Applying Money Laundering Rules to Online Currencies

April 8, 2013

dollar computerThe United States Treasury Department recently announced that the rules directed against money laundering apply to the online currencies, commonly referred to as “virtual currencies,” used for payments on the Internet.  Application of federal money laundering controls to virtual currencies places a wide range of non-traditional parties within the scope of the money laundering regulations.

In an effort to limit money laundering, the Treasury Department places a set of requirements on payment processing organizations.  Those requirements include accounting and reporting obligations.  The obligations generally apply to financial transactions valued in excess of $10,000.

Virtual currencies are not backed or controlled by any government.  They are privately created units of value which enable anonymous online purchases and other digital financial transactions.  Digital currency consists of automatically generated numerical sequences that are recognized and exchanged by agreement among the participating parties.

Perhaps the most widely recognized and used system of virtual currency is the one provided by Bitcoin.  Bitcoin currency is accepted by many online providers of goods and services around the world, and its popularity continues to grow.

Another increasingly widely used form of virtual currency consists of value tokens provided by online merchants.  Online enterprises, Amazon for example, now routinely issue digital tokens to their customers.  Those tokens can be redeemed for purchase of goods and service provided by the issuing merchants.

Application of money laundering rules to virtual currencies means that providers of digital currency, such as Bitcoin, are obligated to comply with the accounting and transactions reporting requirements imposed by the Treasury Department.  Additionally, it is likely that individuals and organizations that convert virtual currency into traditional currency, and the parties who engage in such conversion transactions on behalf of others, will be required to comply with the accounting and reporting obligations.

If the value tokens issued by merchants are considered to be digital currency transactions, then those merchants may be required to comply with the requirements, as well.  By placing virtual currency within the scope of money laundering regulations, the Treasury Department has extended the reach of the accounting and reporting requirements to a wide range of new parties.

Virtual currency is currently used for a variety of legitimate and illegitimate online transactions.  The popularity of digital cash appears to be growing rapidly.  Much of that growth is fueled simply by the dramatic expansion of online transactions.

Some of the recent growth in the popularity of virtual currency is caused by global economic factors.  For example, substantial concern about the stability and terms of service in banking systems in Cyprus and other nations is leading financial service consumers to consider use of non-traditional financial organizations and systems, such as virtual currency.

Application of financial transactions rules, such as those designed to control money laundering, may be justified by current circumstances.  The methods used to structure and enforce those rules in the digital marketplace should, however, be crafted and monitored with significant care in order to avoid unreasonably impeding the growth of digital commerce.