money laundering and funding terror using bitcoin convertible virtual currency and other digital...

8/10/2019 Money Laundering and Funding Terror Using Bitcoin Convertible Virtual Currency and Other Digital Currency Products

http://slidepdf.com/reader/full/money-laundering-and-funding-terror-using-bitcoin-convertible-virtual-currency 1/40



,ith title passin# upon !elivery%B in that they can be use! as a substitute "orcurrency% the "un!s they provi!e access to are accessible by the bearer o" the!evice% an! they can be trans"erre! "rom person to person ,ithout a recor! o" thechain o" title. 4

Travelers ,oul! there"ore be obli#e! to a##re#ate any value that can beaccesse!5 throu#h such a tan#ible5 !evice "or purposes o" !eterminin# i" theyhave crosse! the G10%000 threshol! an! re&uire! to submit the relevant report(inC=; orm 10D% no,n as a CM-35). *ee 1 C3 K 1010.40.D

6ne o" the main purposes behin! the up!ate! $*' reportin# re&uirements ,as to

"acilitate the traceability o" * currency an! currency e&uivalents >prepai! access?

ille#ally movin# across the * bor!er an! out o" the nite! *tates.

inC=; irector Fames L. reis% Fr. state!% inC=; prepai! access re#ulationsalso provi!e a balance to empo,er la, en"orcement ,ith the in"ormation nee!e!

to attac money laun!erin#% terrorist "inancin#% an! other illicit transactionsthrou#h the "inancial system ,hile preservin# innovation an! the many le#itimateuses an! societal bene"its o""ere! by prepai! access.5J

Lo,ever% because o" :ui!ance release! by inC=; on March 1% 201 in !ocument-;201:001% a seemin#ly contra!ictory situation has emer#e! "or $itcoin convertiblevirtual currency.

The subect o" the :ui!ance ,as the 'pplication o" inC=;8s 3e#ulations to Persons'!ministerin#% =chan#in#% or sin# Nirtual Currencies such as $itcoin. This :ui!anceeempts $itcoin "rom bein# re#ulate! as prepai! access. This ,oul! appear to contra!ict

both the 200A an! the 2011 earlier attempts at epan!in# CM-3 re#ulations in or!er to better re#ulate the cross bor!er movement o" "un!s value! at over G10%000.

Lere is tet "rom the inC=; !ocument -;201:001

The inancial Crimes =n"orcement ;et,or (BinC=;B) is issuin# thisinterpretive #ui!ance to clari"y the applicability o" the re#ulations implementin#the $an *ecrecy 'ct (B$*'B) to persons creatin#% obtainin#% !istributin#%echan#in#% acceptin#% or transmittin# virtual currencies

-n contrast to real currency% BvirtualB currency is a me!ium o" echan#e that

operates lie a currency in some environments% but !oes not have all the attributeso" real currency. -n particular% virtual currency !oes not have le#al ten!er status inany uris!iction. This #ui!ance a!!resses BconvertibleB virtual currency. This type

4 ibid

5 Mor#an% 3. (2011). Cash% $earer $on!s% or Cell PhoneO inC=; Proposes to =pan! 6bli#ations un!er Cross

$or!er 3eportin# 3ule. >$lo#? 8ayment 2aw -dvisor . 'vailable atEhttpE//,,,.paymentla,a!visor.com/2011/11/0/cashbearerbon!sorcellphone"incenproposestoepan!obli#ationsun!ercrossbor!erreportin#rule/ >'ccesse! 4 ;ov. 2014?.

6 *antan#elo% $.% Mosher% .% rie!man% H. an! Trua% M. (2012). inC=; issues "inal rules relatin# to money

services business (M*$) !e"initions. >ournal of Investment 6ompliance% 1(1)% pp.1922.

http://www.paymentlawadvisor.com/2011/11/03/cash-bearer-bonds-or-cell-phone-fincen-proposes-to-expand-obligations-under-cross-border-reporting-rule/






o" virtual currency either has an e&uivalent value in real currency% or acts as asubstitute "or real currency.

' person8s acceptance an!/or transmission o" convertible virtual currency cannot be characteri+e! as provi!in# or sellin# prepai! access because prepai! access is

limite! to real currencies.

...inC=;8s re#ulations !e"ine Bprepai! accessB as Baccess to "un!s or the value o" "un!s that have been pai! in a!vance an! can be retrieve! or trans"erre! at some point in the "uture throu#h an electronic !evice or vehicle% such as a car!% co!e%electronic serial number% mobile i!enti"ication number% or personal i!enti"icationnumber.B 1 C3 K 1010.100(,,). Thus% Bprepai! accessB un!er inC=;8sre#ulations is limite! to Baccess to "un!s or the value o" "un!s.B -" inC=; ha!inten!e! prepai! access to cover "un!s !enominate! in a virtual currency orsomethin# else that substitutes "or real currency% it ,oul! have use! lan#ua#e inthe !e"inition o" prepai! access lie that in the !e"inition o" money transmission%

,hich epressly inclu!es the acceptance an! transmission o" Bother value thatsubstitutes "or currency.B 1 C3 K 1010.100("")(D)(i).9

This ne, inC=; #ui!ance appears to contra!ict eistin# attempts to epan! thereportin# re&uirements an! "inancial re#ulations ,hich trace the movements o" currencyan! its e&uivalents across * bor!ers.

Mr. Fames '. inins% =ecutive 'ssociate irector% Lomelan! *ecurity -nvesti#ations"urther mu!!ie! the ,ater an! con"irme! this in a letter to Mr. Fames L. reis% Fr.%irector% inancial Crimes =n"orcement ;et,or on 'pril A% 2012. -t rea!E

!" #hould the border declaration apply to codes$ pass%ords and other

intangibles as %ell as to any tangible ob&ect that is dedicated to accessing

prepaid 'unds(

L*- believes that bor!er !eclaration shoul! not apply to co!es% pass,or!s an!other intan#ibles.

-!enti"ication an! veri"ication o" intan#ibles in the contet o" bor!er en"orcement poses lo#istical an! potential le#al issues that are not contemplate! by currencyan! monetary instrument !eclaration re#ulations. The structure o" the currencyan! monetary instruments !eclaration re#ime% hin#es on the eistence o" a physical obect. The lan#ua#e re&uires somethin# that can be passe! "rom onein!ivi!ual to another in or!er to be presente! to a thir! party "oreecution/payment.

a, Should it only apply to cards or also to cellphones! 'eyfobs! or other

tangible ob$ects that include a device that enables them to function in a

7 .* epartment o" the Treasury inancial Crimes =n"orcement ;et,or% (2014). ?uidance %I1)/35)?//3

-pplication of %in6;1 ) 7egulations to 8ersons -dministering! ;xchanging! or Using @irtual 6urrencies.Hashin#ton% CE .* epartment o" the Treasury% p.1.



similar manner to =swiping= a magnetic stripe cardA

$or!er !eclaration shoul! apply to cell phones% ey "obs% or other tan#ible obects,hen these obects are associate! ,ith a prepai! account. These pro!uctsrepresent the evolution o" value !elivery systems "rom cash to other "orms ,hich

assure the authenticity o" the value associate! ,ith the pro!uct% ,hile provi!in#increase! access an! personal security to the users. 's ,ith car!s the applicationo" the bor!er !eclaration re&uirement shoul! be !etermine! by the prepai! naturean! li&ui!ity o" the pro!uct% rather than the !elivery system.

6ne can conclu!e "rom the interpretation o" this #ui!ance% that $itcoin convertible virtualcurrency is a !ecentrali+e! "inancial tool that maes it possible to easily circumvent the"e!eral currency an! monetary instrument reportin# re&uirements an! the ori#inal intento" $*' re#ulations.

!)a*ple one+

' person crossin# the * bor!er "rom =l Paso to Fuare+ must report an amount o"cash or prepai! car!s in ecess o" G10%000 in their possession. Lo,ever% a personin =l Paso that uses G2D%000 o" cash an! buys $itcoin can trans"er that value overthe bor!er to a buyer in Meico ,ith no reportin# or supervision. The buyer canalso eep the value conceale! in a *$ !rive store! in his pocet an! le#ally,al across the bor!er ,ithout !eclarin# the value. The value representin#$itcoin% can also be printe! on a paper ,allet then carrie! or maile! across the bor!er into Meico ,ithout any reportin#.

!)a*ple t%o+

'n -slamic etremist can "ly into the os 'n#eles "rom '"rica ,ith GD00%000 in$itcoin% to "un! a terror attac% conceale! in a "ile on the *LC memory car!loa!e! into his camera. Le is not re&uire! to !eclare he is carryin# GD00%000 *!ollars ,orth o" $itcoin because $itcoin "un!s are not consi!ere! prepai! access.The criminal travelin# across the bor!er ,ith G11%000 o" unreporte! prepai! car!sis committin# a crime. The terrorist ,ith GD00%000 in unreporte! $itcoin istravelin# le#ally an! ,oul! have no issues passin# throu#h * Customs ,ithout!eclarin# that value.

!)a*ple three+

=ach ,ee in 4 maor 'merican cities% cash procee!s "rom criminal activity is

echan#e! into $itcoin. nlicense! sellers o" $itcoin in each city have ,eely

arran#ements ,ith re#ular cash buyers an! pro"it !urin# this above maret resaleo" $itcoin "or cash. 't the en! o" each ,ee% these 4 anonymous $itcoin buyers in

each city% trans"er or "unnel this ne,ly ac&uire! $itcoin to ,allets controlle! by

associates os 'n#eles. The "un!s are then copie! onto a laptop o" a courier

"lyin# "rom 'Q into Meico City each ,ee.

8 inins% F. (2014). %I16;1)/33)///5)//3: . 1st e!. >p!"? Hashin#ton% CE .*. 6""ice o" Lomelan! *ecurity%

pp.1. 'vailable atE httpsE//,,,.scrib!.com/!oc/24A1J04D/-;C=;2011000001J >'ccesse! 4 ;ov. 2014?.

https://www.scribd.com/doc/249160458/FINCEN-2011-0003-0016






There are no "e!eral or state la,s in 'merican ,hich supervise or re#ulate value movin#

in an! out o" $itcoin ,allets. urther there are no re&uirements to maintain a history o"

transactions. =ven thou#h $itcoin has very similar "eatures to cash an! in 'merica there

are very strict rules #overnin# the movement o" cash% $itcoin "lo,s "reely ,ithout

reportin# or recor! eepin# re&uirements.

More importantly% there is no reportin# or supervision o" the $itcoin"orcash sales

con!ucte! by unlicense! $itcoin a#ents in the *. 'ny ,eely movement o" $itcoin

"un!s across the * bor!er into Meico is invisible to la, en"orcement. This is a

!an#erous "inancial service an! liely to #ro, because o" the pro"itability to the $itcoin

sellers an! the sa"ety it o""ers to those movin# ille#ally obtaine! an! unreporte! "un!s

across the bor!er.

The le#al eclusion o" $itcoin "rom the CM-3 is a mistae. -n or!er "or a healthy an!le#al $itcoin consumer maret to !evelop in the nite! *tates% those in!ivi!uals an!

businesses en#a#e! in * $itcoin activity shoul! remain "ocuse! on the spirit o" the la,an! not the loopholes ,hich permit ille#al activity. $ecomin# properly license! un!er theMoney *ervice $usiness an! Money Transmitter re#ulations shoul! be the #oal every *$itcoin user an! enterprise. 't present% easily avoi!in# these la,s is very common an!creates a substantial ris "or the *.

$ecause o" the anonymous nature o" numbere! $itcoin ,allets% anyone can be the o,nero" the account. $ecause o" $itcoin8s !ecentrali+e! nature% there are no le#al connections bet,een the o,ner o" a ,allet a!!ress an! a veri"ie! in!ivi!ual. 6,nership o" a ,alletcan trans"er in ust a moment "rom one person to another.

