Bitcoin: anonymity as transactional advantage and legal curse

Posted on 14 August 2015 by Mark Lee

Bitcoin - created in 2009 - is a digital means of exchange that enables its holders to transfer funds quickly, securely, and anonymously.

Despite, or indeed because of, its links to the dark net, Bitcoin continues to gain popularity and acceptance in mainstream commerce.  It is now accepted as a form of payment by an increasing number of legitimate websites and traditional brick-and-mortar establishments.[1] This acceptance, however, does not mean that the interplay between Bitcoin and governmental regulation is clearly established.

One indication of financial institutions’ uncertainty concerning how to approach Bitcoin is Goldman Sachs’s $50 million investment in the spring of 2015.[2] This investment was originally hailed as a signal that the Wall Street establishment was ready to embrace Bitcoin as a legitimate currency or means of exchange.  A closer look at the details of the investment, however, revealed that Goldman Sachs made a relatively small investment in Bitcon’s underlying blockchain technology (i.e., the technology underlying Bitcoin)—not Bitcoin itself. 

By choosing to invest in the computer technology instead of Bitcoin, Goldman Sachs at least tacitly acknowledged the significant regulatory challenges that Bitcoin poses to financial institutions that are governed by Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations.  These regulations require that banks and other financial institutions have transparency into their customers and the sources of their funds.  By design, Bitcoin transfers and exchanges happen behind a wall of secrecy.  This anonymity, which is fundamental to Bitcoin, is antithetical to the transparency required by KYC and AML.

Significantly, these regulatory concerns are not just relevant to large banks and large financial institutions. Certainly, all businesses that are subject to KYC and AML controls face significant risks when accepting, transmitting and exchanging Bitcoin.  But, it is less certain how other businesses that transact in Bitcoin may also run afoul of existing and future regulations, as well as criminal statutes.  For example, according to The Financial Crimes Enforcement Network (FinCEN), the bureau of the U.S. Department of Treasury that regulates money transmitters, businesses that transmit, sell, or exchange Bitcoin are now considered money transmitters and are subject to the KYC and AML regulations mandated by the Bank Secrecy Act.[3]  Moreover, in May 2015, FinCEN filed its first ever civil enforcement action against a virtual currency exchange for “failing to implement and maintain an adequate AML program designed to protect its products from use by money launderers or terrorist financiers.”[4] Given the expanding reach of KYC and AML controls and the rise in the acceptance and popularity of digital currencies and means of exchange, one can expect the number and variety of enforcement actions whether by FinCEN or other regulatory agencies to only increase. 

We here at Mishcon de Reya are following Bitcoin’s emergence and the web of regulatory and litigation issues that surround it.  We are uniquely positioned to assist clients with Bitcoin-related legal and regulatory issues in the U.S. and the U.K.