In the intensifying global debate over cryptocurrencies, Europe is taking a stand, providing clarity and assurances that this promising technology can help build stronger economies. If the United States truly wants to shape the future of this innovation, U.S. regulators need to do the same.
The European Parliament recently studied the use of cryptocurrencies in terrorist financing and, against popular belief, found “little evidence of wide adoption” in the terrorist community. That is partly because terrorist cells “usually operate in parts of the world that don’t have a very developed technology.” Nevertheless, the study highlighted the increased use of cryptocurrency in money laundering, ransomware and a range of other cybercrime activities, and made a strong case for tighter regulation and oversight.
Almost lost in the presentation was a brief aside by David Carlisle with the Centre for Financial Crime and Security Studies at the Royal United Services Institute. Commenting on the rising popularity of cryptocurrencies like bitcoin, he made an important distinction: “Bitcoin is pseudonymous, not totally anonymous. You can trace the bitcoin going to one wallet to another, unlike Monero, Zcash or Dash that have blockchains that are less transparent.”
This is a critical point for regulators, one that too often is overlooked. With the right software, most blockchain-based currencies are easier to track than fiat currencies like the dollar. Indeed, only a handful of so-called “anonymous” digital currencies actually stymie lawful investigation.
So let’s dispense with the assumption that the only uses for cryptocurrency are illegal. This misperception stems from its early exploitation on the darknet and the mistaken belief that all cryptocurrencies are “anonymous” and impervious to attribution for ownership or purpose. The reality is quite different.
In fact, bitcoin and similar “pseudonymous” cryptocurrencies are more helpful to law enforcement than to criminals. As wryly observed by criminal attorney and blockchain legal expert Jason Weinstein, “reports of bitcoin’s anonymity are greatly exaggerated.”
Bitcoin provides a traceable, immutable and public ledger of every financial transaction. Law enforcement agents no longer need warrants or subpoenas for financial data; gone are the time restrictions forced by data retention policies; and removed is the onus of obtaining cooperation from foreign governments when seeking financial records in foreign jurisdictions. While it is true that a user’s bitcoin address does not automatically reveal his or her identity, that is no less true for IP addresses – and law enforcement has been successfully matching IP addresses to real-world identities for decades.
Governments have hesitated to regulate cryptocurrency trading for fear of impeding the technology’s growth. That reluctance is fast fading, however. The European Parliament’s Fifth Anti-Money Laundering Directive, released in April, for the first time subjected “virtual currency exchanges and custodian wallet providers” to the same EU regulations as traditional banks and other financial institutions.
Thus, EU regulatory authorities are poised to influence the future of cryptocurrency like never before. There are over 1,600 types of digital currencies, but there will be a “culling out” process. Fiscal authorities have a critical role to play in this “survival of the fittest” evolution, and the reason is simple: liquidity. No digital currency can survive for long if people can’t confidently exchange it for fiat currency. By requiring cryptocurrency exchanges to observe the same due diligence standards that have long applied to fiat currencies, the EU is letting liquidity choose the winners and losers among cryptocurrency developers.
But the EU cannot bring about change without other governments being willing to regulate exchanges similarly, and perhaps the most important voice globally is the United States. The question for U.S. policymakers is, therefore, not whether to ban or create new regulations for cryptocurrencies, but rather whether the U.S.’ existing regulations governing fiat currencies are properly applied to all cryptocurrencies, even if some will never conform to such standards. The EU answered “yes” to that question, but the U.S. has yet to speak so clearly.
The Treasury Department’s Financial Crimes Enforcement Network is best positioned to speak for U.S. interests. Long a driving force in strengthening anti-money laundering and counterterrorist financing laws, FinCEN has broad access to U.S. exchanges as well as the leading developers of investigative software. This specialized software is a critical component of any enforcement regime. Financial regulators need to learn its capabilities and its limits; its implications for sound policy development can’t be overstated.
The EU has advanced the ball nicely, but FinCEN can carry it to the goal. The time is right.
— Special to the Press Herald