Virtual Currency (including cryptocurrency, virtual assets, and "value that substitutes for currency")
by John Bandler
Virtual currency (and cryptocurrency) is a fascinating area with many implications for finance, cybercrime, cybersecurity, law and regulation, and consumer protection. I frequently write, speak, and teach about it. So long ago I compiled a summary of points and references and I update it periodically. This will get you started with your own research.
My experience through the Western Express case
My experience with virtual currency started in 2005 when I was a prosecutor investigating "routine" credit card fraud which turned into a massive investigation into cybercrime data trafficking and money laundering. This is known as the "Western Express case" named after an early virtual currency exchanger that facilitated illicit payments and money laundering (Western Express International, Inc.).
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 investigation as a thread case throughout the book, so you can read more about it there, and I have also written about it in other articles. It was an amazing opportunity to learn about virtual currencies in its early days, in a stellar prosecutor's office with a fantastic team.
My perspective and 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. (Then, later how some investors might get ripped off in cryptocurrencies). I am not trying to say that virtual currency is 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.
Today there is considerable excitement by some about "crypto", virtual assets, non-fungible tokens (NFT) and more. Many expound the benefits, many have made money on it, more will continue to do so. But not all.
Again, I focus on the risks, and I leave it to others to discuss the potential benefits of these virtual value mechanisms.
Focus on what is important but consider evolving terminology
First, focus on what is important -- the storage and transfer of value.
Then, think of some general categories regarding virtual currency and value.
Now, for some minutiae on terminology (feel free to skip to the next section), and let's consider that terminology may include:
- Currency, or fiat currency ("real" currency issued by a government)
- Value other than fiat currency
- Something of value
- Virtual currency (is not fiat currency)
- Digital currency (virtual currency + fiat currency? Depends who you ask)
- Virtual assets
- Digital assets (virtual assets + traditional assets? Depends who you ask)
- Cryptocurrency (a type of virtual asset)
- Non-fungible tokens (NFT)
- Whatever name given for whatever product
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 very real.
Terminology can be important, especially where laws and regulations are involved. Terminology and products have evolved over time from digital currency, virtual currency, cryptocurrency, virtual assets, and "value other than currency".
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"). When a private party issues something that seems like “currency” it cannot be a “real” currency but instead a “virtual currency".
Then some of these "virtual currencies" were being used like a security or other asset. And some attempt to define their product to try keep it outside of regulation and existing legal definitions.
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.
In March 2022 a presidential executive order emphasized the term "digital asset."
Of course, this space is evolving, different people and organizations use different words to describe the same things. 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.
My eleven important points on virtual currency
Here are a few important points on virtual currencies.
- 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.
- Since then, we have learned many lessons about how criminals will abuse virtual currency and other forms of value transfer.
- Terminology has evolved so look to laws and regulations for their definitions, and also realize people use words differently and attach different meanings to them.
- Cryptocurrencies are one type of virtual currency. Put another way, cryptocurrencies are a subset of virtual currencies.
- For AML purposes, look to the transfer of value, and focus less on idiosyncrasies in terminology, technology, and marketing language.
- All forms of value will be misused for criminal purposes. Virtual currency is no exception.
- Bitcoin was the first "cryptocurrency" virtual currency. It was created in about 2009, and many others have been created in its likeness. Bitcoin is decentralized, without a central administrator.
- Cryptocurrencies add new dimensions to virtual currency. It uses a decentralized ledger (bookkeeping) system, rather than keeping a centralized database. It uses blockchain technology.
- "Decentralized" cryptocurrencies like Bitcoin create AML, regulatory, and law enforcement challenges.
- Just because the "ledger" and record keeping is decentralized does not mean the cryptocurrency itself is truly decentralized in its administration. Does the cryptocurrency have owners and administrators? If so, it is not a decentralized cryptocurrency.
- The use of virtual currencies as an "investment" or "security" or "commodity" creates new issues and challenges.
- There will be highly sophisticated investors, including those who can create and move the markets, and many of them will make money even if the market tanks or crashes.
- There will be many unsophisticated investors. Criminals will establish Ponzi-type schemes. Even well-meaning currencies will go bust. Some people will lose money. There will be bad actors, bad actions, and mismanagement.
- See the FTX events of December 2022 as the latest and most high profile example.
Too much regulation or not enough?
Our "traditional" financial system is not perfect and never will be, but has evolved over hundreds of years, and has many legal and regulatory protections. These controls defend the safety and soundness of the system, protect consumers and investors, and identify, report on, and reduce illicit activity and money laundering.
The virtual currency and cryptocurrency space has exploded over recent years. There is already much regulation that applies to it, but it is still evolving and is not complete. Clearly, not everyone complies with all existing laws, so enforcement of existing laws is another area for debate. It is a volatile space and we will see many significant events in the future.
Many claim that lack of regulation is good, over regulation is bad, and that is what makes cryptocurrencies and virtual currencies good. Others take the opposite tack.
Given the current investment value in virtual currencies, a correction (or bust) is inevitable, along with new information about distressing use of them. That will be interesting to see but painful for some to experience.
Of course, this is not legal or consulting advice, nor is it tailored to your circumstances, and this area is evolving rapidly. Let's disclaim some more to say this is not investment advice either. Some of this is simply my opinion, and I have been wrong before (I never would have predicted this cryptocurrency boom).
My articles and books
- Virtual currency presentation has an extensive list of references (including the below) and some fun YouTube links
- Cryptocurrency past is prologue: before and after FTX, John Bandler, Reuters Legal News, January 17, 2023, on Reuters at https://www.reuters.com/legal/transactional/cryptocurrency-past-is-prologue-before-after-ftx-2023-01-17/, and hosted here with permission
- John Bandler, Money Laundering Investigations, within Encyclopedia of Security and Emergency Management, 2018, Shapiro L., Maras MH. (eds), 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, no longer available at the ABA website, but available here.
- 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
- Cybercrime Investigations: A Comprehensive Resource for Everyone. Chapter 15 covers financial investigation, including money laundering 101, virtual currency 101, and more.
- I moved my voluminous and extensive research links to Virtual currency presentation
As above, this is not legal, consulting, or investment 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, copyright John Bandler all rights reserved.
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 1/18/2023.