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.
