Bitcoin and the Law

by George Hatjoullis

Bitcoin and the Law

English: Logo of Group of working out of finan...

English: Logo of Group of working out of financial measures of struggle against money-laundering (FATF) Русский: Логотип Группы разработки финансовых мер борьбы с отмыванием денег (ФАТФ) (Photo credit: Wikipedia)

Governments have devoted a great deal of resource to containing money laundering and terrorist finance. Anyone that is working or has worked in financial, or related, services will be well versed in the relevant regulations, through regulatory exams and continuous compliance education. The regulations are very severe and not just on perpetrators of such illegal activity. If regulated persons have reason to suspect money laundering and do not report their suspicions to their money laundering reporting officer they are also in trouble. In fact, not knowing the name of the MLRO is a breach of regulations!

The basic principle is to be able to clearly identify the client and the source of funds. Anyone opening a bank account must identify themselves in a rigorous manner. Banks have a legal responsibility to check the source of funds. Even using a solicitor requires identification under money laundering regulations. Tracing financial transactions is a vital part of combatting crime and terrorism. If all financial services employees act according to regulations, then it is extremely difficult for criminal and terrorist funds to pass  unnoticed through the global financial system.Enter Bitcoin [ ].

A brief look at this website will reveal that Bitcoin is a peer-to-peer payment system. No one need identify themselves nor explain the source of the Bitcoin. There is no MLRO because it is not part of a national regulated payment system. Bitcoin is, as I explained in my blog Bitcoin, Gold and Private Moneycyber-cash.If you pay a tradesman with cash the source of the funds is not normally a matter for reporting. The tradesman does not normally ask for evidence of the legitimacy of the source. Indeed, how could one provide such evidence? Nor does one make sure that the tradesman pays all taxes arising from the transaction. Once again, this would be impractical.Cash is peer-to-peer and very difficult to trace and regulate. For this reason it is the medium of choice in all black market activity. The only way to stop black market activity is eliminate cash. However, cash is just a form of money that is legal tender. Black market people could produce a private money, let us call it Bits-of-coin, and use this instead of cash. You see where i am going with this?

Bitcoin is a very useful type of cash. It is electronically created, stored and transacted and yet, it seems, offers the same potential anonymity as cash. If successful it will potentially undermine the whole thrust of money laundering regulation that has been painstakingly constructed over many years.As it stands cash can only be challenged when it enters the recordable system. Try banking £10000 in cash and see what happens. The response might more normally be associated with robbing a bank. You will need to explain yourself and the deposit need not be accepted. If Bitcoin balances build up then getting the currency value back into the official currency system will be subject to scrutiny.The Bitcoin system can thus only succeed as a parallel system that has little contact with the official financial system. The two are legally incompatible. The official system aspires to no anonymity for crime and terrorist combatting reasons whilst the Bitcoin system sells itself, in part, on its scope for anonymity. If the two intersect then anonymity is lost.

If Bitcoin is to thrive in the legal world it will eventually have to give up the potential for anonymity. The authorities simply cannot allow such a system to undermine their efforts to fight the financing of crime and terrorism (and nor should we wish them to do so). The question is whether Bitcoin can thrive as a transparent private money? This is a bit like asking whether an offshore banking centre will survive full transparency. I suspect not