Virtual Currency (including cryptocurrency, virtual assets, and “value that substitutes for currency”)
Virtual currency is a fascinating area, especially as it pertains to cybercrime, money laundering, anti-money laundering (AML), law enforcement, consumer protection, and regulation. It is something I have written, spoken, and frequently teach about, so I decided to compile a summary of points and references. This will get you started with your own research, and be a guide for my next talk.
My experience with virtual currency started in 2005, when I started investigating massive cybercrime data trafficking and money laundering (the “Western Express case”). During that investigation, I reviewed hundreds of thousands of virtual currency transactions, related communications, and the global flow of funds (you can read more about this in my second book, Cybercrime Investigations).
First, remember that virtual currency is privately created and is not a “real” currency. It is not an official currency like “fiat currency” issued by a government (e.g. U.S. Dollars or Euros). Nevertheless, the value that virtual currency can store and transfer is real.
Terminology can be important, especially where laws and regulations are involved. With the first regulations, the term “virtual currency” became appropriate, and was used by the Financial Crimes Enforcement Network (FinCEN), New York State Department of Financial Services, and Financial Action Task Force (FATF). The term made sense when you consider that “currency” is defined as the official currency of a government (“fiat currency”), thus if a private party issues something that seems like “currency” it cannot be a “real” currency but instead a “virtual currency”. Terminology has continued to evolve. Some of these “virtual currencies” were being used like a security or other asset, and perhaps some issuers wanted to escape a regulation that targeted “virtual currency”. In June 2019, FATF started migrating to the term “virtual asset,” which makes sense if you consider that the lines between a currency, commodity, investment, and property are blurred with some of these virtual products. Also at that time, FinCEN made use of the phrase “value that substitutes for currency” which points us to the heart of the issue and what needs to be focused on for AML purposes (value). Of course, this space is evolving, different people and organizations use different words to describe the same things, and for a variety of reasons. The definitions to be watched most closely are those in the laws and regulations that apply to you or your organization.
“Cryptocurrencies” such as Bitcoin are one type of virtual currency. Cryptocurrencies are unique in certain ways and present new issues. But because they have many characteristics in common with other virtual currencies, there is much to learn from history there. Since cryptocurrencies are a subset of the broader category of virtual currencies, from an AML and regulatory perspective, it makes more sense to focus on the broader categories, and the transfer of value.
As you will see from some of my articles and my new book on Cybercrime Investigations, I had an amazing opportunity to learn about virtual currencies in its early days, in a stellar prosecutor’s office with a fantastic team. I have an opinion and perspective, and my focus is typically the risks and threats, how criminals and money launderers abuse virtual currency and cryptocurrency, and how cybercriminals use virtual currency in connection with their activities. Of course, virtual currency is not per se bad. And we should recognize that all forms of value and value transfer (cash, banks, etc.) are exploited by criminals, used to facilitate criminal activity, for money laundering, and for investor fraud. That said, I usually leave it to others to expound on the benefits of virtual currencies.
Here are a few important points on virtual currencies.
- The first virtual currency that was adopted for widespread use was Egold, invented in 1996. Webmoney was created in 1998. Thus, virtual currency is not as new as many think.
- Since then, we have learned many lessons about how criminals will abuse virtual currency and other forms of value transfer.
- Terminology may vary depending on person, organization, law, and regulation.
- Cryptocurrencies are one type of virtual currency (a subset).
- For AML purposes, look to the transfer of value, and focus less on idiosyncrasies in terminology and technology.
- All forms of value will be misused for criminal purposes. Virtual currency is no exception.
- Bitcoin was the first “cryptocurrency” virtual currency, and many others have been created in its likeness. It is decentralized, without a central administrator.
- Cryptocurrencies add new dimensions to virtual currency. It uses a decentralized ledger (bookkeeping) system, rather than keeping a centralized database. It uses blockchain technology.
- “Decentralized” cryptocurrencies like Bitcoin create AML, regulatory, and law enforcement challenges. But not every “cryptocurrency” is truly and fully decentralized in its administration.
- The use of virtual currencies as an “investment” creates a new challenge. There will be highly sophisticated investors, including those who can create and move the markets. There will also be unsophisticated investors. Criminals will establish Ponzi-type schemes. Well meaning currencies will go bust. Some people will lose money, some will make money.
Of course, this is not legal or consulting advice, nor is it tailored to your circumstances, and this area is evolving rapidly.
This article is also available at my website (is probably kept more up to date there), and has many references for your further research, so please go to: https://johnbandler.com/virtual-currency-virtual-assets-cryptocurrency/.
Originally posted February 2019, updated 03/03/2021.