There is currently no accessible lan! or computer base! recor! o" o,nership or system o" i!entity !ocuments that mae it possible to lin an in!ivi!ual to a speci"ic ,allet a!!ress%,hich coul! later represent a le#al chain i!enti"yin# the actual o,ner "or that ,allet.

=ampleE Hallet a!!ress% 1;A*;v''r*,RSiu$$iT7s;Ft3#n'ae% ,hich is o,ne!an! use! re! *mith% can be instantly #iven to Fu!y Fones one ni#ht in a bar. This o""ersno provable history o" that ,allets o,nership.

$itcoin is electronic cash minus the * re#ulatory supervision% reportin# re&uirementsan! state level re#ulations o" a cash pro!uct% a ban issue! monetary instrument or a prepai! car!. -n!ustry participants% such as online $itcoin payment processors treat

$itcoin as an online electronic metho! o" payment% ho,ever% its "eatures re&uiresupervision an! reportin# as a cash type o" pro!uct. The current "e!eral an! state la,s#overnin# $itcoin o,nership% transactions an! crossbor!er movements are ,oe"ullyina!e&uate.

The nite! *tates has restrictions on movin# bul cash (amounts o" G10%000 an! hi#her),ithin the * an! across * bor!ers. Lo,ever% there are no restrictions on themovement or payment o" -nternet base! !i#ital currency pro!ucts such as $itcoin



throu#hout the * or across any * bor!er.

The Issue %ith cross,border Bitcoin trans'ers"

-" a person ,ere to !eposit G%000 in t,enty !ollar bills each !ay "or a ,ee or morethrou#h multiple ban branches o" the same maor * ban% this activity ,oul! very

liely tri##er the "ilin# o" a *uspicious 'ctivity 3eport (*'3) as re&uire! by la,. The ban8s so"t,are ,oul! have "la##e! the hi#her than normal multiple cash !eposits an! the ban ,oul! report that activity as suspicious.

Ret% any person or #roup can anonymously trans"er G4%000%000% or more% in $itcoin each,ee "rom anonymous ,allets in ;e, Fersey an! ;e, Ror across the * bor!er into,allets locate! in Culiacan% Meico. These anonymous crossbor!er money "lo,s #ocompletely unnotice! by all bans% * inancial 3e#ulators an! la, en"orcementa#encies.

• There are la,s re#ulatin# the movement o" cash "un!s across national bor!ers. (

G10%000 cash)• There are la,s "or reportin# the lar#e movement o" cash in any business

transaction.(*'3 G2%000 CT3 G10%000)

• There are la,s re&uirin# business persons to reports lar#e transactions o" cash inthe course o" every!ay business (orm 00).

• There are no la%s governing the *ove*ent o' Bitcoin in any o' these

situations"

Moving Cash 'ro* U# to Me)ico"

Cash "un!s locate! in the * can be use! to purchase $itcoin "rom in!ivi!uals "oun!throu#h communities such as httpE//,,,.meetup.com an! httpsE//localbitcoins.com/ plus

a number o" other online $itcoin services% "orums an! #roups.

6ne such connection service is ocal$itcoins.com httpsE//localbitcoins.com/>tet "rom the ,ebsite?$uy an! sell bitcoins near you-nstant. *ecure. Private.Tra!e bitcoins in J20 cities an! 21 countries inclu!in# nite! *tates.A

'cross the nite! *tates in both lar#e an! small cities% $itcoin buyers an! sellers areconnectin# an! completin# private transactions. Hithout eception% in every 'mericancity% anyone can mae a connection throu#h a local #roup an! buy $itcoins ,ith cash.

6utsi!e o" the *% connections are also tain# place in cities aroun! the ,orl!.

's a part time or "ull time ob% private in!ivi!uals resi!in# in the * have been en#a#in#in the online purchase o" $itcoins in the maretplace either "rom a reco#ni+e! echan#ecompany% a "orei#n tra!in# company% a lar#e o"" maret 6TC seller or retail !i#italcurrency business. The purchase is ma!e at or belo, maret prices #enerally usin# a ban ,ire trans"er an! that in!ivi!ual ,ill then attempt to resell the $itcoins in a local "aceto

9 ocal$itcoins.com% (2014). Index 8age. >online? 'vailable atE httpsE//localbitcoins.com/ >'ccesse! 4 ec. 2014?.

http://www.meetup.com/

https://localbitcoins.com/




http://www.meetup.com/






"ace cash transaction at a mare! up price. This is a pro"itable metho! o" tra!in# an! astea!y business in the *. -n!ivi!uals ,ith a #oo! supply o" cash or $itcoins% alon# ,ithsome ne#otiatin# sills can #enerally mae a livin# buyin# an! resellin# $itcoin in theirlocal maret.

Cash buyers ,ill o"ten pay hi#her than maret prices "or $itcoins an! re#ular ,eely business arran#ements are common. This private transaction bet,een local cash buyersan! unlicense!% unre#ulate! $itcoin sellers leaves no transaction history% #enerates noorm 00% *'3 or CT3 activity an! re&uires no "ormal i!enti"ication o" the buyer orseller. The sellers are not license! as money transmitters nor !o they operate as moneyservice businesses. =ven i" these t,o parties have verbal a#reements to buy an! sell usin# bul cash each ,ee% these transaction #o unreporte!.

#cenario+

-nstea! o" the bul cash smu##lin# o" G100%000 G00%000 in small * notes intoMeico% ille#ally obtaine! procee!s "rom !ru# sales can easily be echan#e! into$itcoin an! instantly trans"erre! across the bor!er or aroun! the ,orl!.

Transactions on localbitcoins.com are or#ani+e! an! ,i!esprea!. =ach !ay% in maor *cities an! areas% the ,ebsite localbitcoins.com helps to match buyers ,ith sellers. 'nyonecan simply visit the ,eb site% enter a +ip co!e% an amount o" money% the metho! o" payment% an! be matche! ,ith $itcoin buyers an! sellers.

9 lar#e metropolitan cities in the * ,ere chosen at ran!om an! those cities ,ere entere!into localbitcoins.com re&uestin# in person5 cash buys o" $itcoin in the amount o"GD00. -n each case% hun!re!s o" connections ,ere instantly arran#e! ,ith $itcoin sellersin those maor cities that ,oul! locally accept cash in person.

-n this instance% the in!ivi!uals echan#in# cash "or $itcoin ,ere unlicense!% unsupervise! an! !o not report lar#e or suspicious cash transactions as re&uire! by la,.These buyers an! sellers !o not "ile suspicious activity reports (*'3) or currencytransaction reports (CT3) as re&uire! o" license! money service businesses an! moneytransmitters. These sales circumvent inC=; re#ulations ,hich epose the trans"er o"lar#e amounts o" ille#al cash.

$an 3ecor!s an! orei#n Transactions 'ct o" 1A90 ($*') re&uires "inancialinstitutions to recor! (Title -) re&uires "inancial institutions to create an! retainrecor!s relatin# to !omestic an! international "un! trans"ers in amounts o" G000or more. The re&uirements are !etaile! an! vary !epen!in# on ,hether the ,ire is

con!ucte! throu#h a ban or throu#h a nonban "inancial institution.

-n the case o" "inancial institutions% the re&uirement applies to !eposits%,ith!ra,als% an! echan#es o" currency% or other payments or trans"ers by$

throu#h% or to a "inancial institution in a banin# !ay involvin# a transaction (ormultiple transactions by or on behal" o" the same person) in currency ecee!in#-./$///" I' the a##re#ate amount o" cash ecee!s -./$///$ then the "inancialinstitution must "ile a CT3. -n the case o" casinos% it applies to any Bcash in0 or



Bcash outB transaction involvin# more than -./$///" By volume% theapproimately .1$///$/// CT3s that are "ile! each year.10

These in!ivi!uals are re&uire! to be license! an! re#ulate! but "ail to !o so an! the,ebsite business% localbitcoins.com has no supervision or re#ulations re&uirin# the

buyers an! seller to be re#ulate!.

The ,ebsite also !oes not use any so"t,are that coul! a##re#ate total !aily transactionson its members an! no i!enti"ication o" cash buyers is re&uire!. ocal$itcoins.com o""ersno antimoney laun!erin# pro#ram ('M) an! !oes not have a no, your customer5(7RC) in pro#ram "or cash transactions% nor is there a state! 'M policy on the ,ebsite.

Many o""ers ,ere !iscovere! to sell $itcoin% "or cash% at the GA%000 to GA%AAA level.These appear to be obvious attempts to structure cash purchases belo, re&uire! reportin#level. Cash sales at this (GA%000) level ,ere "oun! in every maor city that ,asresearche!. 'n a!!itional problem is epose! by these sales ,hen one buyer can circulate

throu#h multiple sellers accumulatin# 410 times the amount o" cash per !ay that ,oul!re&uire reportin#. Lo,ever% the ,ebsite an! business o""ers no possible ,ay to a##re#ateor present a total o" accumulate! transactions that have occurre! !urin# one business !ay.

'!!itionally% reportin# levels "or suspicious activity reports (*'3) o" G%000 in cash caneasily be circumvente!. Many G2%A00 transactions ,ere possible ,ithout any report o"suspicious activity. Many cities ha! $itcoin sellers a!vertisin# a maimum sale o" G000%G2%AAA or G2%A00. This is at or belo, the re&uire! reportin# level o" G%000.

Presente! here ,ere the available amounts o" $itcoin "rom sellers in the maor cities,hich coul! be purchase! in person usin# cash only.

os 'n#eles% Cali"orniaate o" cash purchase ,as 11/1/2014 approimately 2pm P*T. Total possible cash purchases available "or that !ay ,ereE0%00020%000A%000A%0002%00040%0004%000D%00010%000

10%0004%D0010%000A%00010%00020%000

10 inn% C. (2010). 3==-;-;: TL= $';7 *=C3=CR 'CTE C33=;CR 3=P63T-;: '; TL= C3-M= 6

*T3CT3-;:. Santa 6lara 2aw 7eview% >online? D0(2)% pp.41241. 'vailable atEhttpE//!i#italcommons.la,.scu.e!u/c#i/vie,content.c#iOarticleU10DIcontetUla,revie, >'ccesse! 14 ;ov. 2014?.

http://digitalcommons.law.scu.edu/cgi/viewcontent.cgi?article=1058&context=lawreview





A%AAAA%000A%000A%000A%AAA10%00020%00010%000A%AAA1%000%00

UUUUUUUUG 2A%9A9More than G2A%000 in $itcoin coul! have been purchase! ,ith cash on this one !ay inthe os 'n#eles area. 11/1/2014

*an ie#o% Cali"orniaate o" cash purchase ,as 11/1/2014 approimately 2pm P*T. Total possible cash

purchases available "or that !ay ,ereEA%AAA2%AAAA%000A%AAA%00029%D00A%A00A%000A%000A%0004%DAAJ%000

J%000A%0002%0004%000A%000D%000A%000

UUUUUUUUG 1D%AAJMore than G1D%000 in $itcoin can be purchase! ,ith cash on this !ay in the *an ie#oarea. 11/1/2014

*an 'ntonio% Teas area (inclu!in# Louston).ate o" cash purchase ,as 11/1/2014 approimately 2pm P*T.Total possible cash purchases available ,ereE%0004%D00J%0002%D00%000D%000



D%0002%000D0%00040%00010%0001%00010%0001%000%000D%0002%000A%A00%0002%J0

UUUUUUUUG 19%D0More than G19%000 in $itcoin can be purchase! ,ith cash on this !ay in the *an 'ntonioarea. 11/1/2014

$roolyn% ;Rate o" cash purchase ,as 11/1A/2014 approimately 9am =*T.Total possible cash purchases available ,ereE2%000A%AAA1%000D%000A%AAAJ%0002%A004%D0010%000

D%0002%A00A%AAA10%00010%00010%00010%000%00010%00010%000A%0004%00

UUUUUUUU

G 1D1%0A9More than G1D1%000 in $itcoin can be purchase! ,ith cash on this !ay in the $roolynan! ;e, Ror City area. 11/1A/2014

