Financial Action Task Force Issues Bitcoin Guidelines, Warns about Money Laundering

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The independent intergovernmental organization FATF or The Financial Action Task Force (on Money Laundering), headquartered in Paris, has published a report as a guide for using digital currencies titled “Guidance for a Risk-Based Approach to Virtual Currencies.” It includes benefits of digital currencies as well as potential risks of money laundering and terror financing.

The report is essentially the conclusion to the recent meeting held at Brisbane that was participated by 34 member nations and two regional organizations – the European Union and the Gulf Co-operation Council — to discuss policies, regulations and compliance for digital currencies.

The 48-page extended report issued by the FATF described bitcoin payment services and products as potential tools for money laundering, and announced that digital currency service providers and companies must identify and notice potential risks of using the currency.

FATF heavily emphasized the importance of its member nations to understand the technicalities and the technology behind digital currencies such as bitcoin, and encouraged its nations to introduce regulations and restrictions for digital currency exchanges that are similar to that of traditional financial establishments, thus requesting all digital exchanges to register and subject to the same regulations of other financial institutions and money transfer businesses.

The FATF’s “guidelines” of bitcoin are predicted to have the same effect as BitLicense had on New York-based bitcoin startups – this time on a global scale.

Despite the report’s persistent connection of bitcoin to money laundering and terrorist financing cases, the report does point out positive usages and applications of the technology behind digital currencies. The FATF respects the attention of venture capital firms and billionaire angel investors who have invested hundreds of millions of dollars in digital currency startups.

“Virtual currency has the potential to improve payment efficiency and reduce transaction costs for payments and fund transfers,” the report said. “For example, Bitcoin functions as a global currency that can avoid exchange fees, is currently processed with lower fees/charges than traditional credit and debit cards, and may potentially provide benefit to existing online payment systems, like PayPal.”

FATF also explained that digital currencies are one of the only financial instruments that enables the transfer of microtransactions, which optimizes financial processes of small online businesses and individuals with low-cost goods and services.

Moreover, the advantages of digital currencies for both the unbanked and banked contributed to a significant part of the report, as digital currencies offer extremely low transaction fees, which is very benefitable for those without bank accounts or those using expensive remittance services and bank transfers.

However, FATF finalized the report with a concern that decentralized systems like digital currencies are vulnerable to anonymity risks.

“For example, by design, Bitcoin addresses, which function as accounts, have no names or other customer identification attached, and the system has no central server or service provider,” the report said. “The Bitcoin protocol does not require or provide identification and verification of participants or generate historical records of transactions that are necessarily associated with real world identity. There is no central oversight body, and no AML software currently available to monitor and identify suspicious transaction patterns. Law enforcement cannot target one central location or entity (administrator) for investigative or asset seizure purposes (although authorities can target individual exchangers for client information that the exchanger may collect). It thus offers a level of potential anonymity impossible with traditional credit and debit cards or older online payment systems, such as PayPal.”

 

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