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July 13, 2017

Bitcoin: Currency of the future or money laundering vehicle?

Digital currency, or digital money, is defined as a means of payment or exchange that occurs in electronic form, with transactions recorded electronically. The traits of digital currency are similar to traditional currencies in that they can be used for payments on purchase or sale of physical goods and services, transferred across locations, and stored in wallets or accounts.

According to the Financial Crimes Enforcement Network (FinCEN), digital currencies are categorized into two broad categories – virtual currencies and cryptocurrencies.

Virtual currencies are defined as the digital representation of unregulated money that is neither issued by a central authority nor associated with „fiat currency‟ (currency established by government regulations) and which are used and accepted among members of specific groups. Examples of virtual currencies are loyalty points, Facebook credits, Amazon coins, and frequent flyer programs.

Cryptocurrencies, on the other hand, is a class of digital monies that use cryptography as a means to protect monetary interactions and monitor the generation of crypto-currency units. Some of the widely-used cryptocurrencies are Bitcoin, Ethereum, and Litecoin.

Bitcoin has now become the de facto standard for crypto-currencies. This can be seen from its exponential growth in the past five years, despite high volatility in price movements. According to Coinbase, a digital asset exchange company based out of San Francisco, California, Bitcoin went from a low of $10 at the beginning of 2013 to a whopping $2,753 in May 2017 (or 200x growth in five years).

Bitcoin is widely used as a means to move money around quickly and anonymously. With no central monitoring authority, this raises concerns about the legitimacy of both the source and the destination of the funds transferred. Is this crypto-currency being used as a front to cover money laundering activities, one could ask.

This article explores how criminals can exploit crypto-currencies (especially Bitcoin) as a new vehicle for money laundering or terrorist financing. It also offers insights on the impact of Bitcoin abuse on the current financial and economic environment, and how we can leverage existing anti-money laundering (AML) and know-your-customer (KYC) methodologies to detect and analyze money laundering patterns in Bitcoin transactions.