You probably know about
Bitcoin, unless you have been living in total seclusion for the last few
years. The big controversy usually centers on determining if it is legal
tender. But imagine if you are confronted with a transaction involving Bitcoin.
Do you file a Suspicious Activity Report (“SAR”)?
It so happens that the
Financial Crimes Enforcement Network (“FinCEN”) has been giving that very
concern laser-like attention! In July 2014’s “SAR Stats,” FinCEN observed that
the “rapid adoption and price fluctuation of Bitcoin”
has put convertible virtual currencies
in the spotlight over the past year.[1] The same attributes of
virtual currencies that attract lawful users, such as the capacity for
anonymity as well as their speed and global reach, attract criminal actors
engaged in illicit financing. FinCEN is observing a rise in the number of SARs
flagging virtual currencies as a component of suspicious activity. Bitcoin is
considered one of the “emerging payment methods.” Consequently, it is important
to understand virtual currencies in order to properly complete the SAR
Narrative.
So let’s define
Bitcoin.
Bitcoin is
a type of virtual currency. It is also known as a crypto-currency or a
math-based currency or digital currency. A virtual currency is considered
“decentralized” because it allows users to conduct transactions peer-to-peer
without a central administrator. It is a software-based payment system
described by one Satoshi Nakamoto in 2008,[2] and introduced as open-source software in 2009.
Payments are recorded in a “public ledger” using its own unit of account, which
naturally is also called Bitcoin. Payments work peer-to-peer without a central
repository or single administrator - which has led the US Treasury to call
Bitcoin a “decentralized virtual currency.”[3]
In keeping
with the general architecture of the Internet, transactions and new currency
issuances are conducted without a central administrator or trusted third party.
Instead, as an open-source software, its protocol links users into a network
that: (1) secures the network from attack; (2) broadcasts transactions; (3)
verifies and settles transactions; (4) issues new currency; and (5) publishes
new transactions to a shared, “distributed ledger of all transactions” called
the “block chain.”[4] The rate
of coin creation, the total Bitcoin to be created (say, 21 million), and other
variables (viz., network difficulty adjustments), are also in the software
protocol. Other crypto-currencies may differ on the basis of these and other
variables.[5]
Besides
“mining,” Bitcoins can be obtained in exchange for fiat money, products, and
services. Users send and receive Bitcoins electronically for an optional
transaction fee using wallet software on a personal computer, mobile device, or
a web application.[6] Mining is
the maintaining of the block chain, and those who do so are rewarded with newly
created Bitcoins and transaction fees. Miners may be located anywhere in the
world; they process payments by verifying each transaction as valid and adding
it to the block chain.[7]
FinCEN’s
view of SAR data and Bitcoin transactions
Financial institutions,
including, but not limited to, Virtual Currency Exchangers, other Money
Transmitters, other types of Money Services Businesses, and Depository Institutions
may all be involved in the chain of transactions making up the lifecycle of a
user’s purchase, use and sale of Bitcoin for currency of legal tender.[8]
FinCEN regards SAR data “crucial in assessing transactions involving Bitcoin or
other virtual currencies.”[9] Indeed, any financial
institution that is required to file a SAR and accepts transactions in Bitcoin
should be giving consideration not only to the SAR filing mandates but also
sharing information relating to such virtual currency transactions. FinCEN
encourages the use of information sharing under 314(b) in this context.[10]
Bitcoin has seen its share of
black market activity. There has been increasing FinCEN and law enforcement
scrutiny regarding the use of Bitcoin for illegal activities.[11] In
October 2013 the FBI shut down the “Silk Road”, allegedly an online black
market, and seized 144,000 Bitcoins worth $28.5 million at the time.[12]
Although the United States is still considered “Bitcoin-friendly” compared to
other governments, in China buying Bitcoins with Yuan is subject to
restrictions, and Bitcoin exchanges are not allowed to hold bank accounts.[13]
Different financial institutions
are more likely to see different elements of the same suspicious activity due to
their participation in and perspective on the transaction chain.
According to FinCEN, while
Depository Institutions do not currently interact directly with the Bitcoin
economy (i.e., accepting deposits in Bitcoin, conducting transactions in
Bitcoin, and so forth), they may see cash, ACH, or Wire and Funds Transfer
deposits and withdrawals associated with the following entities, as outlined in
the SAR Stats.
