Money Laundering and Virtual Cryptocurrencies by Sam Thomas

On 12th October 2017, Bitcoin, a decentralised virtual cryptocurrency, soared above $5,000 to reach a record high. This came only a month after Jamie Dimon, the Chairman and CEO of JP Morgan Chase described the currency as a fraud that would blow up, and was only useful ‘if you were a drug dealer’.

The increase in price continued, at one point reaching $15,000 before “collapsing” to $10,930 on 1/3/18 – still double the value it had reached on 12th October 2017.

Despite warnings cryptocurrencies are growing in acceptance. In September 2017, a London property developer, The Collective, said it would allow its tenants to pay deposits in Bitcoin and would soon accept rent payments in cryptocurrency. The very next day, entrepreneur Baroness Michelle Mone OBE indicated that properties within development Aston Plaza, Dubai, could be purchased using Bitcoin.

So are Bitcoins for the criminal class, or are they the payment method of the future?

There is little doubt that cryptocurrencies avoid many anti-money laundering (AML) provisions in relation to identity. Decentralised systems are particularly vulnerable to anonymity risks. 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 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.

Identities can be further obscured through a ‘mixer’ or ‘tumbler’. Mixers send transactions through a complex, semi-random series of dummy transactions that make it difficult to link specific virtual coins (addresses) with a particular transaction. Bitcoin users have anonymity which is impossible with traditional currencies.

Virtual currencies also exist online over multiple jurisdictions, leaving the responsibility for AML compliance and supervision as unclear, with the strength of AML provisions varying across borders. In the UK, a Bitcoin exchange is not required to follow AML or ‘know your customer’ regulations. Within this jurisdiction Bitcoin is treated more like a commodity than a currency. If you tried to exchange Bitcoin for sterling you would not be charged VAT on the value of the Bitcoin but would be charged on the commission for exchange.

However, greater regulation is coming. In April 2017, Japan introduced legislation to protect users by making Bitcoin exchanges comply with AML regulations, while simultaneously authorising it officially as a normal payment method. Bitcoin exchanges are the easiest target for law enforcement agencies. Preventing criminal property from being converted into Bitcoin is far easier than distinguishing between legitimate and criminal currency once it has become virtual. It is probable that the enormous publicity given during the huge spike in “value” and the obvious potential for misuse of the cryptocurrency by criminal elements will lead to action by UK regulators in the near future.


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Barrister Sam Thomas