Appendix II: Regulatory Environment
Investigating Illegal Cryptocurrency Activities As discussed above, cryptocurrencies are not inherently illegal. However, using cryptocurrencies to facilitate an unlawful activity or facilitate the laundering of proceeds is unlawful. Criminal statutes can be applied just as easily to acts facilitated by nontraditional forms of payment, such as cryptocurrency, as they can to acts facilitated by traditional forms of payment. The illegality lies in the unlawful action, not the form of payment. The key differentiator from a law enforcement perspective is that cryptocurrency, unlike cash, can be used by a criminal through the Internet. Cryptocurrency technology offers a means to transact under a layer of anonymity online, without the need to meet in person. Some illicit actors are drawn to cryptocurrency because of the perceived anonymity it offers in relation to other means of financial exchange. Decentralized cryptocurrencies allow two parties to exchange legal tender without a third party intermediary across international borders. To curtail such illicit activity, law enforcement agencies rely on regulatory measures that maintain a paper trail, such as requirements on MSBs to collect PII from transacting customers. Without a trusted third party accounting for cryptocurrency transactions, such as a bank or a regulator, it can be difficult for law enforcement agencies to collect information on a transaction to identify parties to a transaction. This presents challenges for law enforcement agencies, because they rely on these trusted third parties to know their customers in order to protect against fraud and to detect potentially illicit financial dealings. There are attributes of cryptocurrency that make transacting in them less anonymous than using cash. For example, all transactions are recorded on the publicly available blockchain. Records kept by the blockchain and the PII held by exchanges often leave enough crumbs of evidence for investigators to identify illicit actors. This feature of cryptocurrency assists investigators trying to match suspicious transactions to individuals.
Prosecuting Illegal Cryptocurrency Activities In the United States, the BSA sets forth AML and KYC compliance obligations for MSBs, which act as intermediaries to financial transactions. A major aim of the BSA is to provide a paper trail to assist law enforcement agencies in their money laundering investigations. FinCEN’s March 2013 guidance for financial institutions on virtual currencies strongly encourages qualifying MSBs to take precautions against financial crimes, money laundering, and terrorism by keeping records and filing SARs. Under this framework, many cryptocurrency businesses will be considered MSBs and, thus, will be subject to the record-keeping and reporting requirements promulgated by the BSA. This measure has proven beneficial to investigators seeking prosecutions for criminals transacting in cryptocurrency.
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