Financial Action Task Force releases report on digital financial transactions to establish uniformity for future anti-money laundering law

The Financial Action Task Force (“FATF“) released its anticipated report (the “Report“) on digital finance platforms and digital currency transactions, including Bitcoin. The Report is the first step towards the global regulation of Bitcoin and other digital finance platforms and digital currencies with the goal of providing uniformity in law of certain key terms for FATF member countries to adopt.

The Report was issued in conjunction with several other reports at the conclusion of a two-day FATF plenary session.

The Report summarizes digital currencies as: (a) the wave of the future for payment systems; and (2) a powerful tool for criminals, terrorist financiers and sanctions evaders to move and store illicit funds.

The Report describes and compares virtual currencies generally and is a shorter version of a similar comprehensive report issued by the European Commission 18 months ago.

Defines Virtual Currency and other terms

The main purpose of the Report is to provide definitions of, inter alia, digital currencies and virtual currencies for anti-money laundering purposes.

The FATF proposes countries adopt the following definition of virtual currency:

A “Virtual Currency” is a digital representation of:

  1. A medium of exchange;
  2. A unit of account: or
  3. A store of value without legal tender status in any country

that is not issued by any country and fulfills the functions in 1 – 3, above, by virtue only of agreement among its users.

The FATF proposes the following definition of digital currency:

A “Digital Currency” is a digital representation of a Virtual Currency.

The Report defines several other terms such as miners, users, administrators, wallet, cold storage, hot storage, dark web and exchangers.

Groups Bitcoin with Liberty Reserve

The Report groups Bitcoin in a similar category as Liberty Reserve, e-Gold and SecondLife Linden Dollars. However, there are material differences.

Liberty Reserve  was: (a) a centralized digital currency; (b) created and controlled by private enterprise; and (c) lacking transactional transparency on a public ledger. Bitcoin has none of these characteristics.

Linden Dollars and Liberty Reserve Dollars are not uniformly and globally merchantable by which I mean that they are not accepted by merchants to purchase goods and services, like a Visa card and Bitcoin are anywhere in the world. Linden Dollars and Liberty Reserve Dollars have or had, value only within their economic ecosystems and not outside of it with respect to third party merchants.

Identified legitimate uses of Digital Currencies

The Report provides some legitimate uses for digital currencies and twice as many financial crime concerns. According to the FATF, the legitimate uses include:

  1. Ability to improve payment efficiency;
  2. Reduction of transaction costs;
  3. Facilitation of micro payments;
  4. Facilitation of remittances to the underbanked and unbanked populations; and
  5. May be held for investment.

Identified concerns with Digital Currencies

The FATF lists the potential concerns with respect to digital currencies as follows:

  1. Money laundering risks;
  2. Terrorist financing risks;
  3. Anonymity in payment systems;
  4. No central oversight;
  5. No anti-money laundering systems to detect transactions of concern;
  6. No ability for law enforcement to “enforce” at one location or over one system for asset seizures, for example;
  7. Global reach that increases risks;
  8. Segmentation of transactions worldwide that obfuscate responsibility for financial crime compliance;
  9. Customer transaction records that are unaccessible to law enforcement;
  10. Ability of digital currency businesses to relocate to countries with lax anti-money laundering controls; and
  11. Operations that are outside the reach of any country.

There are many more legitimate uses for digital finance platforms and many more legal concerns with them.

With respect to the latter, the most obvious of concern to the FATF are its use as a preferred method to receive bribes in places like China, tax evasion and preservation of beneficial ownership albeit in a new form.  With respect to the benefits of digital finance platforms, using a financial innovation such as the Bitcoin protocol could have eliminated the €4 billion carbon credit trading fraud in the European Union. And the blockchain could be programmed and used to detect suspicious transactions and transactions that are the subject of economic sanctions more efficiently, more rapidly and with more precision than anything we currently use for financial crime compliance in the banking sector.

Uniformity in law

The idea behind the creation of the Report was so that countries would adopt the same definitions in respect of digital financial products so that national legislation from countries on anti-money laundering and counter terrorist financing coming down the pipe globally in the next six months, will be uniform and capable of uniform application, such as for extradition.

The next step for the FATF is to determine if it wishes to draft amendments to the 2012 Recommendations to include digital finance platforms and if it does, member countries, to the extent they have not already done so, will have to take steps to bring their national anti-money laundering laws in alignment with the revised FATF Recommendations on digital currencies.

The contributors to the Report were US, Canada, UK and Australia.

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