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, and long ago I compile a summary of points and references. I update it over the years, and 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.
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.
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. This is not 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. I usually leave it to others to discuss the 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.
Now, 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 and look to laws and regulations, and realize people may use words differently.
- Cryptocurrencies are one type of virtual currency (e.g., 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.
- 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.
- The use of virtual currencies as an "investment" or security 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.
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. 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. While we are disclaiming, let's mention that 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 references for a cleaner list of some of the above references, plus some YouTube links
- Cybercrime Investigations: A Comprehensive Resource for Everyone. Chapter 15 covers financial investigation, including money laundering 101, virtual currency 101, and more.
- 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
Financial Crimes Enforcement Network (FinCEN) (the U.S., our financial intelligence organization and AML regulatory organization)
- 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, 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 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, https://www.law.cornell.edu/uscode/text/18/1956
- 18 U.S. Code § 1957, Engaging in monetary transactions in property derived from specified unlawful activity, https://www.law.cornell.edu/uscode/text/18/1957
- 18 U.S. Code § 1960, Prohibition of unlicensed money transmitting businesses https://www.law.cornell.edu/uscode/text/18/1960
- New York State Penal Law Article 470, Money Laundering, https://codes.findlaw.com/ny/penal-law/pen-sect-470-00.html
- New York State Banking Law § 650, Unlicensed Money Transmitter, https://codes.findlaw.com/ny/banking-law/bnk-sect-650.html
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.
- NYS DFS Rule 200 at Cornell Law's site: https://www.law.cornell.edu/regulations/new-york/title-23/chapter-I/part-200
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.
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
U.S. Executive orders
- Fact Sheet on President Biden's Executive Order on Ensuring Responsible Development of Digital Assets, 3/9/2022, https://www.whitehouse.gov/briefing-room/statements-releases/2022/03/09/fact-sheet-president-biden-to-sign-executive-order-on-ensuring-responsible-innovation-in-digital-assets/
- Executive Order on Ensuring Responsible Development of Digital Assets, 3/9/2022, https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/
- Dan Olson, Line Goes Up - The Problem With NFTs https://youtu.be/YQ_xWvX1n9g
- More links at my landing page for my 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 4/25/2022.