Users
FinCEN claims that information on
users of crypto-currency - even when their participation in the transaction is
not considered suspicious - is very useful for the analysis of the narrative,
and may be supplemented with the ACH or wire data related to transactions
conducted to or from known virtual currency exchangers. Some of these users may
be engaged in illicit marketplace activity that is indicated in other
corroborating data.[14]
Speculators
Depository
institutions may also see user or entity activity that is associated with
speculative activity. The example given by FinCEN is where, “following a rapid
rise in the relative value of a crypto-currency to the dollar, an institution
may see high value deposits originating from foreign or domestic virtual
currency exchangers.”[15] Although
speculation in a volatile asset is not a criminal activity, “speculation can
share a transaction footprint with other activities that might be suspicious
(such as activity associated with High Yield Investment Programs (HYIP), or
outright criminal, such as Ponzi Schemes involving Bitcoin.”[16]
Dealers
Depository institutions may also
observe variable cash deposits into bank branches in many different states
followed by either an ACH or wire to known virtual currency exchangers. FinCEN
believes that these may denote individuals or entities acting as virtual
currency dealers that may be acting as unregistered MSBs.[17]
Correspondent
Banks
FinCEN
maintains that Correspondent Banks have a “unique vantage point” because they
are able to see aggregate fund transfers to and from foreign-based virtual
currency exchangers. According to FinCEN, “information in this data may be
related to exchanger account ownership and high-value transactions from other
businesses, dealers, individuals, and both domestic and foreign entities.”[18]
Money Transmitters, Other MSBs,
and Funding Intermediaries
These entities also have a unique
vantage point on transactions associated with dealers and their customers
(viz., domestic and international). Dealers may accept a wide variety of
payment mechanisms in exchange for Bitcoin (and other virtual currencies).
These “payment mechanisms,” acting through different funding intermediaries in
a dealer to customer transaction, may be able to identify customers and the
dealers of crypto-currency in and outside the United States.[19]
Hacker, Identity Fraud, and
Account Takeover
Virtual currencies may be used as
part of schemes to layer funds or obfuscate financial trails associated with
stolen funds from account takeovers. FinCEN states that “MSBs may be uniquely
placed to see the funds originating from a compromised bank account destined
for a virtual currency exchanger, other MSB, to other compromised accounts,”
such as MSBs or other financial institutions or for the purchase of virtual
currency.[20]
Virtual Currency Exchangers
Virtual Currency Exchangers and
other virtual currency entities may have a unique view of the activities of
their users and counterparties as they enter and exit the virtual currency economy
and conduct transactions within that economy. FinCEN’s example is where
“exchangers may know when users send Bitcoin to other users who are customers
of that same exchange or may be able to compare Bitcoin addresses associated
with illicit activity against the activity of addresses they have issued to
their customers.”[21]
Is bitcoin legit?
A Bitcoin documentary film, called “The Rise
and Rise of Bitcoin” made its debut at the Tribeca Film Festival in New York on
April 23, 2014. The film chronicles the Bitcoin's origins to its explosive
growth in 2013.[22]
In the 2014 Fall semester, undergraduate
students at the Massachusetts Institute of Technology will be receiving $100 in
Bitcoins "to better understand this emerging technology". A student
had the idea of a Bitcoin Club and raised more than half a million dollars from
a high frequency trader.[23]
Some US political candidates, including New
York City Democratic Congressional candidate Jeff Kurzon, have said they would
accept campaign donations in Bitcoin.[24]
Is the Bitcoin legit? You decide!
[1] SAR Stats, Technical Bulletin, July 2014,
Financial Crimes Enforcement Network
[2] Quantitative
Analysis of the Full Bitcoin Transaction Graph, Dorit, Ron and Adi Shamir
(2012), Cryptology ePrint Archive. Also see Bitcoin:
A Peer-to-Peer Electronic Cash System, www.bitcoin.org, October 2008.
[3] Statement
of Jennifer Shasky Calvery, Director Financial Crimes Enforcement Network
United States Department of the Treasury Before the United States Senate
Committee on Banking, Housing, and Urban Affairs Subcommittee on National
Security and International Trade and Finance Subcommittee on Economic Policy,
Financial Crimes Enforcement Network, November 19, 2013
[5] Op. cit. 1, p 15
[6] How do
I get Bitcoins? (For Beginners), The Bitcoin Bulletin, March 11, 2011
[7] Source: Wikipedia
[8] Op. cit. 1, p 15
[9] Ibid
[10] USA PATRIOT Act, Section 314(b). In general,
Section 314(b) permits financial institutions, upon providing notice to the
United States Department of the Treasury, to share information with one another
in order to identify and report to the federal government activities that may
involve money laundering or terrorist activity.
[11] Tracy, Ryan, Bitcoin Comes Under Senate Scrutiny, November 5, 2013, The Wall
Street Journal
[12] Greenberg, Andy, FBI Says It's Seized $28.5 Million In Bitcoins From Ross Ulbricht,
Alleged Owner Of Silk Road, October 23, 2013, blog, Forbes.com
[13] Peterson, Andrea, This map shows which countries are friendly to Bitcoin, January 27,
2014, The Switch, The Washington Post
[14] Op. cit. 1, p 15
[15] Op. cit. 1, p 16
[16] Ibid
[17] Ibid
[18] Ibid
[19] Ibid
[20] Ibid
[21] Ibid
[22] http://newsbtc.com/2014/03/17/bitcoin-documentary-film-rise-rise-bitcoin-debut-tribeca-film-festival
[23] Hern, Alex, MIT students to get $100 worth of bitcoin from Wall Street donor,
April 30, 2014, The Guardian
[24] Smith IV, Jack, NY Congressional
Candidate Jeff Kurzon, June 3, 2014, BetaBeat
