Virtual Currencies: Key Definitions and Potential AML/CFT Risks

Virtual Currencies - Key Definitions and Potential AML/CFT Risks

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In a short period of time, virtual currencies, such as Bitcoin, have developed into a powerful payment method with ever growing global acceptance. Virtual currencies offer an innovative, cheap and flexible method of payment. At the same time, the unique and often unfamiliar business model of virtual currencies poses a challenge to regulators around the world who are unsure how to deal with this payment method.  The policy responses vary considerably, with some countries embracing this new technology and others severely or totally limiting its legitimate use.

The FATF conducted research into the characteristics of virtual currencies to make a preliminary assessment of the ML/TF risk associated with this payment method.  An important step in assessing the risks and developing an appropriate response, is to have a clear understanding of the various types of virtual currencies and how they are controlled and used. This report establishes a conceptual framework of key definitions, which could form the basis for further policy development.

The legitimate use of virtual currencies offers many benefits such as increased payment efficiency and lower transaction costs.  Virtual currencies facilitate international payments and have the potential to provide payment services to populations that do not have access or limited access to regular banking services.

However, other characteristics of virtual currencies, coupled with their global reach, present potential AML/CFT risks, such as:

  • the anonymity provided by the trade in virtual currencies on the internet
  • the limited identification and verification of participants
  • the lack of clarity regarding the responsibility for AML/CFT compliance, supervision and enforcement for these transactions that are segmented across several countries
  • the lack of a central oversight body

The report provides law enforcement examples a number of examples of money laundering offences involving virtual currencies to demonstrate how this payment method has already been abused for money laundering purposes.