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Digital currency firms struggle with anti-money laundering regulations

May 14th, 2015 - Posted by Debbi Lyle Essey in Anti-Money Laundering

Currently currency laundering applications can be used online to render both the transaction and the owner anonymous. This is prominent in illegal transactions on the 'Dark Net' for supplying weapons, drugs and counterfeit goods. In a recent blog we looked at how the government unveiled plans to support the legitimate use and growth of digital currencies in the UK.  The government has said that it will work with leading organisations in the digital currency industry, as well as organisations like the British Standards Institution (BSI), to develop voluntary standards that will protect consumers and allow legitimate use of digital currencies to prosper.

In a rather timely coincidence, soon after these anti-money laundering regulations were proposed, Paypal was issued with a £5M fine from the US Treasury Department for allowing payments that were linked to weapons of mass destruction. Paypal commented that they had failed to prevent the 136 illegal transactions because their screening process was not working properly which resulted in Paypal not complying with the Treasury's Foreign Assets Control regulation. Until this incident the Office of Foreign Assets Control had been focused on financial institutions, but this settlement indicated a broader focus on the payment industry, with any organisation failing to comply with regulations being exposed to severe penalties and criminal liabilities.

In another recent instance, Ripple Labs, the developer of Ripple payment protocol and exchange network, was fined $700,000.00 for not having an anti-money laundering program.

The United States Treasury Department's Financial Crimes Enforcement Network (FinCEN) reported that Ripple Labs had willfully violated several requirements of the Bank Secrecy Act (BSA) by acting as a money services business (MSB) and selling its virtual currency, known as XRP, without registering with FinCEN, and by failing to implement and maintain an adequate anti-money laundering (AML) program designed to protect its products from use by money launderers or terrorist financiers. In 2013, Ripple had made $1.3 million through sales of XRP and this had exposed their business to the potential for online illegal activity. One customer in particular refused to complete a 'know your customer' form after they processed a $250,000 transaction.

"Virtual currency exchangers must bring products to market that comply with our anti-money laundering laws," said FinCEN Director Jennifer Shasky Calvery. "Innovation is laudable but only as long as it does not unreasonably expose our financial system to tech-smart criminals eager to abuse the latest and most complex products".

Just last week on 9 May, New York state's top financial regulator granted the first license to a Bitcoin exchange, allowing it to open legally to customers across the country. The exchange, itBit, said that it was beginning to take on U.S. customers immediately after receiving a banking trust charter from New York State's Department of Financial Services. This is good news for businesses using digital currencies. George Osborne will need to move swiftly on the new package of regulation proposed for digital currency use in this years' budget if the UK is to take advantage of these customers. The price of Bitcoin has increased recently with commentators speculating that the recent Rise In Price Marks The End Of The Bitcoin Value Stagnation. Over the last year, interest in its technology has been growing among large financial and technological companies and recently Goldman Sachs became the first bank to make a significant investment in a Bitcoin company when it helped lead a $50 million funding round for the Bitcoin payment company Circle. If George Osborne can push the promised plans to support the legitimate use and growth of digital currencies, the UK could become an attractive location for businesses using digital currencies.

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