The New Wild West: Preventing Money Laundering in the Bitcoin Network

Singh, Kavid | February 1, 2015

Bitcoin is the most popular, decentralized virtual currency in the world. Businesses both large and small have begun to accept bitcoins as a legal form of payment. In addition, Bitcoin currency exchanges, which trade bitcoins for real currency, have quickly arisen because of the currency’s growing popularity. But Bitcoin’s evolution has also been marred with criminality. Hundreds of millions of dollars’ worth of bitcoins have been stolen from businesses and large Bitcoin currency exchanges. The infamous “Silk Road”—an illegal, online drug market, which the FBI took down in 2013—dealt in this currency. The use of bitcoins for illicit purposes not only facilitates criminal activity throughout the world, but also undermines the security of individuals using bitcoins for legitimate purposes, such as users who send remittances to family members abroad. The Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, stands at the forefront of Bitcoin regulation. FinCEN was the first federal agency to address convertible virtual-currency regulation, providing legal guidance (the Guidance) explaining how the Bank Secrecy Act applies to convertible virtual currencies. For this reason, this Article analyzes and evaluates the Guidance’s standards regarding convertible virtual currencies. This Article proposes a refined regulatory framework that both deters money laundering in Bitcoin—a pervasive problem in the world of decentralized virtual currencies—and allows the recognized benefits of this virtual currency to develop free from innovation- stifling regulation. Among other benefits, Bitcoin increases access to financing in impoverished areas, provides an avenue for low-cost remittances, lowers transaction costs for businesses burdened with high credit-card fees, and perhaps most importantly, creates a global platform for financial and technological innovation to flourish. While authorities recognize these advantages, the potential for criminal abuse nevertheless remains salient. This Article seeks to provide the optimal balance between these often-conflicting interests.