$altimore% M an! Phila!elphia areasate o" cash purchase ,as 11/1A/2014 approimately 9am =*T. Total possible cash purchases available ,ere0%000



More than G144%000 in $itcoin can be purchase! ,ith cash on this !ay in *outh lori!a.11/1A/2014

*eattle% H' area (inclu!in# ust over the */C' bor!er)ate o" cash purchase ,as 11/1A/2014 approimately Jam P*T. 'll prices in * unless

other,ise note!. Total possible cash purchases available ,ereEA%000A%000D%000D%000A%D00D%000D%0001%0009%D00%0001%00010%000 C'A%009%424 C'1%0001%000 C'1%000 C'D%000 C'A%000 C'

UUUUUUUUG 90%00 * G AA%424 C' U Total value o" cash buys in *- 2/$3// 4 - 32$2567 - .83$856

More than G1D%000 in $itcoin can be purchase! ,ith cash on this !ay in the *eattle area.11/1A/2014

:reater 'tlanta% :' areaate o" cash purchase ,as 11/1A/2014 approimately 10am =*T. Total possible cash purchases available ,ereE1%00010%0002%0002%000A%000A%000%0001%000%000

1%000J%000%000%000%000J%000%0002%000%000J%000



1%000A%000A%000

UUUUUUUUG AD%000More than GAD%000 in $itcoin coul! be purchase! ,ith cash on this !ay in the #reater

'tlanta% :eor#ia area. 11/1A/2014

Tet "rom the ocal$itcoins.com ,ebsiteE

B3eal name is not re&uire! in local cash tra!e or sa"e online payment metho!s.BB3eal name is not re&uire! ,hen sellin# bitcoins.B11

The For* 39// :e;uire*ent

(3eport o" Cash Payments 6ver G10%000 3eceive! in a Tra!e or $usiness inC=;%orm 00% 6M$ ;o. 1D0J001% epartment o" the Treasury% inancial Crimes=n"orcement ;et,or -3* orm 00% epartment o" the Treasury -nternal 3evenue

*ervice)

The * Treasury epartment alon# ,ith e!eral a, =n"orcement '#encies isconcerne! ,ith unreporte! lar#e cash transactions in 'merica. 's re"erence! by orm005 even car !ealers% real estate a#ents an! attorneys are re&uire! to report more thanG10%000 chan#in# han!s.

The $*' re&uires certain non"inancial tra!es an! businesses to report the receipto" more than G10%000 in currency in the sale o" #oo!s or services. This is the socalle! Borm 00B re&uirementa re"erence to the name o" the "orm commonlyuse! by "ilers such as automobile !ealers% real estate closin# a#ents% an! attorneys

to report lar#e currency transactions. The orm 00 report has "our parts. Part -re&uires the "iler to i!enti"y the person "rom ,hom the cash ,as receive!. Part --re&uires in"ormation about the person or persons on ,hose behal" the transaction,as con!ucte!. Part --- re&uires a !escription o" the transaction itsel"i.e.% the!ate% time% nature o" the currency% an! amount o" the transaction. Part -N re&uiresin"ormation about the business participatin# in the transaction.B The orm 00 isuni&ue amon# $*' reports in that it !oubles as a in! o" *'3 "orm as ,ell.12

Ret% every !ay in 'merica% hun!re!s o" thousan!s o" !ollars can be &uicly an! &uietly beechan#e! "or $itcoin convertible virtual currency. The source o" the cash is unno,n%the en! users (The receivers) an! "inal !estination o" the virtual currency is unno,n% an!

the transactions #o unreporte!. urthermore% lar#e amounts o" $itcoin movin# across the* bor!er #o unreporte!.

The situation raises some important &uestions.

11 ocalbitcoins.com% (2014). 7eal name policy on 2ocalBitcoins. >online? 'vailable atE

httpsE//localbitcoins.com/#ui!es/realname >'ccesse! 10 ;ov. 2014?.12 inn% C. (2010). 3==-;-;: TL= $';7 *=C3=CR 'CTE C33=;CR 3=P63T-;: '; TL= C3-M= 6

*T3CT3-;:. Santa 6lara 2aw 7eview% >online? D0(2)% pp.41241. 'vailable atEhttpE//!i#italcommons.la,.scu.e!u/c#i/vie,content.c#iOarticleU10DIcontetUla,revie, >'ccesse! 14 ;ov. 2014?.

https://localbitcoins.com/guides/real-name








1. !ngaged in *atching Bitcoin buyers %ith sellers$ is LocalBitcoins"co*

re;uired to operate as a *oney service business(

2. <ithout FinC!= registration and the proper *oney trans*itting licenses$ is

LocalBitcoins"co* operating legally(

3. Is this yet another e)a*ple o' ne% disruptive technology$ %hen paired %ithso*e si*ple ht*l$ circu*vents old outdated 'inancial regulations(

Co*pared %ith P6P Lending

PeertoPeer online len!ers such as Prospers% ,hich match len!ers ,ith borro,ers% arere&uire! to be license! as money transmitters an! operate as money service businesses.Lo,ever% such companies !irectly en#a#e in sen!in# an! receivin# payments on behal"o" customers.

Co*pared to Travel and :ental Co*panies

' company such as 'irbnb that matches travelers ,ith open rentals is also re&uire! to be

re#istere! an! properly license!. Lo,ever% this business !irectly han!les all payments bet,een parties. -n "act% all customer payment transactions BmustB tae place throu#h the'irbnb ,ebsite. The company transacts online payments throu#h various currencies an! payout metho!s. (Cali"ornia Money Transmitters icense V2D0)

LocalBitcoins"co* as a Money #ervice Business(

ocal$itcoins.com !irectly accepts $itcoin value an! trans"ers that value on behal" o" itsclients (trans"erre! throu#h online ,allets maintaine! at ,,,.localbitcoins.com).

The "act that ocal$itcoins.com arran#es transactions bet,een buyer an! seller o" a"inancial pro!uct% then trans"ers $itcoins on behal" o" its customers% may cause inC=;

to !etermine that ocal$itcoins.com is operatin# as an money service business an!re&uire proper re#istrations an! licensin# across the *. =scro, services an! online bill pay (&uic sell "orm) may also "urther &uali"y the operation as a money service business.

Certainly% those in!ivi!uals buyin# an! sellin# $itcoin throu#h the ,ebsite as a#ents arere&uire! to be properly re#istere! an! license!% ho,ever "ail to !o so.

-n recent a!ministrative rulin#s% inC=; has trie! to clari"y the re#ulations an! helpi!enti"y eactly ,hich $itcoin businesses are re&uire! to be re#istere! an! ,hichcompanies are eempt. 6ne o" these letters eplains that a business ,hich matches$itcoin buyers I sellers is re&uire! to obtain proper licensin#. inC=; maes it clear

that such companies may be consi!ere! money services businesses un!er * la,.Lo,ever% the rulin# is "ocuse! on one speci"ic case% not ocal$itcoins.com% an! thatrulin# may or may not eten! to ocal$itcoins.com.

6n 6ctober 29% 2014 the * epartment o" the Treasury inancial Crimes =n"orcement ;et,or issue! t,o a!ministrative rulin# letters. These are -;20143011 an! -;20143012

http://www.localbitcoins.com/





The subect o" the letters ,asE 3e&uest "or '!ministrative 3ulin# on the 'pplication o"inC=;s 3e#ulations to a Nirtual Currency Tra!in# Plat"orm

FI=,6/.5,:/..E

This respon!s to your letter o" ecember % 201% seein# an a!ministrativerulin# "rom the inancial Crimes =n"orcement ;et,or (inC=;5) on behal" o"> ? (the Company5)% about the Companys possible status as a money services business (M*$5) un!er the $an *ecrecy 'ct ($*'5). *peci"ically% you as,hether the convertible virtual currency tra!in# an! booin# plat"orm that theCompany inten!s to set up (the Plat"orm5) ,oul! mae the Company a moneytransmitter un!er the $*'. $ase! on the "ollo,in# analysis o" the !escription o"the Plat"orm as presente! in your letter% inC=; "in!s that the Company ,oul! bea money transmitter pursuant to our re#ulations.

Rou state in your letter that the Company ,ishes to set up a Plat"orm that consists

o" a tra!in# system (the *ystem5) to match o""ers to buy an! sell convertiblevirtual currency "or currency o" le#al ten!er (real currency5)% an! a set o" booaccounts in ,hich prospective buyers or sellers o" one type o" currency or theother (Customers5) can !eposit "un!s to cover their echan#es.1

rom this rulin#% inC=; policy !ivision associate !irector Famal =lLin!o clearly statesthat such $itcoin businesses "all un!er the !e"inition o" a money transmitter. This letter"urther !etails the movement o" customer "un!s throu#h the company in connection ,ithtransactions. -t shoul! be rea! an! interprete! very care"ully.

#elling Bitcoin 'or Cash Deposit

Lere is tet "rom an in!ivi!ual a#ent sellin# $itcoins an! receivin# cash !eposits(payments) into an in!ivi!ual $an o" 'merica account.

The ocal$itcoins.com ,ebsite rea!sEThir! party !eposit at $an o" 'mericaEB:o insi!e any $an o" 'merica or 1st Convenience an! "ill out a !eposit slip,ith my account in"ormation. 6;R =P6*-T C'*L.B14

Conse&uently% an unlicense! $itcoin seller usin# in!ivi!ual or multiple $an o" 'mericaaccounts plus other national bans% can accept cash !eposits "rom stran#ers an! transmit$itcoin in 040 !i""erent states ,ithout any re#istration or supervision.

6nce the cash procee!s o" crime are converte! into $itcoin% the virtual currency caninstantly be trans"erre! out o" the * an! sol! (converte! bac to national currency)

13 * epartment o" the Treasury inancial Crimes =n"orcement ;et,or% (2014). %I1)/34)7/33 Sub$ect 7e*uest

for -dministrative 7uling on the -pplication of %in6;1 ) 7egulations to a @irtual 6urrency Trading 8latform.Hashin#ton% CE * epartment o" the Treasury% pp.19.

14 ocalbitcoins.com% (2014). Buy bitcoins online in from cylon9 6ash deposit I1ST-1T Ban' of -merica! 3st

6onven. +Cpen Sun.,. >online? 'vailable atE httpsE//localbitcoins.com/a!/ADD2/purchasebitcoincash!epositinstant bano"america1stconvenopensununite!states >'ccesse! 4 ec. 2014?.

https://localbitcoins.com/ad/98552/purchase-bitcoin-cash-deposit-instant-bank-of-america-1st-conven-open-sun-united-states







throu#h a non* echan#e a#ent or tra!in# company. The procee!s coul! then be ,ire!to any ban account in the ,orl! or ,ith!ra,n by !ebit car! "rom 'TMs locate! inalmost any country in the ,orl!.

Layering %ith Bitcoin

ayerin# is a techni&ue use! in the laun!erin# o" money. The cash procee!s o" crime canalso be move! throu#h $itcoin an! layere! by usin# multiple !i#ital currency pro!ucts. -" the en! user (receiver) so !esires% the incomin# $itcoin can easily be echan#e! intoanother !i#ital currency pro!uct% such as Per"ectMoney% ,hich may o""er more li&ui!ityin certain countries an! thus mae the trans"erre! "un!s more accessible. This a!!itionalechan#e into another !i#ital currency pro!uct a!!s another "orei#n echan#e a#enttransaction an! another uris!iction to the tas o" tracin# the movement o" "un!s aroun!the #lobe. This type o" echan#e is !iscusse! "urther in the paper.

*toppin# this entire chain o" "un!s shoul! be accomplishe! in the * at the point ,here$itcoin is echan#e!. Lo,ever% the strict re#ulations "or echan#e a#ents sellin# $itcoin

"or cash #o unen"orce! in the *.

This problem o" !i#ital currency bein# sol! to unno,n parties throu#h anonymous cash!eposits into local ban accounts is not ne,.

