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In a May 2014 GAO study, Virtual Currencies: Emerging Regulatory, Law Enforcement, and Consumer Protection Challenges, the GAO examines:  (1) federal financial regulatory and law enforcement agency responsibilities related to the use of virtual currencies and associated challenges and (2) actions and collaborative efforts the agencies have undertaken regarding virtual currencies.

 

Among the emerging challenges identified, the GAO highlights the following:

  • The anonymity provided by virtual currency systems often translates into a lack of centralized transaction control; making it very difficult for regulators and enforcement agencies to detect and prevent money laundering and other financial crimes.
  • As virtual currency systems can be accessed globally, law enforcement agencies must rely upon international partners -- with their own regulatory agendas and regimes -- to investigate and prosecute financial crimes.
  • As virtual currencies evolve, consumer and investor protections issues continue to multiply, including:  loss of consumer bitcoin funds through fraud or negligence, price volatility, and the regulation of virtual-currency-based investment products.

 

Per the GAO study, federal regulatory and enforcement agencies have taken several actions of note with respect to virtual currency:

  • In March 2013, FINCEN clarified that certain virtual currency system market participants must comply with anti-moneylaundering provisions and register with FINCEN.
  • In July 2013, the SEC filed individual and entity charges related to a fraudulent bitcoin investment scheme.
  • In October 2013, multiple agencies coordinated to shut down Silk Road -- where bitcoins were used to traffic illegal goods and services.

 

With respect to comprehensive interagency collaboration on existing and emerging virtual currency consumer protection issues, the GAO recommends that the Director of CFPB:  (1) identify which interagency working groups could help CFPB maintain awareness of these issues or would benefit from CFPB's participation; and (2) decide, in coordination with the agencies already participating in these efforts, which ones CFPB should participate in.

 

The GAO report provides an excellent primer on virtual currencies markets along with excellent insights regarding the challenges that federal agencies face with respect to regulating the use of virtual currencies.  It is required reading for anyone involved with virtual currencies or those who are considering entry into the market.

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