Addressing the Risk of Cryptocurrencies

19 January 20159.35 – 10.50

PresentersDavid Cafferty

Head of Compliance Advisory ServicesKane LPI Solutions

Brian J. Stoeckert, JD, CAMS, CFE Managing Director

CoinComply

What’s on Tap for this Session?

• Understanding virtual currencies and tackling challenges such as customer anonymity

• Interpreting the FATF’s recommendations regarding virtual currencies

• Applying lessons learned from recent enforcement actions on alternative currency exchanges

Understanding Virtual Currencies

Virtual & Crypto Currencies

• Do you know what virtual currencies are?

• Are they something that you should be considering?

• When it comes to virtual currencies “are you in or out”?

• Are you aware of the risks / benefits of virtual currencies?

Virtual & Crypto Currencies• Financial Action Task Force (FATF): Virtual currency is

a digital representation of value that can be digitally traded and functions as medium of exchange, and / or a unit of account, and / or a store of value but does not have legal tender status in any jurisdiction.(FATF Report: Virtual Currencies: Key Definitions and Potential AML / CFT Risks (June 2014))

• It is however regulated in some countries and under consideration by many others.

• Other definitions of virtual currencies exist including – digital currencies and peer-to-peer payment systems

Virtual & Crypto Currencies• Virtual currencies can be “convertible / open”, which means

that they have an equivalent value in real money and as a result they can be changed for real money, or

• Virtual currencies can be non-convertible or closed, which are specific to online activity and cannot be converted to real money

• Virtual currencies can also be centralised with a single, administrative authority or de-centralised, which are open-source, peer-to-peer virtual currencies with no central administration authorities

• Decentralised virtual currencies are frequently know as “crypto currencies” and as such are maths-based currencies that are protected by cryptography

• The best known, and most commonly used decentralised virtual currency is “Bitcoin”

Virtual Currency Types

Centralized• Single Admin• Central

Repository• “Closed”

Decentralized• No Single Admin• No Central

Repository• “Open”

Different Forms of Virtual Currency

Decentralized Exchange

$-BTC: Transmission & Exchange

BTC Only - Transmission: Peer-to-Peer

$-BTC-$: Transmission & Exchange

Is it Really Anonymous?

Understanding the Ecosystem

The Ecosystem

Wallets

ATMs

Processors

Exchanges MinersUsers

Global ATM Market

Bitcoin 2014 VC Investments

2014 Bitcoin Investment Surpassed Early Internet VC Investment

Virtual & Crypto Currencies• Commercial Usage

• Small as predominantly used for speculative purposes• Increasing growth because of lower transaction fees• Increasing adoption for business use

• 1000 offline / 35000 online• Capitalisation reached US$ 10 billion in 2013

• Current Concerns include -• Theft• Volatility• Exchange failures• Technical problems• Regulatory interest• Money Laundering concerns (Silk Road)• Legal status

Virtual & Crypto Currencies• BTC usage

• Can be used to buy a beer in Berlin and London• Can be used to buy a pizza in Amsterdam• Can be used to hire a taxi in Edinburgh• Can be used to book a hotel through Expedia• Can be used to pay for a dental check-up in

Ljublijana• Can be used to buy socks in Massachusetts• Can be used to book a space flight with Virgin

Atlantic

• But beware – bitcoin will be taxed in Australia!

Regulatory Framework

Early Adoption/ Minimal Regulation

Increased Adoption/ Increased Regulation

Mainstream Adoption/ Enhanced Regulation

Virtual Currency Adoption & Regulation

Examples of Global ‘Regulation’ of Virtual Currencies• U.S. FinCEN Interpretative Guidance (March

2013)• New York State BitLicense (Nov 2013)• Canada Bill C-31 (Feb 2014)• FATF Virtual Currencies Key Definitions and

Potential AML/CFT Risks (June 2014)• Organisation for Economic Co-Operation and

Development “The Bitcoin Question: Currency vs. Trust-less Transfer Technology (June 2014)

• European Banking Authority Opinion on ‘virtual currencies’ (July 2014)

Regulatory ConcernsBTC bought and sold on internet exchanges but as most buyers have to pay for BTC in hard currency, banks and payment processors are the usual entry points for trade in virtual currencies, which is why the FATF and banking regulators are interested because of the perceived risk of their misuse for money laundering and terrorist financing purposes.

Virtual Currency Enforcement Actions

Themes of Enforcement Actions

Enforcement Action

Unlicensed Money

Transmission

Money Laundering

Narcotics Trafficking

Fraud

Virtual & Crypto Currencies• Next steps – a Virtual Bank?

• Virtual banks have been successfully launched in Europe and are being considered in the other regions

• exist only online and as a digital credit provider• can offer some or all of the same types of accounts as

traditional banks• enter the market charging lower fees and pay higher

interest because of lower overheads• are seen as providing a technological edge to customers

by allowing real-time transactions• have no ATMs so deposits / withdrawals are made

electronically or by e-mail

Virtual & Crypto Currencies• reimburse ATM fees charged by other banks• appeal more to the young and technologically savvy as

transactions can be conducted via smart phones, computers or home telephones

• offer 24 / 7 service and live customer support• appeal to larger techno-savvy companies• do not have the legacy costs of “older” financial

institutions and are seen as more convenient• are targeting the “unbanked” market• can be more flexible• can “white-label” technical systems with no capital outlay

• Examples include: Metro (UK); Ally (US); and Simple (Spain)

• Why not MENA?

Key Takeaways• Understand the basics, begin to learn the

fundamentals• Cryptocurrencies move funds globally• Very early stage development and market

adoption• Existing regulatory framework may be

stressed if/when increased adoption occurs • Key risks continue to be price volatility,

cyber security, pseudonymity, and early-stage financial services companies