$e"ore their no, in"amous iberty 3eserve money laun!erin# case% t,o o" the primaryoperators% Nla!imir 7ats an! 'rthur $ubovsy o,ne! ,,,.#ol!a#e.com a very popular!i#ital currency echan#e locate! in $roolyn% ;e, Ror.

Lere is tet "rom the press release provi!e! by the ;e, Ror County istrict 'ttorneyre#ar!in# their 200J operation an! arrests. Please note the sale o" !i#ital currencies "orcash !eposite! into local ;R accounts.

>oldage"net Indicted =?C

-*T3-CT 'TT63;=R ;=H R637 C6;TR ;e,s 3elease@uly 62$ 6//1

ContactE $arbara Thompson 212.D.A400

Manhattan istrict 'ttorney 3obert M. Mor#enthau announce! to!ay thein!ictment o" t,o people on char#es o" operatin# an ille#al money transmittal business. =i#ht subsi!iary businesses operate! by the !e"en!ants have also beenin!icte!.

The !e"en!ants are '3TL3 $6N*7R an! N'-M-3 7'T*. The!e"en!ants ille#al money transmittal business is :6':= -;C. 'lso in!icte!to!ay are other companies operate! by $6N*7R an! 7'T*E :6':=L6-;: -;C.% =C*; -;C.% =Q=CT-N= C6MM=3C-' *=3N-C=* -;C.%-;T=3;=TH637 M';':=M=;T -;C.% ::; -;C.% $ T6 $M'37=TP'C= -;C. an! M:' -;T=3;'T-6;' -;C. The !e"en!ants

http://www.goldage.com/

http://www.goldage.com/



operate! out o" their $roolyn apartments.

The in!ictment char#es that the !e"en!ants operate! an ille#al money transmittal business that receive! an! transmitte! G4 million bet,een Fanuary 1% 200J an!Fune 0% 200J. The investi#ation lea!in# to to!ays in!ictment !etermine! that

:6':= (,,,.#ol!a#e.net) ,as set up by $6N*7R an! 7'T* in 2002%an! at least G0 million ,as ille#ally transmitte! to accounts ,orl!,i!e since thestart o" the !e"en!ants ille#al activities. $6N*7R an! 7'T* allo,e!in!ivi!uals to open accounts at :6':= ,ith limite! !ocumentation o"i!entity. The investi#ation is continuin# into the i!entity o" the !e"en!antscustomers an! the source o" customers "un!s.

The investi#ation reveale! that in!ivi!uals ,oul! open an online :6':=account. Then% customers instructe! the !e"en!ants to purchase an amount o" =:ol! "or their accounts. Customers coul! also choose their metho! o" payment to:6':=. *peci"ically% they coul! ,ire money% mae cash deposits or mail

postal money or!ers an! checs. $6N*7R '; 7'T* maintaine! various ban accounts un!er the #uise o" !i""erent !e"en!ant subsi!iary companiesE oreample% :6':= L6-;: -;C.% hel! accounts at Commerce $an an!$an o" 'merica =C*;% -;C ha! accounts at Citiban =Q=CT-N=C6MM=3C-' *=3N-C=* -;C.% ha! accounts at Hells ar#o-;T=3;=TH637 M';':=M=;T -;C.. La! accounts at $an o" 'merica:;; -;C.% ha! accounts at Hachovia $ T6 $ M'37=TP'C= -;C.% ha!accounts at FP Mor#an Chase M=:' -;T=3;'T-6;' -;C.% ha! accounts atHashin#ton Mutual. :enerally% cash ,as !eposite! into accounts at $an o"'merica% Commerce an! Hells ar#o% ,hile ,ire trans"ers an! postal moneyor!ers ,ere #enerally han!le! throu#h accounts at Citiban an! FP Mor#anChase.

6nce the !e"en!ants ha! purchase! the =:ol! "or their customers% the customerscoul! ,ith!ra, the money by re&uestin# ,ire trans"ers to accounts any,here inthe ,orl! or have checs sent to in!ivi!uals any,here in the ,orl!.

The !e"en!ants ept a "ee on both en!s o" the transaction =:ol! char#es a socalle! stora#e "ee5 "or hol!in# its !i#ital currency.

's part o" the investi#ation% un!ercover investi#ators "rom the Manhattan istrict'ttorneys 6""ice set up three accounts at :6':= an! move! money throu#hthe !e"en!ant companies. n!ercovers !eposite! GDD%000 in cash an! postalmoney or!ers to :6':= accounts an! then trans"erre! the "un!s to otheraccounts.

Those parties actin# as license! money transmitters en#a#e! in le#al "inancial activity

,ith the public are a critical lin in uncoverin# criminal activity. -t is "or this reason that

those a#ents are re&uire! to be license!% maintain antimoney laun!erin# pro#rams% an!

report suspicious activity alon# ,ith lar#e transactions. This re#ulate! activity helps to

http://www.goldage.net/

http://www.goldage.net/



i!enti"y money laun!erin# an! also "orces criminals to use more risy metho!s o"

movin# money. Ret% every!ay% thousan!s o" in!ivi!uals across the *% operatin# in plain

vie,% are en#a#e! in ille#al money transmittin# an! !an#erous cross bor!er $itcoin

echan#e transactions ,ithout any licensin# or supervision.

=ach !ay% the total amount o" * "un!s movin# throu#h nonban !i#ital currency pro!ucts is in the hun!re!s o" millions an! that number ,ill only #ro, lar#er in the years

ahea!.

espite the "act that * bans have strict re&uirements "or money transmitters an!

re#istere! money service business accounts% thousan!s o" unre#istere! in!ivi!uals are

actin# as $itcoin sales an! echan#e a#ents5 transmittin# "un!s throu#h personal an!

company ban accounts ,ithout !isclosin# this activity to the ban. These echan#es

,or to !is#uise the ori#inal source o" "un!s% an! en! up completin# anonymous

"inancial transactions on behal" o" unno,n international clientele.

Lere is a short list o" bans represente! by unlicense! echan#e a#ents transactin# cash!eposits throu#h the ,ebsite ocal$itcoins.com. There is little i" any !ue !ili#ence onthese cash !eposits an! this represents thir! party transactions complete! by unlicense!money transmitters.

11.20.2014 "rom httpE//,,,.localbitcoins.com

•'rvest $an (httpsE//,,,.arvest.com)

•$an o" 'merica (httpsE//,,,.bano"america.com)

•$an Hest

•$$IT (httpE//,,,.bbt.com)

•$$N' Compass $an (httpsE//,,,.bbvacompass.com)

•$'C (httpE//,,, .banbac.com)

•$M6 $an o" Montreal (httpE//,,,.bmo.com)

•Citi#roup/Citiban (httpE//citiban.com)

•Citi+ens (httpsE//,,,.citi+ensban.co m)

•Citi+ens nion $an (httpE//,,,.cubban.com)

•Chase $an (httpsE//,,,.chase.com)

•Capital 6ne (httpsE//,,,.capitalone.com)

•Commerce $an (httpsE//,,,.commerceban.com)

•Co6p Cre!it nion CC (httpsE//,,,.coopcu.com)

•Charter $an (httpsE//,,,.chart erb.com)•i"th Thir! $an (httpsE//,,,.D.com)

•Luntin#ton (httpsE//,,,.huntin#ton.com)

•FP Mor#an Chase I Co (httpE//,,,.pmo r#anchase.com)

•L*$C (httpsE//,,,.us.hsbc.com)

• ;$IT ;ational $an an! Trust (httpsE//,,,.bannbt.com)

•Peoples nite! $an (https E//,,,.peoples.com)


https://www.arvest.com/

https://www.bankofamerica.com/

http://www.bbt.com/

https://www.bbvacompass.com/

http://www.bankbac.com/

http://www.bmo.com/

http://citibank.com/

https://www.citizensbank.com/

http://www.cubbank.com/

https://www.chase.com/

https://www.capitalone.com/

https://www.commercebank.com/

https://www.coopcu.com/

https://www.charterbk.com/

https://www.53.com/

https://www.huntington.com/

http://www.jpmorganchase.com/

https://www.us.hsbc.com/

https://www.banknbt.com/

https://www.peoples.com/


https://www.arvest.com/

https://www.bankofamerica.com/

http://www.bbt.com/

https://www.bbvacompass.com/

http://www.bankbac.com/

http://www.bmo.com/

http://citibank.com/

https://www.citizensbank.com/

http://www.cubbank.com/

https://www.chase.com/

https://www.capitalone.com/

https://www.commercebank.com/

https://www.coopcu.com/

https://www.charterbk.com/

https://www.53.com/

https://www.huntington.com/

http://www.jpmorganchase.com/

https://www.us.hsbc.com/

https://www.banknbt.com/

https://www.peoples.com/



•P;C (httpsE//,,,.pnc.com)

•3e#ions $an (httpE//re#ions.com/)

•*=C (*tate =mployees Cre!it nion)

•*untrust (https E//,,,.suntrust.com)

•*antan!er (httpsE//,,,.santan!erban.com)

•T $an (httpE//,,,.t!ban.com/)•* $an (httpsE//,,,.usban.com)

•Hells ar#o (httpsE//,,,.,ells"ar#o.com)

•Hoo!orest ;ational $an (httpsE//,,,.,oo!"orest.com)

This basic list is not all o" the possible combinations "or cash !eposits in * bans. Thislist represents a one !ay slice o" activity "rom a section o" ocal$itcoins.com

*everal in!ivi!ual $itcoin buyers "rom this cate#ory !isclose! their ability% to !epositcash in multiple bans ,ithin an area or re#ion. These statements ,ere "oun! in thelistin#sE

·B'ny ban in ;RC areaB as hi#h as G10%000

·B'ny Maor $anB as hi#h as G0%000

·BCash !epositE 'ny Maor $anB as hi#h as G10%000

·BCash !epositE 'ny ban branch near me in the * $ay 'reaB as hi#h asG%0001D

Transactions by unlicense! in!ivi!uals purchasin# $itcoin convertible virtual currency by!epositin# cash into a local account are occurrin# throu#hout the nite! *tates. -t isreasonable to pre!ict that as the volume an! li&ui!ity o" $itcoin increases alon# ,ith the

number o" $itcoin echan#e outlets% the currency ,ill be !elu#e! ,ith crossbor!ertransactions ori#inatin# ,ith the ille#al !ru# tra!e. $ecause laun!erin# money throu#hother popular !i#ital currency pro!ucts on a #lobal scale has alrea!y been ,ell!ocumente!% it shoul! alrea!y be a #oal o" la, en"orcement to i!enti"y this possible"uture $itcoin issue.

Hithout !irect proo"% it ,oul! be improper to assume that !ru# cartels are en#a#e! inmoney laun!erin# operations usin# $itcoin. espite a lot o" circumstantial evi!ence%there are no publishe! cases ,hich re"lect this situation. The li&ui! tra!in# maret o"$itcoin is not yet lar#e enou#h to han!le the volume o" cash movin# south. -n the recenttra!e base! money laun!erin# case "rom os 'n#eles ashion istrict (6ct. 2014)%aroun! GJD million in cash ,as recovere! "rom the rai!s.1J 't the present time% amounts

o" cash this si+e are "ar too lar#e "or the $itcoin maret. Lo,ever% maret li&ui!ity an!"amiliarity ,ith $itcoin ,ill continue to #ro, in the months an! years ahea!. The potential that any number o" transnational criminal or#ani+ations ,ill a!opt $itcoinremains hi#h.15 ocalbitcoins.com% (2014). %ind bitcoin offers. >online? 'vailable atE httpsE//localbitcoins.com/instantbitcoins/

>'ccesse! 11 ;ov. 2014?.16 Tain% '. (2014). os 'n#eles ashion istrict #ets ne, cash reportin# rules a"ter moneylaun!erin# bust. 2os

-ngeles Daily 1ews. >online? 'vailable atE httpE//,,,.!ailyne,s.com/#eneralne,s/20141002/losan#eles"ashion!istrict#etsne,ca shreportin#rulesa"termoneylaun!erin#bust >'ccesse! 1J ;ov. 2014?.

https://www.pnc.com/

http://regions.com/

https://www.suntrust.com/

https://www.santanderbank.com/

http://www.tdbank.com/

https://www.usbank.com/

https://www.wellsfargo.com/

https://www.woodforest.com/

https://localbitcoins.com/instant-bitcoins/



http://www.dailynews.com/general-news/20141002/los-angeles-fashion-district-gets-new-cash-reporting-rules-after-money-laundering-bust




https://www.pnc.com/

http://regions.com/

https://www.suntrust.com/

https://www.santanderbank.com/

http://www.tdbank.com/

https://www.usbank.com/

https://www.wellsfargo.com/

https://www.woodforest.com/






!)changing Bitcoin 'or other digital currency products

6ne o" the ey a!vanta#es in laun!erin# money throu#h multiple !i#ital currency pro!ucts is the !isappearin# history o" o,nership an! the vanishin# connection to anysource o" "un!s as !i#ital value moves bet,een currency pro!ucts.

