AML

Detecting Suspicious Activity on the Bitcoin Blockchain

It is a globally accepted belief that financial crimes such as money laundering, fraud and the financing of terrorism are societal evils warranting enormous preventative and investigative efforts.  Such a belief has been translated into a corpus of guidelines, principles, statutes and implementing regulations around most of planet Earth known as anti-money laundering (AML) and countering the financing of terrorism (CFT) or AML/CFT.

Generally speaking, AML/CFT regulations are intended to deter criminal activity before it happens, and to detect it when it has happened.  Because doing this on their own would be an impossibly gargantuan task, governments issue regulations whereby they deputize financial intermediaries as crime fighters on behalf of the public.  Each and every financial service provider categorized by law as an “obligated subject” is thus mandated to implement processes, procedures and controls aimed primarily at warding off criminals and, if they manage to penetrate the financial institution, identify them, report them, and ideally stop them in their tracks.

The primary crime deterrent is the obligation to identify customers and beneficial owners, a process known as customer due diligence (CDD) or Know Your Customer (KYC).  The Continue reading →

Thoughts on a Country Adopting a Bitcoin-Like Currency

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A few months ago, a Latin American advisory group asked me to comment on the Digital Sucre and the potential impact of a country adopting a digital or crypto currency as legal tender.  It never occurred to me that I should post the surface-scratching responses I came up with, until American Banker‘s Bailey Reutzel asked the question (here).  With the upcoming release of AuroraCoin in Iceland, and the adoption of a bitcoin clone by the Oglala Lakota Native American nation, this seems to be a good time to poke the discussion.  So here go my two cents in the hope that a few extra thoughts will be triggered.

In concept, is bitcoin more a currency or a payments system?

Bitcoin is both.  In addition, and most importantly and fundamentally, it’s also a protocol on top of which additionally functionality can be built.  The fact that Bitcoin (with a capital B) is multiple things at once is what creates most of the confusion about it.  Bitcoin is a sophisticated globally distributed asset register that, at this moment in time, is mostly being used to register value in USD or other fiat currencies.  Hence the fact that it’s Continue reading →

The Value of a Necessary Evil

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Over the past few years, I have been polling compliance professionals around the world, anonymously, of course, on how compliance and risk management are treated by their senior management within their organizations.  Consistently and overwhelmingly, the preponderance of responses has fallen on the A side:

The truth is that, whether we acknowledge it or not, a focus on compliance and risk management has always been a hard internal sell.  Although compliance professionals are partly to blame for that, I believe most of the Continue reading →

“Compliance-Enabled Legitimacy is Key to Bitcoin’s Survival”

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Interview with Megan Burton, founder and CEO of CoinX

Early last month, at a Bitcoin pitch contest organized by Ultra Light Startups, the winner, Atlanta-based CoinX, beat the competition by a landslide.  To be precise, the show-stealer was actually Megan Burton, its founder and CEO.  John Frankel, partner of venture-capital firm ff Venture Capital, one of the three expert judges in the panel, said to me: “It was a strong presentation.  She came across as someone who has done her homework and her strategy seems sound.”

Megan, whom I was delighted to meet in person last week at the Inside Bitcoins conference in New York City, has graciously agreed to an interview.  Enjoy!

Juan: Please tell us about your background and how you got involved with Bitcoin.

Megan: My background is in internet and payments security.  I first came across Bitcoin in the spring of 2012, when reading an article on the BBC website about a foreign currency exchange that had been shut down as a result of a security breach.  Nothing out of the ordinary, except that this breach had been due to an encryption Continue reading →

The Hidden Rule that Could Kill Bitcoin’s Irrevocability

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If federal anti-money laundering rules ‘killed’ Bitcoin’s anonymity, could consumer protection rules ‘kill’ its irrevocability?

Last March, the crypto-currency world was struck dumb when the Financial Crimes Enforcement Network (FinCEN), the United States federal agency responsible for enforcing anti-money laundering and anti-terrorist financing regulations, issued the now famous interpretive guidance equating exchangers and administrators of ‘convertible virtual currencies’ to money transmitters.

Although some of us saw it coming, crypto-preneurs are just now slowly waking up to the reality of what it really means to be this particular species of non-bank financial institution.  See the final section for a compendium of risks and obligations.

One set of regulations that I included in the laundry list of obligations last April but has yet to come to the fore are the federal consumer protection rules emanating from the Dodd-Frank Act and being enforced by the Continue reading →

The Criminal Precedent that Could Curb Bitcoin’s Enthusiasm

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In July of 2008, after months of wrangling with the Department of Justice (DOJ), E-Gold, Ltd.’s senior management and directors pleaded guilty to the following charges:

• Conspiracy to Launder Monetary Instruments (federal)
• Conspiracy to Commit an Offense Against the United States (federal)
• Operating of Unlicensed Money Transmitting Business (federal)
• Transmitting Money Without a License (District of Columbia)

What does E-Gold have to do with Bitcoin?

Well, as soon as I describe what E-Gold was and did, you’ll see that the parallels with Bitcoin and its crypto-brethren are remarkably similar.  I will be quoting from the indictment itself, underlining Bitcoin-relevant language, and adding comments in brackets:

1. E-Gold was an issuer of “digital currency,” defined as a medium of exchange offered over the Internet Continue reading →

Is US Regulation the Single Biggest Threat to Bitcoin?

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On March 4, 2013 I gave a talk titled just like this post at the New York City Bitcoin Meetup.  The talk blurb read:

If you are a Bitcoin ecosystem participant (user, entrepreneur), you may be aware that there is a myriad of rules and regulations, at the federal, state and even international level, that may apply to you.  Why?  Because Bitcoin is technically a “value transfer” system, and such systems are heavily regulated to protect consumer rights and deter financial crime, including the financing of terrorism.  Join us for a lively discussion of potential obstacles to the growth of the Bitcoin ecosystem.

The rather hyperbolic title attracted a few dozen very smart (and gracious) entrepreneurs and geeks, most of whom, unsurprisingly, were not aware that the United States has a very convoluted and onerous regulatory regime that can potentially stifle innovation or, at a minimum, slow down the spread of virtual peer-to-peer value transfer systems like Bitcoin. Continue reading →

How Not To Run an AML Department

If you really want to learn how not to run an AML Department (or a financial institution, for that matter) just read this US Senate Report on HSBC.  Great learning tool.