The US Senate committee due to begin hearings into ‘virtual currencies’ on 18 November has released the responses it received to its August 2013 requests for information on the topic from a number of federal agencies.
Until the actual hearings begin, the letters provide one of the most detailed insights so far into how various US government authorities view bitcoin and its contemporaries.
The requests from the Senate’s Committee on Homeland Security and Governmental Affairs (HSGAC) asked five agencies about their existing policies and procedures regarding virtual currencies, their level of coordination with other federal agencies or governments at all levels on the matter, plus any strategies or ongoing initiatives they had in place.
Responses to committee chair the Hon. Thomas R. Carper came from The Department of Homeland Security (DHS), the Department of Justice (DOJ), the Federal Reserve, the Securities and Exchange Commission (SEC) and the Department of the Treasury.
We've learned that the five agencies have a keen interest in virtual currencies, and have money laundering and terrorist financing weighing on their minds. Nearly all agencies referenced Liberty Reserve, which offered anonymous payments backed by US dollars, euros and gold ounces and was shuttered by authorities just months earlier (May 2013). Some also mentioned Texan Trendon T. Shavers and his alleged bitcoin ponzi scheme which was making headlines at the time.
The crime-heavy spotlight of the responses might be an indication of the US government’s overall approach to digital currencies such as bitcoin, with only the Federal Reserve and Treasury Department commenting that such payment systems could provide benefit and increase efficiency. Throughout the responses, bitcoin was the only digital currency referred to by name.
Perhaps unsurprisingly, the Department of Homeland Security was most likely to identify virtual currencies as a threat, recognizing the need for an “aggressive posture towards this evolving trend,” and a “multi-prong strategy” to target virtual currency platforms and virtual currency exchanges.
“The most critical capability for transnational organized crime is to quickly and quietly move large quantities of money across borders,” wrote the Department of Homeland Security. It continued:
The response concluded with: “The Department is pleased that the Committee recognizes the magnitude of these issues and the evolving nature of these crimes.”
The DHS also referred to the many crimes committed in the operation of Silk Road, a “criminal eBay” whose “sole currency accepted and transacted… is Bitcoins.” As well as the familiar drugs and hitmen stories, they also revealed a vendor on Silk Road had sent the poison ricin to President Obama earlier in 2013.
The DOJ’s response (through the FBI) recognized that both centralized and decentralized digital payment systems offer legitimate financial services, but pointed out that ‘malicious actors’ are attracted to systems with “lax money-laundering and know-your-customer” controls.
The FBI appears to be keeping a close watch on virtual currencies through its Virtual Currency Emerging Threats Working Group (VCET) as well as a New Payment Methods Ad Hoc Working Group (a subgroup of the Terrorist Finance Working Group). The letter continues that the FBI has created “numerous intelligence products related to virtual currency,” and works closely with its regulatory partners in money laundering, computer crimes and intellectual property to address any threat posed by virtual currency.
Federal Reserve Response
The Board of Governors of the Federal Reserve System acknowledged that virtual currencies “may pose risks related to law enforcement and supervisory matters,” but “there are also areas in which they may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system.”
The Federal Reserve also pointed out it does not necessarily have any authority to regulate any currency not controlled by a banking organization it supervises, but is required to be consulted when any special measures (such as those concerning virtual currencies) are being considered.
The SEC mentioned its Investor Alert in the wake of Trendon Shavers’ ponzi scheme, and pointed out that “any interests issued by entities owning virtual currencies or providing returns based on assets such as virtual currencies” were considered securities and thus fell under its remit.
It also said the SEC’s Division of Trading and Markets had held informational meetings with the Bitcoin Foundation and the Financial Crimes Enforcement Network (FinCEN) covering legal, policy, technology, and law enforcement issues from the Foundation’s perspective.
“The Treasury Department is following the emergence of virtual currencies and their potential for licit and illicit use very closely.” Like the Federal Reserve, it acknowledged virtual currencies provided legitimate financial services that may be exploited by criminals (the usual money launderers and terrorists). Such illicit activity had been limited by virtual currencies’ “scope, liquidity and volatility,” though.
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