The :ol!'#e cre, operate! many echan#e businesses inclu!in# Cambist.net% ,hich,as an automatic echan#e "or multiple !i#ital currencies. Hhile Cambist.net ,as inoperation% "or a "ee% anyone coul! anonymously !eposit one !i#ital currency an!,ith!ra, another !i#ital currency. The entire transaction too ust a matter o" moments.Many instant an! anonymous !i#ital currency echan#e services are in operation to!ayaroun! the ,orl!. These ,ebsites inclu!e the "ast echan#e o" $itcoin "or other !i#italcurrency pro!ucts.

$elo, are some eamples o" online services ,here anyone can &uicly echan#e one!i#ital currency pro!uct% inclu!in# $itcoin% "or another. *ome services are automatic an!

the echan#e occurs instantly. 6thers operate manually an! the business completes thetransactions by han!. 'll o" these ,eb businesses are locate! outsi!e o" the * an! someare operate! "rom Paistan.

$elo, is a short list o" about 40 active echan#es. =ach month ne, echan#es appearonline. *ometimes% eistin# echan#es ,ill !isappear overni#ht. This is a very unlicense!an! unre#ulate! area o" the !i#ital currency business.

httpsE//p2pchan#e.is/ -nstantaneous automatic echan#e 24/9/JDhttpsE//escroo#e.is/!e"ault.asphttpsE//&cashpay.com/httpsE//#ol!u.com/httpsE//obmen.pm/httpE//,alletsechan#e.com/httpsE//++.bi+/ automate!httpE//easypay.p/httpE//chan#er+one.com/httpE//urobmen.com/httpsE//coinomat.com/V$T C/P=3=CT automatichttpsE//,mcash.bi+/ httpsE//emoney.su/ automate!httpsE//,,,.+hari"so"iaechan#er.com/ sell $TC them buy another httpE//,,,.superchan#e.ru/in!e.php $TC $TCehttpE//,,,.!i#italchan#er.com/httpsE//,,,.paymentbase.com/ $TCehttpsE//,,,.ehere.es/ sell no veri"icationhttpsE//chan#e.cc/en/ $TChttpE//e!ollar.n#/ sellin# $TC then buyin# another 2 transactionshttpsE//ma#neticechan#e.or#/httpsE//,,,.al"acashier.com/ $TC% non* proy

https://p2pchange.is/

https://e-scrooge.is/default.aspx

https://qcashpay.com/

https://goldux.com/

https://obmen.pm/

http://walletsexchange.com/

https://xzzx.biz/

http://easypay.pk/

http://xchangerzone.com/

http://ukr-obmen.com/

https://coinomat.com/#BTC/PERFECT

https://wmcash.biz/

https://e-money.su/

https://www.zharifsofiaexchanger.com/

http://www.superchange.ru/index.php

http://www.digitalchanger.com/

https://www.paymentbase.com/


https://www.exhere.es/

https://xchange.cc/en/

http://e-dollar.ng/

https://magnetic-exchange.org/

https://www.alfacashier.com/

https://p2pchange.is/

https://e-scrooge.is/default.aspx

https://qcashpay.com/

https://goldux.com/

https://obmen.pm/

http://walletsexchange.com/

https://xzzx.biz/

http://easypay.pk/

http://xchangerzone.com/

http://ukr-obmen.com/

https://coinomat.com/#BTC/PERFECT

https://wmcash.biz/

https://e-money.su/

https://www.zharifsofiaexchanger.com/

http://www.superchange.ru/index.php

http://www.digitalchanger.com/


https://www.exhere.es/

https://xchange.cc/en/

http://e-dollar.ng/

https://magnetic-exchange.org/

https://www.alfacashier.com/



httpE//,,,.ml#ol!.eu/ non* proyhttpsE//,,,.echan#e4u.com/ httpsE//,m#lobus.com/httpE//epresspm.com/httpsE//obmen.com/ ;o $TC but others an! automate!

httpsE//naira4!ollar.com/ (re#istration means veri"y a cell phone)httpE//,,,.sahibec han#e.com/ httpE//,,,.echan#ecre!it.ru/httpE//,,,.a"ricashinter.com/httpsE//,,,.cbte#hana.com/httpsE//buyemoney.com/httpE//,,,.mrcashier.com/ cash out to HhttpsE//,,,.echan#e#ol!.or#/httpE//,,,.bestechan#eonline.com/ autohttpsE//nete.io/en $TCehttpsE//24chan#e.com/

httpsE//soli!chan#er.com/httpE//paechan#e.p/httpsE//preechan#e.com/ automate! mo!e ,ithin D minuteshttpE//,,,.sonuec han#e.com/

The anony*ous *ove*ent o' 'unds 'ro* Middle !ast countries into the U#

!)a*ple #cenario+ nony*ously 'unding a U# terror attacA 'ro* the Middle !ast

%ith Bitcoin"

These are simple arms len#th transactions throu#h a * thir! party ,ith no veri"iablesource o" "un!s an! no possible i!enti"ication o" the ori#inal sen!er.

The ocal$itcoins.com site a!vertises on behal" o" unlicense! in!ivi!uals actin# as$itcoin buyers. These buyers ,ill complete a $itcoin purchase by !epositin# cash intolocal * ban branches an! accounts. $itcoin is sol! an! trans"erre! to one o" these buyers an! cash is anonymously !eposite! into thir! party * ban accounts.

'n eample transaction usin# this metho! o" echan#e to "un! a terror attac is !etaile!in this section o" the paper. -t8s important to un!erstan!% that because there are presentlyhun!re!s o" possible $itcoin echan#e transactions an! !i#ital currency pro!uctcombinations% this scenario is ust one eample in thousan!s o" possible "un!in#situations.

This transaction ,as create! ,ith an amount o" cash "rom a "orei#n country bein#converte! into $itcoin% trans"erre! into the *% converte! bac to cash by an unlicense!thir! party "inancial a#ent% then anonymously !eposite! to an unno,n * ban account.

The actsE

• ' re#ulate! * ban account is on the receivin# en! o" this transaction

• The cash ori#inates ,ith a "orei#n national

http://www.xmlgold.eu/

https://www.e-xchange4u.com/

https://wmglobus.com/

http://express-pm.com/

https://x-obmen.com/

https://naira4dollar.com/

http://www.sahibexchange.com/

http://www.exchange-credit.ru/

http://www.africashinter.com/

https://www.cbtekghana.com/

https://buyemoney.com/

http://www.mrcashier.com/

https://www.exchangegold.org/

http://www.bestexchangeonline.com/

https://netex.io/en

https://netex.io/en

https://24change.com/

https://solidchanger.com/

http://pakexchange.pk/

https://preexchange.com/

http://www.sonuexchange.com/

http://www.xmlgold.eu/

https://www.e-xchange4u.com/

https://wmglobus.com/

http://express-pm.com/

https://x-obmen.com/

https://naira4dollar.com/

http://www.sahibexchange.com/

http://www.exchange-credit.ru/

http://www.africashinter.com/

https://www.cbtekghana.com/

https://buyemoney.com/

http://www.mrcashier.com/

https://www.exchangegold.org/

http://www.bestexchangeonline.com/

https://netex.io/en


https://solidchanger.com/

http://pakexchange.pk/

https://preexchange.com/

http://www.sonuexchange.com/



• The "un!s are sent "rom Paistan

• -t8s impossible to !etermine a source o" the "un!s

• -t leaves no cross bor!er transaction recor!% report or receipt i!enti"yin# that"un!s have crosse! the * bor!er

Much lie the outcome "rom a La,ala transaction% the cash in these $itcoin trans"ers!isappears throu#h one "orei#n country then reappears in the * ,ithout any receipt o" itcrossin# the * bor!er.

This "un!in# transaction coul! be accomplishe! to!ay throu#h in!ivi!uals a!vertise! onthe ,ebsite ocalbitcoins.com or similar online re"erencin# services matchin# $itcoin buyers ,ith sellers in the *.

The anonymous "un!s in this eample can ori#inate as either national currency cash notesor !i#ital currency pro!ucts echan#e! into $itcoin.

#cenario+' party in Paistan buys $itcoin usin# cash (Paistani rupee) at a local echan#e service.

!)a*ple+

httpE//bitcoinp.com/Crystal illin# *tation (P*6 Petrol Pump)Plot % $loc % 3aput Colony% Main 3ashi! Minhas:ulshane-&bal7arachi *in!h 9D00PaistanA2 4 2A21D

httpE//bitcoinp.comThis sale o" $TC "or cash at this particular location is complete! throu#h so"t,are provi!e! by httpsE//,,,.coinsa"e.com/Crystalillin#*tation/an! mobile phones.

>Tet "rom the ,ebsite?(Coin*a"e maes it easy "or merchants aroun! the ,orl! to buy an! sell bitcoin attheir store locations. Hith our intuitive mobile so"t,are an! echan#e partnerships% ,e help local businesses attract ne, customers by o""erin# their o,n$itcoin 'TM service.) 19

The ori#inal "un!in# party in Paistan #ives the #as station operator cash an! receives

$itcoin usin# a mobile !evice. ;o - is re&uire! an! the transaction is completelyanonymous.

That ori#inal Paistani party coul! then create an online alias ,ith an 'merican soun!in#name (:re# *mith) an! :mail a!!ress (:re#*mith@#mail.com). -t is impossible toveri"y le#al $itcoin o,nership throu#h a ,allet a!!ress an! this causes a hu#e problem

17 Coinsa"e.com% (2014). 6rystal %illing Station +8SC 8etrol 8ump, 6oinSafe . >online? 'vailable atE

httpsE//,,,.coinsa"e.com/Crystalillin#*tation/ >'ccesse! 4 ec. 2014?.

http://bitcoinpk.com/


https://www.coinsafe.com/Crystal-Filling-Station/

mailto:[email protected]







mailto:[email protected]



"or the *.

sin# this alias% the party then enters a sell or!er o" $itcoin "or Bcash !epositB in the *%usin# one o" many unre#istere! in!ivi!uals actin# as $itcoin echan#e a#ents% a!vertise!on httpE//ocal$itcoins.com. The $itcoins are sol! to the * a#ent an! cash is

imme!iately !eposite! into a thir! party * ban account selecte! by the Paistani selleran! until that point unno,n by the person !epositin# the cash.

This is a thir! party transaction ori#inatin# ,ith an unno,n in!ivi!ual8s "un!in#. The buyer in the * has no no,le!#e o" ,ho is ultimately receivin# the "un!s. 6nce thecash is cleare! into the account% the "un!s coul! then be bun!le! ,ith other incomin#$itcoin cash!eposit5 sale transaction !eposits or sources an! "unnele! into other * ban accounts.

The en! result o" this $itcoin transaction leaves cleare! "un!s on !eposit in a * banaccount rea!ily available "or ,ith!ra,al or trans"er. These "un!s coul! also be instantly

,ith!ra,n usin# a ban 'TM car!.

