High Risk Transactions: Understanding Virtual Currencies & Associated Proposed Legislative Action

In recent months, virtual currency has seen an influx in interest from various directions. While in some circles, these currencies have always maintained their status, recent events have given rise to mainstream popularity, especially from those who may not fully understand how crypto and other means of virtual currencies work. Most prices have seen volatility, with wild swings in the exchange rate for many, and progressive record-breaking climbs for mainstays such as Bitcoin and to a lesser extent, Ethereum. Noting the growing popularity of virtual currencies, financial institutions need to continually adjust their own knowledge and understanding of virtual currencies and their respective markets to maintain a handle on the risks associated with their corresponding transactions.

So, the BSA layperson might ask, “What exactly are virtual currencies, and how do I determine and manage the risks associated with them?” While a bit dated, a good frame of reference for virtual currencies begins with The Financial Action Task Force (FATF). Back in June of 2014, FATF published a report, Virtual Currencies: Key Definitions and Potential AML/CFT Risks. It provides a great overview of virtual currency in its various forms, such as convertible versus non-convertible, centralized versus decentralized, altcoins, cryptocurrency, and others. The report also explains the various mechanisms involved with creating and exchanging said currencies using wallets, exchanges, mining, and torrents.

Groups such as FATF provide common basis behind much of the regulatory workspace. This is seen when looking at recent FinCEN actions, such as the request for comment recently extended by the Biden Administration. The Pending Notice of Proposed Rulemaking involving convertible virtual currencies proposes BSA requirements on certain Money Services Businesses (MSBs), exchanges and wallet administrators that are in line with Currency Transaction Reporting requirements in place today.

It is imperative that the AML and Risk professional have a basic understanding of the underlying gaps that these proposals are trying to fill and how they may or may not affect their institutions and their members and customers. Gaining a broader perspective on virtual currency provides a better understanding for the risk professional and allows for a more succinct risk-based approach.