After an eventful 2015 for bitcoin and the blockchain, what's in store on the regulatory and enforcement front in 2016?
Here are some things to watch:
1. Policing of onramps and offramps
With multiple federal regulatory agencies having outlined their mandates in the bitcoin and blockchain space and laid down how they intend to treat digital currencies, we are increasingly likely to see 'regulation by enforcement' next year.
That is, we may see more enforcement actions brought against particular industry companies, sending a message to other firms about how agency rules will be applied in practice.
The obvious focus of enforcement will be money service businesses (MSBs), which sit at the intersection between bitcoin and other digital currencies and fiat currencies.
While up to now some of these cases have involved 'low-hanging fruit' – companies where there was allegedly clear evidence of intentional failure to comply with anti-money laundering (AML) rules – these cases still should incentivise all companies that qualify as MSBs to ensure that they have an appropriate risk-based AML compliance program in place and that they take seriously the obligation to file suspicious activity reports (SARs) where appropriate.
But even beyond MSBs, don’t be surprised to see the Financial Crimes Enforcement Network (FinCEN), the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) continue to police the activities of bitcoin and digital currency businesses within their purview in the year ahead.
2. Spotlight on terror financing
In the wake of the tragic terrorist attacks in Paris, there understandably has been increased focus by governments and the media on the ways that terrorists communicate and move money.
Some of that attention has been directed at bitcoin and other digital currencies.
Still, governmental authorities have recognized that the traditional financial system presents at least as high, if not a much higher, risk.
Indeed, the UK Treasury recently released a risk assessment of money laundering and terrorist financing, finding that digital currencies present the lowest risk for money laundering and that there was “little evidence to indicate that the use of digital currencies has been adopted by criminals involved in terrorist financing”.
That said, the reality is that terrorists and criminals are using all sorts of technologies to try to hide their activities over the Internet and there is unquestionably a risk that they could seek to use digital currencies to help finance their operations.
This greater anxiety about terrorist threats will naturally being increased attention to the risks posed by possible terrorist misuse of digital currencies.
The best way for the industry to help address these concerns is through education, engagement and dialogue with law enforcement agencies.
3. Scrutiny of blockchain applications
This year has seen an explosion of blockchain-related activity among 'traditional' financial services institutions, developing applications for either the bitcoin blockchain or for proprietary blockchains or blockchain-like systems.
Blockchain-based applications have the potential to reduce transaction fees and other frictional costs, and to improve compliance efforts by the inherently transparent nature of the blockchain's decentralized and immutable record of transactions..
However, as more 'traditional' service providers move to blockchain-based applications, look for regulatory agencies in particular to stake out their territory, first through surveys and informational meetings, but then through targeted investigations and perhaps even enforcement actions.
4. Bitcoin's reputation improved
This past October, a broad coalition of industry representatives, led by the Chamber of Digital Commerce and Coin Center joined forces to create the 'Blockchain Alliance', a public-private forum to help combat criminal activity involving bitcoin and the blockchain.
The Blockchain Alliance serves as a resource for law enforcement to benefit from the expertise of some of the brightest minds in the blockchain industry for technical assistance in response to challenges faced during investigations.
It also provides a resource for the blockchain community to understand the interests and concerns of law enforcement and regulators about the blockchain and its applications, and serves as a mechanism for open dialogue between law enforcement and industry about issues of concern.
By providing this resource to law enforcement, industry participants can help protect public safety while at the same time combating misperceptions about bitcoin and further demonstrating the industry’s good-faith efforts to cooperate with investigations.
Although the Blockchain Alliance is in just its first few months of operation, we have already made great strides in improving government perceptions of the industry, while helping communicate that our companies are good corporate citizens.
And reflecting the global nature of the industry and the perception problems it faces, the Alliance has expanded to include not just US enforcement agencies, but also Europol and Interpol.
We predict that the positive engagement being undertaken by the Blockchain Alliance will help government agencies develop a better understanding of the benefits of bitcoin and the blockchain, and will help foster an approach to enforcement and regulation that supports innovation and growth, so this transformative technology can reach new heights in 2016 – and beyond.
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