At the latest Bloomberg Breakfast event held in New York on 18th March, David S Cohen, Under Secretary of the US Department of the Treasury, discussed the challenges of digital currencies as part of a broader conversation with the media outlet’s Matt Miller to air on Bloomberg TV.
In the hour-long talk, Cohen spoke about the organisation’s role as a global leader in educating consumers and governments on the evolving issue, paying a particular interest to the potential illicit uses of digital currencies, as well as the measures it is willing to take to ensure their proper use.
Most notably, however, Cohen revealed that the Treasury is taking an interest in ensuring that the digital currency industry evolves in a regulated manner despite these concerns.
For the first time, Cohen said, his group will be including an unnamed member of the digital currency community as part of the Treasury’s Bank Secrecy Act Advisory Group (BSAAG) in an effort to work toward this goal.
Chaired by the Financial Crimes Enforcement Network (FinCEN) director, the body makes recommendations to the Treasury on issues regarding the Bank Secrecy Act, the US law that requires financial institutions to help detect and prevent money laundering.
Said Cohen regarding the decision:
“We are hopeful that formally including the virtual currency community’s voice in the BSAAG will mean that our regulatory approach as a whole, including our approach to virtual currency regulation, is better informed and more effective.”
Cohen indicated that there had already been “ad-hoc” meetings with members of the community, though this move is intended to ensure such conversation is more consistent.
Accounting for illicit use
Cohen began his prepared remarks by denoting the dangers of digital currencies in an effort to show his organization would not hesitate to take tough measures against those who abuse the technology.
For example, Cohen evoked the now-defunct digital currency Liberty Reserve, a site shut down through measures made possible by the controversial USA Patriot Act; and Silk Road, the online black market seized by law enforcement officials in late 2013, calling the negative attention paid to digital currencies in respect to these organisations “well-deserved”.
Such high-profile arrests, he said more positively, were also indicative that current regulations are working to contain the illegal use of digital currencies.
The under secretary indicated that the Treasury would take a approach that looks to encourage lawful practices, while understanding that not every entity will comply with rules. Cohen did, however, firmly warn organisations that are not in compliance with FinCEN, suggesting these entities could face consequences for this decision.
Cohen also addressed the innovative aspects of the technology, but suggested the full power of the illicit use of digital currency remains something it needs to consider:
“For terrorist financiers virtual currencies are understandably appealing: if funds could be swiftly sent across borders in a secure, cheap and highly secretive manner, it would suit their needs well. Moreover, access to a fully anonymous – or even pseudonymous – currency would allow terrorists to better cover their tracks.”
For the moment, at least, he indicated that the focus of the organisation is on the former.
"We do not currently see widespread use of virtual currencies as a means of terrorist financing or sanctions evasion. The volatility associated with virtual currency, combined with its low capitaliziation and liquidity has limited its appeal to these illicit actors."
Further, he noted that digital currency companies regulated under FinCEN are now filing more suspicious activity reports, a fact that shows evidence the industry is willing to assist law enforcement.
Cohen also suggested that it will seek to regulate digital currencies only at the points where digital currency is exchange for 'real' money.
“At the current adoption levels, we think that this type of oversight is sufficient to guard against money laundering and other illicit finance threats."
However, he indicated that long-term, the Treasury may move to apply cash-like restrictions to the use of virtual currencies. Though, this he said, would come with wider adoption.
For now, Cohen said he remains focused on working with international partners, including the European Commission, to increase global understanding of the illicit finance threats associated with virtual currencies and regulatory approaches to confront them.