency") by John Bandler

Virtual currency is a fascinating area, especially as it pertains to cybercrime, money laundering, anti-money laundering (AML), law enforcement, consumer protection, and regulation. It is something I have written, spoken, and frequently teach about, so I decided to compile a summary of points and references that I can point students to. This will get you started with your own research.

My experience with virtual currency started in 2005 when I was a prosecutor investigating some "routine" credit card fraud which turned into a massive investigation into cybercrime data trafficking and money laundering (the "Western Express case"). During that investigation, I reviewed hundreds of thousands of virtual currency transactions, related communications, and the global flow of funds. In my second book, Cybercrime Investigations, we use this as a thread case throughout the book, so you can read more about it there.

First, remember that virtual currency is privately created and is not a "real" currency. It is not an official currency like “fiat currency” issued by a government (e.g. U.S. Dollars or Euros). Nevertheless, the value that virtual currency can store and transfer is real.

Terminology can be important, especially where laws and regulations are involved. With the initial regulations, the term “virtual currency” became appropriate, and was used by the Financial Crimes Enforcement Network (FinCEN), New York State Department of Financial Services, and Financial Action Task Force (FATF). The term made sense when you consider that “currency” is defined as the official currency of a government ("fiat currency"), thus if a private party issues something that seems like “currency” it cannot be a “real” currency but instead a “virtual currency". Terminology has continued to evolve. Some of these "virtual currencies" were being used like a security or other asset. And certainly there are some who attempt to define their product so that it falls outside of regulation. In June 2019, FATF started migrating to the term “virtual asset,” which makes sense if you consider that the lines between a currency, commodity, investment, and property are blurred with some of these virtual products. Also at that time, FinCEN made use of the phrase “value that substitutes for currency” which points us to the heart of the issue and what needs to be focused on for AML purposes (value). Of course, this space is evolving, different people and organizations use different words to describe the same things, and for a variety of reasons. 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. Cryptocurrencies are unique in certain ways and present new issues. But because they have many characteristics in common with other virtual currencies, there is much to learn from history there. Since cryptocurrencies are a subset of the broader category of virtual currencies, from an AML and regulatory perspective, it makes more sense to focus on the broader categories, and the transfer of value. Given the excitement around cryptocurrencies, they present new challenges for investor and consumer protection.

As you will see from some of my articles and my new book on Cybercrime Investigations, I had an amazing opportunity to learn about virtual currencies in its early days, in a stellar prosecutor's office with a fantastic team. I have an opinion and perspective, and my focus is typically the risks and threats, how criminals and money launderers abuse virtual currency and cryptocurrency, and how cybercriminals use virtual currency in connection with their activities.  Of course, virtual currency is not per se bad. And we should recognize that all forms of value and value transfer (cash, banks, etc.) are exploited by criminals, used to facilitate criminal activity and for money laundering. With today's excitement around "crypto", no doubt many investors will get burned, though some will do well, and many service providers will do well. Thus, I usually leave it to others to expound on the benefits of virtual currencies and assets.

Here are a few important points on virtual currencies.

  1. The first virtual currency that was adopted for widespread use was Egold, invented in 1996. Webmoney was created in 1998. Thus, virtual currency is not as new as many think.
  2. Since then, we have learned many lessons about how criminals will abuse virtual currency and other forms of value transfer.
  3. Terminology has evolved and look to laws and regulations, and realize people may use words differently.
  4. Cryptocurrencies are one type of virtual currency (a subset).
  5. For AML purposes, look to the transfer of value, and focus less on idiosyncrasies in terminology and technology.
  6. All forms of value will be misused for criminal purposes. Virtual currency is no exception.
  7. Bitcoin was the first "cryptocurrency" virtual currency (created in about 2009) and many others have been created in its likeness. It is decentralized, without a central administrator.
  8. Cryptocurrencies add new dimensions to virtual currency. It uses a decentralized ledger (bookkeeping) system, rather than keeping a centralized database. It uses blockchain technology.
  9. "Decentralized" cryptocurrencies like Bitcoin create AML, regulatory, and law enforcement challenges. But not every "cryptocurrency" is truly and fully decentralized in its administration.
  10. 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. There will also be unsophisticated investors. Criminals will establish Ponzi-type schemes. Well meaning currencies will go bust. Some people will lose money, some will make money.

Of course, this is not legal or consulting advice, nor is it tailored to your circumstances, and this area is evolving rapidly.

RESOURCES

My new book: Cybercrime Investigations: A Comprehensive Resource for Everyone. Chapter 15 covers financial investigation, including money laundering 101, virtual currency 101, and more.

 

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

An earlier version of this article, posted on Medium: John Bandler, Virtual Currency (including cryptocurrency), Feb 2019, Medium, https://medium.com/@johnbandler/virtual-currency-including-cryptocurrency-252d1173bf25 (largely duplicative of the above article)

 

Financial Crimes Enforcement Network (FinCEN) (the U.S., our financial intelligence organization and AML regulatory organization)

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

FinCEN Advisory, October 1, 2020, FIN-2020-A006, Advisory on Ransomware and the Use of the Financial System to Facilitate Ransom Payments, https://www.fincen.gov/sites/default/files/advisory/2020-10-01/Advisory%20Ransomware%20FINAL%20508.pdf


Office of Foreign Assets Control (OFAC)

OCAC, Advisory on Potential Sanctions Risks for Facilitating Ransomware Payments1, October 1, 2020,  https://home.treasury.gov/system/files/126/ofac_ransomware_advisory_10012020_1.pdf

Financial Action Task Force (FATF) (an international organization devoted to fighting financial crime and money laundering)

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 relevant to money transmitting and money laundering

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

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

New York State Penal Law Article 470, Money Laundering

New York State Banking Law § 650, Unlicensed Money Transmitter

 

United States Department of Justice (DOJ)

Cryptocurrency Enforcement Framework, Report of The Attorney General’s Cyber Digital Task Force, Department of Justice, (October 2020) https://www.justice.gov/cryptoreport

 

NYS Department of Financial Services (NYS DFS) (New York's financial regulator)

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

On 6/24/2020 there was some interesting news about partnership with the State University of New York (SUNY) and potential conditional licensing, so I have updated the links below.

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

https://www.dfs.ny.gov/docs/legal/regulations/adoptions/dfsp200t.pdf  (The regulation)

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

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

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

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

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

https://www.dfs.ny.gov/reports_and_publications/press_releases/pr202006241

https://www.dfs.ny.gov/system/files/documents/2020/06/mou_dfs_suny_20200618.pdf

 

New York State Attorney General (NYS AG or NYAG)

Virtual Markets Integrity Initiative Report, Sept 18, 2018, https://ag.ny.gov/sites/default/files/vmii_report.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

 

Again, this is not legal or consulting advice, nor is it tailored to your circumstances, and this area is evolving rapidly.

This article is hosted at https://johnbandler.com/virtual-currency-virtual-assets-cryptocurrency

A version of article, though without references and not kept as updated, is also available on Medium at https://johnbandler.medium.com/virtual-currency-including-cryptocurrency-252d1173bf25

Originally posted February 2019, updated 05/19/2021.