It’s estimated that about half of all trade in cryptocurrencies such as bitcoin is for criminal activity. Governments are starting to act.
Investors are being drawn into digital currency trading by rocketing prices and the potential transformation to payments technology, but regulators are concerned about criminal activity and financial risks.
Australia is implementing new laws that will regulate and allow closer monitoring of digital currency trading but China and South Korea have moved to ban trading.
Interest in cryptocurrencies has been driven by the remarkable growth in the value of the most popular digital currency, bitcoin.
In 2010, a bitcoin was worth six US cents, by October 2016 it had gone past US$600 and on 11 December 2017 the price topped US$17,000.
In spite of this near unprecedented growth, there have been plenty of high level warnings for investors to exercise care.
In a speech at the end of last year, Australia’s Reserve Bank governor Dr Philip Lowe warned that “the current fascination with these currencies feels more like a speculative mania than it has to do with their use as an efficient and convenient form of electronic payment.”
Goldman Sachs CEO Lloyd Blankfein was more direct: “Something that moves 20 per cent [overnight] does not feel like a currency. It is a vehicle to perpetrate fraud.”
Governments and bitcoin regulation
CPA Australia’s head of policy, Paul Drum points out that governments are, in many ways, playing catch up in devising regulatory safeguards for these emerging technologies.
“With their decentralised basis and underlying protocols which don’t require user identification, virtual currencies can bypass regulated financial institutions and exchanges and really present challenges for regulators,” says Drum.
He says investors have little to fall back on when things don’t go their way, and certainly bitcoin prices have gone the other way with very large drops between December 2017 and February 2018.”
“Catching up is a real focus for governments in Australia and around the world, not just to provide consumer protection but also to ensure digital currencies and blockchain don’t become an area of major tax revenue leakage.”
The price halved between December 2017 and early February 2018, to around US$8200.
Emerging legal framework for cryptocurrencies
Drum points out that digital currency trading is about to face a higher level of regulation in Australia.
The financial intelligence agency and regulator, AUSTRAC (Australian Transaction Reports and Analysis Centre) has been monitoring the cryptocurrency market and working with participants for some time, but the Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill 2017 will give it clear power to act.
The legislation was passed in late 2017 and is expected to take effect in April 2018.
The law will require cryptocurrency exchanges to register with AUSTRAC, identify and verify their customers, record transactions, report suspicious matters, and set up anti-money laundering and counter-terror financing programs. Operating a non-registered exchange will be a criminal offence.
“To date we have been pretty pleased with the level of responsibility in the cryptocurrency sector, and with the Code of Conduct developed by the Australian Digital Commerce Association,” says Brad Brown, AUSTRAC acting deputy CEO, international and policy.
“We will continue to work with them.”
The legislation will formalise procedures, centralise disclosure, and expand AUSTRAC’s legal powers.
One of the agency’s key objectives is to leverage intelligence to fight money laundering, cybercrime and threats to the community. Ultimately, a sound regulatory system works to the benefit of everyone, says Brown.
“Yes, it will still be possible for people to go to unregulated global exchanges, or buy digital currencies through a dark net site. But that means accepting a very high degree of risk. If you are a legal user, why would you want to do that?”
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Crime and cryptocurrencies
Despite the legitimate uses of cryptocurrencies, at the global level there is a strong association with criminal activities, mainly connected to the dark net, or using software with a level of encryption that makes a site hard for authorities to monitor.
This is underlined by new research conducted by professor Talis Putnins and Jonathan Karlsen from UTS Business School, along with Dr Sean Foley from Sydney University. The team tracked illegal bitcoin activity by studying worldwide data from 2009 to 2017.
Their paper, Sex, Drugs, and Bitcoin, reveals that about one-quarter of the total dollar value of transactions in bitcoin is associated with illegal transactions. Around one-third of bitcoin users are using the digital currency for illegal activity, with close to half of all bitcoin transactions facilitating illegal trade.
“The uses include drugs, weapons and illegal pornography, as well as crowdfunded murder contracts – pretty well every crime you can think of. Bitcoin has become the PayPal of the dark net,” says Putnins.
The researchers analysed the trade networks of those known to be involved in illegal activity. They also tracked whether users tried to conceal their identity, to mark users involved in illegal activity.
“The techniques we developed could be used by legal authorities, although much of what we developed is transferable to analysing other blockchains,” Putnins says. “Our research also indicates the size of the task regulators face in attempting to monitor and regulate bitcoin.”
Governments ban bitcoin
Some governments have decided that the risks of cryptocurrencies outweigh the potential advantages.
China banned cryptocurrency trading in 2017, and the South Korean Government recently announced its intention to ban cryptocurrencies. This is significant as South Korea conducts roughly 20 per cent of all bitcoin trading, making it the third-largest market after Japan and the US.
Despite the problems, cryptocurrencies are likely to grow in importance, especially as blockchain technology develops. The Chicago Mercantile Exchange recently announced that it will begin trading bitcoin futures contracts, which would help to limit the price volatility.
“We take the view that the future direction of cryptocurrencies is tied to markets and related consumer confidence,” says Brown. “And markets operate best when everyone clearly understands who they are dealing with. Over time the regulatory framework might have to evolve along with the market, but we are making a good start.”
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