Recent Efforts to Regulate Bitcoin Fall Flat

July 31st, 2014

This week several analysts reported that the European Union is considering regulating and taxing the digital currency, Bitcoin. Specifically, the EU is looking to impose a Value Added Tax (VAT) on trades in bitcoin. Meanwhile, its plans to regulate the digital currency—whether imminent or not—are still unclear.

Bitcoin presents short- and long-term risks to financial crime. Like tax havens and other jurisdictions with lax laws on beneficial ownership, Bitcoin presents criminals with an opportunity to keep their money and their transactions secret. Specifically, Bitcoin users don’t need to present an ID to receive a Bitcoin address—or key—so they are not necessarily tied to a flesh and blood person. This means Bitcoin transactions unidentifiable as long as the user takes care to anonymize his or her IP address.

U.S. officials have early and often expressed deep concerns about the digital currency. Both the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury and the U.S. Department of Justice have released official statements regarding the regulation of virtual currencies. FinCEN has also already imposed money laundering controls on Bitcoin usually reserved for traditional wire transfer services, like Western Union. These controls include bookkeeping requirements and mandatory reporting for transactions of more than $10,000.

It’s high time that the European Union follows suit with this, probably minimal, effort. While the European Central Bank has noted the dangers of the currency, the European Union has yet to pass any specific regulations on digital currency. Although it looks like that may change. A spokesperson for the European Commission’s financial services commissioner said this of the EU’s considerations: “It’s imperative to move quickly on this issue […] The potential for money laundering and terrorist financing is too serious to ignore.”

In fact, the global approach to regulating digital currency has been unilateral, piecemeal, and spotty at best. A recent U.S. survey of forty foreign jurisdictions found that only a very few nations have any specific regulations applicable to Bitcoin. According to the survey, one notable exception to this finding was China. In a joint Notice issued at the end of 2013, the Chinese central bank and four other government ministries and commissions declared that Bitcoin “does not have the same legal status as currency, and cannot be used as circulating currency in the market.”

There are reasons that worldwide regulations on Bitcoin have been unilateral and spotty. At the Financial Innovators Summit at 10 Downing Street, one participant suggested the UK lead an international approach to regulating digital currency. Tom Robinson, co-founder of Elliptic, responded that such a move would be too difficult and would take far too long to envision and implement. He suggested the UK follow in the footsteps of the United States and “make their own decisions.”

Developing nations stand to lose a great deal from the rise of digital currency. And yet this is also the group of nations that does not have the power and capacity to track illicit activity in digital currencies and regulate their transactions. In fact, the piecemeal approach to regulating digital currency is reminiscent of the problems with the recent OECD regulations on automatic tax information exchange. An international framework that thoughtfully includes developing nations is imperative on both issues.

Developed nations need an international framework, too, though. While I mainly am interested in the creation of comprehensive and universal financial regulations because of its impact on economic development, that doesn’t mean that developed countries can’t pursue these universal standards out of self-interest.

An international approach is the only approach that will effectively mitigate the risk for crime and money laundering posed by digital currency. Any one nation that imposes regulations on digital currency will not substantially reduce the currency’s cross-border risk for financial crimes. And in world where crime is increasingly transnational, the world’s financial regulations will only be as strong as its weakest link. Without an international framework for regulating digital currency any unilateral effort is doomed to fail.

Written by Ann Hollingshead

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