' series o" these anonymous * currency "un!in# transactions coul! be accomplishe!throu#h the same * $itcoin buyer or multiple buyers "oun! on ocal$itcoins.com (there,ere !o+ens liste! on this ,ebsite that coul! per"orm this almost instant anonymous cashechan#e.)

6ther than cash% several types o" "un!in# metho!s coul! also be use! to pay "or theori#inal $itcoin purchase. This anonymous "un!in# coul! have ori#inate! "rom multiplelocations% in!ivi!uals an! countries.

un!in# o" this type o" $itcoin sale can be accomplishe! usin# any o" these sources.

(-" you have value in any o" these !i#ital currency pro!ucts% you can easily an! o"ten imme!iately%echan#e it or convert it to $itcoin. *ome "un!in# sources re&uire i!enti"yin# the sen!er because o" "rau!.'s one eample% stolen or hace! accounts an! cre!it car!s mi#ht be use! to purchase $itcoin. Cashre&uires no name or -.)

'pple *tore :i"t Car! Co!e%'ma+on :i"t Car! Co!e%'lipay%'stroPay%$P'R $ill Payment%$TCe%

C:ol! (Commerce :ol!)%Cash by mail%Cash%Cashier8s chec%Chase Suicpay%,olla%eCoin%=ntro Money%=P=*=%=#oPay%

http://localbitcoins.com/

http://localbitcoins.com/



recor! or i!enti"ication o" sen!er an! "inal receiver ("irst person to receive it a"tercrossin# the bor!er or the last person sen!in# it be"ore "un!s crosse! the * bor!er) an!no possible metho! to veri"y the source o" "un!in# (Taliban heroin sales% -*-* plun!erin#%etremist% charity "un!s% etc.) The "un!s ori#inate! as cash notes (Paistani rupees) inPaistan sent "rom an uni!enti"iable "orei#n party.

-n or!er "or the "un!s to anonymously move across the * bor!er% the monetaryinstrument !urin# that transaction is $itcoin. The movement o" "un!s #oes 100Wun!etecte! by re#ulatory a#encies.

=ven thou#h the money is !eposite! into a re#istere! * ban account% this simple% cheapan! almost instant crossbor!er trans"er o" "un!s completely circumvents * re#ulations,hich are !esi#ne! to monitor "un!s movin# in an! out o" the nite! *tates.

*imilar transactions can also tae place be#innin# ,ith another !i#ital currency pro!uct(not cash). =chan#in# another bran! o" !i#ital currency% or another !i#ital currency

pro!uct% "or $itcoin throu#h a local Paistani service ,oul! create the same type o" "inaltrans"er.

ere is an e)a*ple+

httpE//,,,.ecash.p/Tet "rom the company8s ,ebsiteEHelcome to =Cash.P (6ur service is meant especially "or those ,ho ,ant to sa"ely =currency ,ith Hesternnion or Money :ram. =chan#e% $uy I *ell% Hebmoney% Per"ect Money% $itcoin an!=#opay ecurrencies Hestern nion or Money:ram% -nstant oa!in#% =chan#es bet,een ecurrencies. Thans to us% you ,ill be able to echan#e Per"ect Money% =#oPay%Hebmoney% $itcoin an! many more comin#. He are Horl!Hi!e $est% =""icient an!Cheap eCurrency =chan#er.)1

'ny o" other type or bran! o" !i#ital currency such as Per"ect Money% 67Pay% =#opaycan &uicly an! anonymously be echan#e! into $itcoin by parties !omicile! in Paistanor any,here in the Mi!!le =ast. :enerally all that is re&uire! is a smartphone. ;o sourceo" "un!s is ever nee!e! an! this type o" thir! party echan#e is ,i!ely permitte! an!accepte!. Those ne,ly ac&uire! $itcoins can then be sol! throu#h an a#ent "oun! onocal$itcoins.com% as previously !escribe!% an! cash receive! into a * ban account.

1. The t%o Bitcoin sales transactions 'ro* PaAistan are+Cash$ e)changed into

Bitcoin and sent to the U#

2. Digital Currency products$ e)changed into Bitcoin and sent to the U#

Hithout restriction% any person resi!in# or travelin# outsi!e o" the *% may have anaccount at ocalbitcoins.com. Those en#a#e! in buyin# an! sellin# on ocal$itcoins.com!o not compare or chec any $itcoin client names a#ainst the *pecial esi#nate! ;ationals ist (*;) nor !o they screen "or customers locate! in "inancial sanctione!18 =cash.p% (2014). SellEBuyE;xchange 8erfect #oney! Bitcoin! Febmoney ;gopay In 8a'istan! Festern Union!

#oney ?ram!. >online? 'vailable atE httpE//,,,.ecash.p/ >'ccesse! 4 ec. 2014?.

http://www.e-cash.pk/






countries.

$itcoin ,allets !o not i!enti"y the le#al o,ner o" the "un!s. Conse&uently% thisresponsibility "alls on the a#ent en#a#e! in $itcoin "inancial transactions. The in!ivi!ualsactin# as a#ents on ocal$itcoins.com an! other ,ebsites% "orums etc. are not re#istere!

or supervise!.

Lavin# thousan!s o" unlicense!% unre#istere! an! unsupervise! in!ivi!uals en#a#e! ininternational $itcoin "inancial transactions throu#h the * banin# system is certainly a ba! i!ea.

There are several hun!re! live !i#ital currency pro!ucts accessible online. These have been loosely or#ani+e! into three types o" pro!uct cate#ories. Pro!ucts can be !e"ine! as!i#ital currency systems% echan#e a#ents an! payment processors.

i#ital currency systems operate ,ithin a close! le!#er movin# value bac an! "orth "or

customers. :enerally% a!!in# "un!s to this in! o" system is accomplishe! throu#h a thir! party a#ent echan#in# value on behal" o" the user. Lo,ever% there are some activecompanies to!ay that accept !irect "un!in#.

=chan#e a#ents are responsible "or echan#in# national currency into !i#ital currencyan! also echan#in# various bran!s o" !i#ital currency into other bran!s o" !i#italcurrency pro!ucts.

' "inal cate#ory o" !i#ital currency pro!ucts is the payment processor. Payment processors are the most a!vance! an! #enerally the most re#ulate! o" all these pro!ucts.The payment processor can accept national currency "or !eposit into a !i#ital account% buy an! sell !i#ital currency (in echan#e "or national currency !eposits)% echan#evarious !i#ital currencies "or other bran!s o" !i#ital currency an! "inally arran#e anational currency ,ith!ra,al into re#ulate! ban pro!ucts such as a ban account or a!ebit car!.

The reason "or i!enti"yin# an! loosely !e"inin# these cate#ories is to sho, the ,i!evariety o" money laun!erin# options available to!ay ,ithin the !i#ital currency universe.' maority bene"it usin# !i#ital currency as a money laun!erin# tool is the ease at ,hichcriminals can en#a#e in layerin#.

The primary purpose o" layerin# is to separate the illicit money "rom its criminal sourceor ori#in. ayerin# o" !i#ital currency transactions means obscurin# any au!it trail an!severin# any lin ,ith the ori#inal crime that pro!uce! the currency.

-" a re#ulate! ban pro!uct% such as an overseas ,ire trans"er to a * checin# account%,as i!enti"ie! as bein# line! to the procee!s o" a crime% those "un!s coul! easily beelectronically trace! bac to the ori#inal source (or at least the o,ner o" recor!).

Many !i#ital currency pro!ucts operatin# "rom uris!ictions outsi!e o" the * !o not



re&uire "ull i!enti"ication o" account hol!ers. '!!itionally% as the case ,ith $itcoin%!i#ital currency accounts rarely re&uire "ull #overnment i!enti"ication an! veri"ication o"the in!ivi!ual o,ner.

Conse&uently% one !i#ital currency that is echan#e! "or another !i#ital currency pro!uct

leaves an untraceable path "or anyone investi#atin# the ori#inal source o" "un!s.Complicatin# matters even "urther% i" each !i#ital currency company is !omicile! in a!i""erent uris!iction this creates an enormous strain on la, en"orcement a#encies ,henattemptin# to investi#ate the ille#al trans"er o" "un!s.

!)a*ple one+

The procee!s an! pro"it "rom the sale o" narcotics on a *il 3oa! type online !ru# ba+aar%"un!s ,hich ori#inate in $itcoin% are echan#e! into Commerce :ol! httpsE//c#ol!.com/ operatin# "rom Malaysia. The echan#e o" !i#ital currency pro!ucts occurs throu#h a popular automatic an! semiautomatic currencies echan#e a#ent% 24chan#e(httpsE//24chan#e.com/) ,hich is operatin# "rom 3ussia.

The balance in Commerce :ol! is then echan#e! into Per"ect Money% ,hich operates"rom 3ussia. This c#ol! to PM echan#e ,as per"orme! by yet another in!epen!entechan#e a#ent in Paistan% =buy =chan#e% (httpE//ebuyechan#e.com/) >C#ol! *to Per"ect Money / =#oPay * ?

The en! result o" this chain is an easy to create but comple ,eb o" layerin#. The ori#inalsource o" the "un!s is obscure! an! the en!in# balance is li&ui! an! available in another!i#ital currency pro!uct. un!s can no, be anonymous echan#e! into cash% ,ire! to a ban or loa!e! onto a !ebit car!. These "un!s can be cashe! out ,ithout any ,orry o" bein# trace! bac to their ori#inal source.

Lere is the chain o" o,nership "rom start to "inish.1. Procee!s o" crime receive! in a $itcoin ,allet.

2. un!s are echan#e! in Commerce :ol!% a company that operates "rom Malaysia.

3. The echan#e ,as han!le! by 24chan#e ,hich is an or#ani+ation operatin# "rom

3ussia.4. The Commerce :ol! balance is then echan#e! into Per"ect Money% another

or#ani+ation operatin# "rom 3ussia.5. This "inal echan#e is han!le! by =buy =chan#e% operatin# "rom Paistan.

These procee!s o" !ru# sales have move! throu#h multiple !i#ital currency pro!uctslocate! in multiple uris!ictions. The various a#ents "or each echan#e ,ere also locate!

in a!!itional uris!ictions an! those parties are no,n to operate throu#h multiplecorporate or#ani+ations an! businesses.

Please note that even as the ori#inal $itcoin o,ner ,as resi!in# in the *% none o" the!i#ital currency issuers or the echan#e a#ents are re#istere! money transmitters oroperatin# as money service businesses. ;or are any o" them re#istere! ,ith inC=;.Tracin# these "un!s bac to an ori#inal source ,oul! be a monumental an! lielyimpossible% tas "or any local la, en"orcement a#ency.

https://c-gold.com/

https://c-gold.com/


http://ebuyexchange.com/

https://c-gold.com/


http://ebuyexchange.com/



The scary component in these transactions is the sheer number an! variety o" un,ittin#* bans an! branches ,hich are ma!e available to any anonymous $itcoin seller. Suiteliterally% one can sen! "un!s almost !oorto!oor "rom any,here in the Mi!!le =ast toany small to,n or lar#e city in the * leavin# no trace o" the ori#inal sen!er an! no

source o" "un!s.

6ne eample "rom the ocal$itcoins.com ,ebsite 11/1A/2014% one o" the many% ,as anin!ivi!ual usin# the nicname C'*LXT6XC3RPT6.1A This unmonitore! in!ivi!ual ,illaccept $itcoin !i#ital currency !elivere! into his ,allet "rom any person operatin# "romany,here in the ,orl!. ;o i!enti"ication on the sen!er is re&uire!% nor is any source o""un!s !ocumentation. 6nce an amount o" $itcoin is !eposite! into the * buyer8s online$itcoin ,allet% he ,ill anonymously mae a cash !eposit to any unno,n thir! party ban account !esi#nate! by the sen!er% at any o" the "ollo,in# * bans inclu!in# oneP;C ban branch in Cana!a.

