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U.S. Government Accountability Office Reviews Emerging Regulatory, Law Enforcement, Consumer Protection Challenges of Virtual Currencies




by:
Colodny Fass Talenfeld Karlinsky Abate Webb P.A. - Fort Lauderdale Office

 
July 14, 2014

Previously published on July 9, 2014

Virtual currencies--digital representations of value that are not government-issued--have grown in popularity in recent years. This was underscored by an Internal Revenue Service March 2014 declaration that virtual currencies will now be treated as property for U.S. federal taxation purposes.

Some virtual currencies can be used to buy real goods and services, as well as exchanged for dollars or other currencies. One example is Bitcoin, which was developed in 2009. Bitcoin and similar virtual currency systems operate over the Internet, using computer protocols and encryption to conduct and verify transactions. While these virtual currency systems offer some benefits, they also pose risks. For example, they have been associated with illicit activity and security breaches, thus raising possible regulatory, law enforcement and consumer protection issues.

In a June 26, 2014 report, the U.S. Government Accountability Office ("GAO") elaborated on its examination of federal policy and interagency collaboration issues relating to virtual currencies.

To date, federal financial regulatory and law enforcement agencies have taken a number of actions on virtual currencies. In March 2013, the U.S. Department of the Treasury's Financial Crimes Enforcement Network ("FinCEN") issued guidance that clarified which participants in virtual currency systems are subject to anti-money-laundering requirements. It also required virtual currency exchanges to register with FinCEN.

Additionally, financial regulators have taken some actions on anti-money-laundering compliance and investor protection. For example, in July 2013, the Securities and Exchange Commission charged an individual and his company with defrauding investors through a Bitcoin-based investment scheme. Further, law enforcement agencies have taken actions against parties alleged to have used virtual currencies to facilitate money laundering or other crimes. In October 2013, multiple agencies worked together to shut down Silk Road, an online marketplace where users paid for illegal goods and services with Bitcoins.

Federal agencies also have begun to collaborate on virtual currency issues through informal discussions and interagency working groups primarily concerned with money laundering and other law enforcement matters. However, these working groups have not focused on emerging consumer protection issues, and the Consumer Financial Protection Bureau ("CFPB")--which responsibilities include educating consumers about making responsible decisions on financial transactions--has generally not participated in these groups. The GAO warns that, without targeted CFPB participation, future interagency efforts may not be in a position to address consumer risks associated with virtual currencies in the most timely and effective manner.

 



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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