What is the Threat of Money Laundering Associated with Bitcoin?


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Bitcoin has become increasingly popular as an alternative form of currency over the last several years. The digital currency offers interesting new options for secure and private transactions, for earning money through “Bitcoin mining,” and, unfortunately, for money laundering. What is the threat of Bitcoin and money laundering and what is being done to stop it?

In the United States, businesses that transmit money, such as PayPal, Western Union, and MoneyGram, must comply with the regulations adopted by the U.S. Treasury Department. The Treasury Department's Financial Crimes Enforcement Network (FinCEN) and anti money-laundering unit are concerned that Bitcoin is operating outside of these regulations, even though it is effectively carrying on the same type of business, just using Bitcoins instead of a nationally recognized fiat currency.

For over a decade, the Treasury Department has required money transmitters to register with FinCEN, enact controls to prevent money laundering, report suspicious financial activity, and obtain state licenses. These measures are mandated by the Bank Secrecy Act, a federal law that serves as the main anti-money laundering statute. There are also a number of other federal laws that ban unlicensed money transmitters.

However, proponents of Bitcoin have argued that it should remain unregulated and that it is not subject to these legal requirements because it is not government currency (also known as “fiat currency”), but more like a bartering tool. As a result, some Bitcoin businesses have rejected FinCEN's demands that they register as money transmitters, though others have complied.

The problem, of course, is that one can convert anything of value, including fiat currency, into Bitcoins simply by bartering or buying them. As a result, one could easily sell illegal services or products strictly for Bitcoins, or purchase large amounts of the digital currency with regular fiat currency, then transmit the digital currency offshore and either exchange it for more illegal products and services or convert it to another nation's fiat currency and deposit it into a bank. Through this process, one either avoids handling actual currency or simply converts it to fiat currency out of the country where the transaction will not be noted by the government and the associated criminal activity is less likely to be detected.

As a result, FinCEN has been sending letters to businesses that use or transmit Bitcoins and that would appear to fall under the money transmitter definition. The letters demand that the businesses come into compliance with the registration and reporting requirements of federal law or face harsh administrative penalties and possible criminal sanctions. As a result, a number of businesses have opted to either come into compliance or shutter their businesses rather than lose the privacy and security that Bitcoin would otherwise afford. However, some see this as an improper extension of current laws and an extra-judicial means of shutting down otherwise legitimate businesses. Litigation is likely imminent and will undoubtedly shape the nature of this legal debate forever.

In the meantime, if you are engaged in a Bitcoin business, you may wish to seek the assistance of a local attorney experienced in banking regulation laws. Unless you are interested in being one of the test cases to challenge the Treasury Department's authority over treating Bitcoin merchants as money transmitters, your best option, if faced with a government demand letter, is probably to come into compliance. But, that is a question for your attorney and will depend largely on the nature of your particular Bitcoin related business.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.

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