US Treasury Undersecretary for Terrorism Discusses Banks, Bitcoin, AML & Sanctions

By Christine Duhaime | March 18th, 2014

US Treasury Undersecretary for Terrorism on Bitcoin, Banks, AML and Regulation

The US Treasury Undersecretary for Terrorism and Financial Intelligence, David S. Cohen, discussed the risks of digital currencies and Bitcoin in a Bloomberg talk in New York City today.

Mr. Cohen said the regulation of Bitcoin coming down the pipe may require financial transparency which he said will involve the identification of Bitcoin customers (in an anti-money laundering sense).

“Financial Scarlet Letter”

He also said that if push comes to shove and it is not possible to balance transparency in the financial system and digital currencies, the US government will choose financial transparency over virtual currency to protect the global financial system.

And, he said, financial institutions that do not comply with their legal obligations [in respect of Bitcoin transactions and AML compliance], will be saddled with a financial scarlet letter.

Executive Summary

Our Executive Summary of Mr. Cohen’s presentation is as follows:

  • FATF is coming out with a paper on digital currencies and Bitcoin with common definitions for international use, led by the US Treasury.
  • Digital currency differs from cash mainly because of the consumer protection risks associated with it, whether as a securities, commodity, or financial service.
  • The long-term viability of digital currencies depends upon whether the financial crime risks associated with it can be controlled.
  • The chief concerns in respect of digital currencies and illicit finance include terrorist financing, drug trafficking, sanctions avoidance, money laundering and these concerns are not theoretical, as evidenced by the Liberty Reserve and Silk Road prosecutions.
  • The anonymity of digital currency transactions makes it somewhat difficult for financial institutions to comply with anti-money laundering laws.
  • Not enough attention has been given to terrorist financing and proliferation of WMD potential risks with digital currencies. Digital currencies are appealing to terrorists except that its instability is currently a deterrent for them.
  • With respect to sanctions, they only work if law enforcement can detect efforts to avoid them and sanctions will have a weaker bite if digital currencies are permitted to continue in anonymous form.
  • Currently, there is no widespread use of digital currencies for terrorist financing.
  • Besides the US Treasury, the SEC, CFTF, IRS, and CFPB are assessing digital currencies.
  • US Treasury wants to foster the viability of digital currencies as a core goal to allow financial innovation to flourish in order to serve the unbanked and underserviced populations, however transparency is paramount.
  • Transparency of digital transactions will mean basic controls – client identification, client transaction monitoring, record-keeping, reporting to FIUs, risk assessments – in other words, AML law.
  • Any financial institution can be exploited for money laundering from digital currencies and therefore, all of them must have in place controls to mitigate threats. Those that are disregarding their [AML] obligations, “will be saddled with a financial scarlet letter.”
  • US Treasury is aware of the opposition to the regulation of Bitcoin and regardless, there will be scalable regulation to bring in transparency.
  • The regulations currently in place in the U.S. apply at the two crucial points in digital currency transactions – entry and exit of users in respect of digital currencies (e.g., when you buy and when you sell). The federal view is that this is currently sufficient to detect and deter financial crimes. However, if digital currencies achieve greater adoption or if normal financial life can be conducted for long stretches fully within the digital currency regime, the US government will increase regulation.
  • US government intends to go after digital currencies not registered as money transmitters, financial institution not in AML compliance, entities violating sanctions law in respect of digital currencies, and the use of digital currencies for illicit purposes.
  • With respect to Bitcoin, Blockchain records are immaterial – for financial crime, it is not the transactions of Bitcoin that are material – it is the transactors (e.g., the identity of the persons).

The full presentation is here.

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