1. <ells Fargo , Hells ar#o provi!es services at more than A%000 locations across

'merica% more than 12%D00 'TMs2. BanA o' *erica , $an o" 'merica operatesYbut !oesn8t necessarily maintain

retail branches in all D0 states o" the .*.% the istrict o" Columbia an! more than40 other countries. -t has 1J%2DA automate! teller machines ('TMs).

3. #untrust , *unTrust operates 1%4A9 ban branches an! 2%24 'TMs across

*outhern states% inclu!in# 'labama% 'ransas% lori!a% :eor#ia% Marylan!%Mississippi% ;orth Carolina% *outh Carolina% Tennessee% Nir#inia% Hest Nir#inia%an! Hashin#ton% .C.

4. P=C BanA , P;C is the one o" the lar#est bans in the nite! *tates base! on

!eposits an! branches% operatin# in 1A states an! Hashin#ton% .C. P;C has2%40 branches in the "ollo,in# states an! a branch in C';''. P;C $an

Cana!a $ranch% The =chan#e To,er% 10 7in# *treet Hest% *uite 2140% Toronto%6ntario MDQ 1=4% Cana!a

5. Co,Op Credit Union , HisconsinE Coop Cre!it nion has "ive "ullservice

locations in Hisconsin% inclu!in#% $lac 3iver alls% all Cree% :alesville%Melrose% an! *trum.

6. :egions BanA , 3e#ions $an% operates some 1%900 branches an! 2%400 'TMs

across a 1Jstate net,or in the *outh% Mi!,est% an! Teas.7. BBT BanA , $ase! in Hinston*alem% ;.C.% the company operates 1%24

"inancial centers in 12 states (inclu!in# ;orth Carolina% *outh Carolina% Nir#inia%Marylan!% Hest Nir#inia% 7entucy% Tennessee% :eor#ia% lori!a% 'labama%-n!iana% an! Teas) an! Hashin#ton% .C.

-n ebruary 2014% lori!a *tate authorities announce! criminal char#es a#ainst t,o men%a!vertise! on ocal$itcoins.com% "or sellin# $itcoins in echan#e "or cash. n!ercovera#ents meet ,ith unlicense! in!ivi!uals in lori!a a!vertise! on ocal$itcoins.com an!a"ter several purchases totalin# more than G0%000 each the t,o ,ere separately arreste!.

19 ocalbitcoins.com% (2014). Buy bitcoins online in from 6-S"GTCG67H8TC 6ash deposit 6C)C8

6U!BBT!TD!SU1T7UST!6ITI!FCCD%C7;ST+Jpm est . >online? 'vailable atEhttpsE//localbitcoins.com/a!/102DD/purchasebitcoincash!epositcoopcubbtt!suntrustciti,oo!"orestA pmestunite!states >'ccesse! 4 ec. 2014?.

https://localbitcoins.com/ad/108255/purchase-bitcoin-cash-deposit-co-op-cubbttdsuntrustcitiwoodforest9pm-est-united-states







$oth in!ivi!uals have been char#e! ,ith multiple "elonies inclu!in# lori!a8s version o"money laun!erin# an! en#a#in# in an unlicense! moneyservicin# business.

espite these hi#h pro"ile arrests% cash echan#es "or $itcoin are still commonplaceacross the *.

Bitcoin Money Laundering

Money laundering through Bitcoin Pay*ent Processors

6nline payment processors ,ere not !esi#ne! to accept anonymous cash payments.

6nline payment processors receive consumer payments in the "orm o" checs% banissue! electronic "un! trans"ers% 'CL% cre!it an! !ebit car!s. 'll o" these paymentsori#inate throu#h a hi#hly re#ulate! bans an! "inancial institutions.

Consumer access to these "inancial pro!ucts re&uires a hi#h !e#ree o" personali!enti"ication an! re&uires etensive recor! eepin# o" every penny movin# throu#h

every transaction. This important recor! eepin# presents a history o" the "un!s an! moreimportantly an accumulate! history o" the total money "lo,in# throu#h each account.

There is also "orensic so"t,are ,ithin these bans an! institutions ,hich activelyeamines !eposits an! ,ith!ra,als ,ith the intent o" preventin# the "inancial accounts"rom bein# usin# in money laun!erin# transactions. The recor!s o" these accounts provi!e a le#al money trail ,hich can later prove an! prosecute money laun!erin#crimes.

Consumer payments "lo,in# into an online payment processor have a veri"iable historyan! an easily i!enti"iable o,ner. $itcoin transactions provi!e none o" this in"ormation.The account (,allet) initiatin# the consumer payment is not le#ally connecte! to anyonean! o""ers no history an! in"ormation on the source o" "un!s. The $itcoin payment processor has no ,ay to trace the history o" the payment an! veri"y the i!entity o" the person spen!in# the $itcoin. -n this case% $itcoin acts as cash% ho,ever% the $itcoin payment processor !oes not treat $itcoin ,ith the re#ulations re&uire! "or cashtransactions.

$itcoin is not a ban issue!% easily traceable% hi#hly re#ulate! "inancial pro!uct. 3etailconsumer businesses acceptin# in person cash payments operate very !i""erently thanonline payment processors. Cash businesses are re#ulate! by a very !i""erent set o""inancial rules.

The $*'8s recor!eepin# provisions re&uire "inancial institutions to veri"y an! recor!certain i!enti"yin# in"ormation about the person con!uctin# a "inancial transaction at orabove a G000 monetary threshol!. $itcoin payment processors may or may not be ableto eten! any veri"ication to the le#al o,ner o" an incomin# $itcoin transaction.

!)a*ple+ Merchandise purchased %ith Bitcoin is Then :esold

=ssentially% this metho! to laun!er money can be accomplishe! usin# $itcoin "rom any



maor city in the ,orl!. This particular eample uses online retailers acceptin# $itcoinan! e$ay "or the resale% ho,ever there are many other options o" this ,orin# eampleusin# various other a#ents aroun! the #lobe.

#cenario+

$itcoins have been obtaine! by a resi!ent o" the * throu#h the ,orl!,i!e !istributiono" ransom ,are. The ransom ,are #enerate! an anonymous $itcoin income o"approimately G0%000 in $itcoin per ,ee "or a total perio! o" t,o months.'pproimately G240%000 in $itcoin is no, available an! rea!y to be laun!ere!.

The $itcoin o,ner establishe! accounts at the "ollo,in# online retailers usin# aliasnames an! a!!resses. The a!!resses coul! be mail !rops in the area% vacant houses%"rien!8s homes% mail boes% trailer pars etc. The #oal is to use a !i""erent name an!a!!ress "or each purchase o" merchan!ise online ,hen possible.

14 aliases have been create! an! no, there are 14 names% a!!ress an! emails available to

#o shoppin# online ,ith $itcoin. G140%000 ,orth o" $itcoins is then !ivi!e! up into 14separate ,allets.

sin# various local proies or !i""erent -P a!!resses% each o" the aliases% visits,,,.overstoc.com an! purchases hi#h &uality merchan!ise ,hich can be resol!.

Purchase eamples may inclu!eE

·Preo,ne! 3ole 1 :ol! Presi!ent Men8s $lac ial Hatch% G12%DD0.00

·Pre6,ne! 3ole Men8s ateust *teel an! 1 :ol! Fubilee $an! Hhite 3omanial Hatch% G%DD.AA

·Pre6,ne! 3ole Homen8s 8Presi!ent8 :ol! Hatch% G%JD0.00

·

rema!a 14 Hhite :ol! Men8s *oli! A.9mm Curb in Chain (24inch) G%A44.4·'uriya 14 :ol! 2ct TH Certi"ie! Cushion Cut iamon! 3in# (L-% *-1*-2)

GA%9A.JA

·Canon =6* D Mar --- 22.MP i#ital *3 Camera ,ith 2490mm ens%G4%2AA.00

·Canon =6* 9 Mar -- 20.2MP i#ital *3 Camera ,ith 1DDmm ens%G2%14A.00

·Panasonic ':LMC40 'NCC'M L $lac Camcor!er% G%JAD.AA

These items are all hi#h !ollar% hi#h &uality% name bran!s that can easily be resol!.

'"ter the items arrive% another roun! o" buyin# commences throu#h the same alias onhttpE//,,,.ti#er!irect.com/

Purchase eamplesE

·Panasonic Tou#hboo 1 Core iD 40M / 2.9 :L+ -temVE P;0102990 ZMo!elVE C1H$PD0M GJ%20AAA

·Panasonic Tou#hboo 1A Convertible Core iD 40M / 2.9 :L+ -temVE P;0102929J2D Z Mo!elVE C1ADJRHQM G4%0JAA

http://www.overstock.com/

http://www.tigerdirect.com/

http://www.overstock.com/

http://www.tigerdirect.com/



online ,ith 6verstoc% the source o" "un!s an! the person spen!in# the money can easily be i!enti"ie!. This is not the case ,ith retail $itcoin transactions. 's $itcoin movesthrou#h the blocchain "rom o,ner to o,ner an! ,allet to ,allet% there is noi!enti"ication o" those in!ivi!uals. $itcoin also leaves no real veri"iable recor!s ,hichcoul! allo, la, en"orcement to trace ille#al "un!s bac to a ,allet o,ner at some "uture

time. This is very similar to a cash pro!uct.

-t8s &uite simple to set up 20D0 alias online an! pay ,ith $itcoin% it8s very !i""icult% i" notimpossible "or most people% to set up 20D0 !i""erent cre!it car!s an! ban accounts% thencomplete the same series o" online merchan!ise purchases. The same is true "or D0 ne,veri"ie! PayPal accounts.

$itcoin ,allets pose a serious ris o" money laun!erin# "or online retailers acceptin# payments throu#h a $itcoin payment processor. The i!entity o" the $itcoin o,ner cannot be veri"ie! an! ,allet spen!in# the "un!s contains no account history or veri"iable sourceo" "un!s. ecentrali+e! convertible currency acts more lie a cash pro!uct.

-" an online retailer is processin# consumer payments throu#h a $itcoin merchant servicesuch as $itPay or Coinbase% "rom the online retailer8s point o" vie,% a lar#e monthlyincrease in $itcoin or!ers "rom in!ivi!ual buyers may simply be vie,e! as an increase in$itcoin sales (Looray% more consumers are no, "locin# to $itcoin\). Hhereas% the sameamount o" increase in cash purchase transactions movin# throu#h a retail store locationmi#ht raise a "la# ,ith the merchant or tri##er a reportin# re&uirement throu#h the ban.

Bitcoin Pay*ent Processing

BitPay

$itPay accounts are available in every country aroun! the ,orl! an! the merchantaccount can be set up in any o" more than 1D0 national currencies. $itPay supportssettlement in A currencies an! !irect ban !eposit in countries.' 'ustralian ollars$TC $itcoinC' Cana!ian ollars=3 =uros:$P Poun!s *terlin#MQ; Meican Pesos ;[ ;e, [ealan! ollar * * ollars['3 *outh '"rican 3an!20

The $itPay Company shoul! be receivin# a substantial amount o" praise "rom thein!ustry an! the public alie "or a!vancin# the use o" $itcoin in consumer marets.Company eecutives have !one a very #oo! ob in pioneerin# this maret. Lo,ever%there may be some !i""icult re#ulatory items ahea! in $itPay8s "uture.

$itPay has re#istere! ,ith inC=;% ho,ever% !oes not operate as a license! money20 $itPay *upport% (2014). Fhat are my options for settlementA. >online? 'vailable atE

httpsE//support.bitpay.com/hc/enus/articles/201A0D1:ettin#Pai! >'ccesse! 4 ec. 2014?.

https://support.bitpay.com/hc/en-us/articles/201890513-Getting-Paid





transmitter. The company has state! that its operations are consi!ere! eempt "romre#istration as a money transmitter. Lere is an ecerpt "rom a post on the $itPay blo#,ebsite.

The heart o" inC=;s #ui!ance recommen!s that activities ,hich are classi"ie!

as Money *ervices $usinesses (M*$) or Money Transmission $usinesses (MT$)shoul! be applie! e&ually to both real currency an! virtual currency. There"oreactivities such as remittance% payroll% an! chec cashin# ,oul! be re#ulate!,hether the type o" money is real or virtual.

$itPay has a contractual a#reement ,ith our sellers "or transaction processin#%clearance% an! settlement o" "un!s that arrive "or a #iven merchant account.$itPay !oes not have any contractual a#reement ,ith any sen!er o" "un!s% an!!oes not en#a#e in any activities that ,oul! be consi!ere! Money Transmissionactivities.

He shoul! pay close attention to "ootnote V10 o" the #ui!ance% ,hich statesE

./ FinC!=s regulations provide that %hether a person is a *oney

trans*itter is a *atter o' 'acts and circu*stances" The regulations

identi'y si) circu*stances under %hich a person is not a *oney

trans*itter$ despite accepting and trans*itting currency$ 'unds$ or

value that substitutes 'or currency" 9. CF: E ././".//''G8GiiGG,

FG"

BG cts as a pay*ent processor to 'acilitate the purchase o'$ or

pay*ent o' a bill 'or$ a good or service through a clearance and

settle*ent syste* by agree*ent %ith the creditor or sellerH

FG ccepts and trans*its 'unds only integral to the sale o' goods or

the provision o' services$ other than *oney trans*ission services$ by

the person %ho is accepting and trans*itting the 'unds"

He have hi#hli#hte! eemptions ($) an! () ,hich !escribe the activities per"orme! by $itPay. The -3* has !e"ine! rules "or classi"yin# PaymentProcessors% or Payment *ettlement =ntities (P*=) in 200 ,ith the -nternal3evenue Co!e J0D0H. This rulin# an! others clearly state that PaymentProcessors an! Payment *ettlement =ntities are not Money Transmitters.

$itPay has a contractual a#reement ,ith our sellers "or transaction processin#%clearance% an! settlement o" "un!s that arrive "or a #iven merchant account.$itPay !oes not have any contractual a#reement ,ith any sen!er o" "un!s% an!!oes not en#a#e in any activities that ,oul! be consi!ere! Money Transmissionactivities.21

21 $lo#.bitpay.com% (201). "ow %in6;1 ?uidelines -ffect Bit8ay The Bit8ay Blog . >online? 'vailable atE

httpE//blo#.bitpay.com/201/0/2/ho,"incen#ui!elinesa""ectbitpay.html >'ccesse! 4 ec. 2014?.

http://blog.bitpay.com/2013/03/23/how-fincen-guidelines-affect-bitpay.html





's recent as 6ctober 2014% inC=; release! ne, #ui!ance "or virtual currency payment processors statin# that such companies may be consi!ere! money services businessesun!er * la,.

There is clari"ication re#ar!in# virtual currency payment processors an! the $*'

re#ulations on money transmission. rom this statement an! conclusions ma!e by severaleperience! !i#ital currency pro"essionals% inC=; may re&uire all $itcoin payment processors to operate as license! money transmitters. Lere is a portion o" tet "rom therecent #ui!ance that !irectly applies to $itcoin payment processors. The important tethas been hi#hli#hte!. Please note that this response "rom inC=; is not ,ritten or!irecte! to,ar! $itPay% ho,ever% it may apply to their business mo!el.

-;20143012-ssue!E 6ctober 29% 2014*ubectE 3e&uest "or '!ministrative 3ulin# on the 'pplication o" inC=;s 3e#ulationsto a Nirtual Currency Payment *ystem

inC=; stipulates "our con!itions "or the payment processor eemption toapply to a particular business patternE

(a) the entity provi!in# the service must "acilitate the purchase o" #oo!s or services% or the payment o" bills "or #oo!s or services (other than moneytransmission itsel")bG the entity *ust operate through clearance and settle*ent syste*s

that ad*it only B#,regulated 'inancial institutionsH

(c) the entity must provi!e the service pursuant to a "ormal a#reement an!(!) the entitys a#reement must be at a minimum ,ith the seller or cre!itor that provi!e! the #oo!s or services an! receives the "un!s.

The Company "ails to satis"y one o" these con!itions. The Co*pany is

not operating through clearing and settle*ent syste*s that only ad*it B#,

regulated 'inancial institutions as *e*bers" 'ccor!in# to your letter the realcurrency payments "rom the consumer tae place ,ithin a clearin# an! settlementsystem that only a!mits $*'re#ulate! "inancial institutions as members(speci"ically% a cre!it car! net,or)% ho,ever% the pay*ent o' the Bitcoin

e;uivalent to the *erchant$ by de'inition$ taAes place outside such a clearing

and settle*ent syste*% either to a merchanto,ne! virtual currency ,allet or to alar#er virtual currency echan#e that a!mits both "inancial institution an! non"inancial institution members% "or the account o" the merchant. 22

!)a*ple One

' "orei#n company sets up a $itcoin payment processin# account throu#h a * base!$itcoin payment processor. The "orei#n entity coul! be a corporation in any "rien!ly uris!iction such as *in#apore% Meico% $ahamas% Panama% Lon# 7on#% Cyprus etc. or

22 * epartment o" the Treasury inancial Crimes =n"orcement ;et,or% (2014). %I1)/34)7/3 Sub$ect 7e*uest

for -dministrative 7uling on the -pplication of %in6;1 ) 7egulations to a @irtual 6urrency Trading 8latform.Hashin#ton% CE * epartment o" the Treasury% pp.1.



this eample the company ,ill be !omicile! in *in#apore an! the !aily procee!s "rom the payment processor are receive! by the company% !enominate! in =uros% throu#h a Cyprus base! ban.

The company is in the business o" operatin# ,ebsites% "orums an! sellin# memberships in

or#ani+ations alon# ,ith the or#ani+ations so"t,are an! pro!ucts. The laun!erin#operation occurs as ne, members are a!!e! payin# ,ith $itcoin. The incomin# ille#al procee!s% !enominate! in $itcoin% are use! to purchase pro!ucts or memberships "romthe or#ani+ation throu#h a payment button embe!!e! "rom the payment processor,ebsite (lin). The "orum char#es its members% G20 a month "or access to the privatein"ormation an! "orum8s member area.

'"ter several months o" #ro,th% acceptin# PayPal an! online cre!it car!s% the popular,ebsite no, has more than 100%000 online members. The apparently le#itimate "orei#noperate! online business chooses to a!! $itcoin as a metho! o" payment an! cycles theincomin# $itcoins thou#h a * base! $itcoin payment processor. 6ver the net J

months the ,ebsite pics up 200%000 ne, members. Fust over 100 o" these each month pay ,ith $itcoin.

't 00%000 total members% the ,ebsite is #eneratin# about GJ%000%000 in monthly "ees.G4%000%000 is movin# throu#h re#ulate! ban pro!ucts (PayPal an! cre!it car!s) an!G2%000%000 is comin# into the business each month in $itcoin (100%000 G20). Thesene, payin# members sen! $itcoins throu#h the * base! payment processor. =ach !aythe $itcoin procee!s are converte! into =uros an! electronically !eposite! into thecompany8s ban account.

'"ter a "e, more months the business o,ner receives a nice letter "rom the $itcoin payment processor con#ratulatin# them on the #ro,th in $itcoin members. Lo,ever% this"orum ,ebsite business has actually !evelope! into a $itcoin money laun!erin#operation. 'lmost all o" the ne, 100%000 $itcoin customers payin# each month are "aealiases an! almost the entire G2%000%000 is $itcoin comin# in each month is the ille#al procee!s obtaine! "rom the sale o" !ru#s in the *. That coul! &uicly a!! up to morethan G24%000%000 a year bein# converte! into =uro an! trans"erre! to a "orei#n o,ne! ban account. The money moves out o" the *% throu#h the $itcoin payment processoran! into a le#al company ban account.

=ach $itcoin member has a "ae name% a!!ress an! email% an! a real $itcoin ,allet,hich maes a G20 payment per month to $itcoin payment processor.

This other,ise le#al company ,hich has been acceptin# le#itimate income throu#hre#ulate! ban pro!ucts has pi##ybace! a $itcoin money laun!erin# operation on topo" it usual monthly business. -lle#al !ru# procee!s are bein# move! out o" the *%converte! into =uro an! !eposite! into a "orei#n ban account. Ta is pai! on the incomean! the !irty money is no, le#itimate income.

!)a*ple 6



'n establishe! $ra+ilian company% sellin# pro!ucts to the *% !eci!es to a!! $itcoininvoicin# to their * sales. ' #oo! portion o" sales are no, receive! in $itcoin usin# a* base! payment processor.

That company !oes G120%000%000 a year in * sales% an! by a!!in# $itcoin no, passes

G1D0%000%000. the "ollo,in# year. The a!!itional G0 million in income is pai! throu#h$itcoin an! cycle! bac to the company8s ban account in atin 'merica.

Hhile it appears that a!!in# $itcoin has increase! sales% in "act the company is "alseinvoicin# an! overinvoicin# "rom $ra+il to move ille#al "un!s out o" the *.

There is no metho! o" accountin# that ,oul! cause the $ra+ilian company to pro!uce averi"ie! source o" "un!s "or the incomin# $itcoin accounts other than a simple "or#e!receipt. The payment processor coul! even re&uest i!enti"y in"ormation on the accountsan! simply receive "or#e! in"ormation. *ince the $itcoin "un!s !o not ori#inate ,ith averi"iable ban pro!uct% the o,ner is unno,n. There is no ,ay "or the $itcoin payment

processor to ever le#ally veri"y that the o,nership in"ormation connecte! to any $itcoin,allet is accurate because ,allets !o not o""er the ability to be le#ally line! to any party.

-n both o" these eamples% i" the a!!itional sales ha! been #enerate! by cash paymentsinstea! o" $itcoin% the a!!itional income in cash ,oul! have been "la##e! by the ban%reporte! an! liely investi#ate! at some "uture point. $itcoin shoul! be consi!ere! ascash income an! re#ulate! as such% ho,ever% it is improperly treate! as an online payment receive! "rom a re#ulate! "inancial institution.

The ori#ins o" cash payments% as ,ith incomin# $itcoin "un!s% cannot be trace! "rom ani!enti"ie! o,ner. ' $itcoin payment processor coul! only re&uest the receipt supplie! bythe company receivin# the payment or en#a#e! in the sale. -n this case the $ra+iliancompany coul! ust "or#e the receipt or over invoice ,hich is very common in tra!e base! money laun!erin#.

This be#s the &uestion% BLo, are incomin# $itcoin payments throu#h a * are base! payment processor !i""erent "rom incomin# "un!s lie ban ,ires or cre!it car! paymentsOB There are no "e!eral or state re#ulations that re&uire companies to recor! orreport $itcoin transactions as a company ,oul! treat cash transactions. ;o company or person in the nite! *tates is ever re&uire! to "ile a *'3 on a $itcoin payment o" morethan G%000 or a CT3 on a G10%000 !eposit to a $itcoin ,allet. urthermore% * personsan! businesses receivin# more than G10%000 in crossbor!er $itcoin "un!s are notre&uire! to "ile a "orm 00.

There are at least a hun!re! more eamples o" ho, ille#ally obtaine! $itcoin can becycle! throu#h a * or "orei#n base! $itcoin payment processor. $itcoin acts lie cashan! shoul! not be treate! as a ban payment.

Lere is a!!itional tet "rom the $itPay blo#.



$itPay has voluntarily re#istere! ,ith inC=; in 2011% so that ,e have an onlineaccount to electronically report any suspicious activity that may arise. Lo,ever%to !ate ,e have not seen any suspicious activity an! have not "ile! any reports.'ll o" our merchants are i!enti"ie! an! ,e no, their ban account in"ormation%so there is little lielihoo! "or someone en#a#in# in criminal activity to use our

service.2

QQQ

money laundering and funding terror using bitcoin convertible virtual currency and other digital...

Documents