In the recent years, virtual currencies have gained a lot of prominence in the real world. Different types of virtual currency have evolved, which have also resulted in the increased risks in the areas of information technology, compliance, and financial crime. Virtual currencies are available in the digital form and do not follow the same regulations as the e-money (traditional currency exchanged electronically). However, with the growing popularity of virtual currencies, regulatory expectations and guidance on their risk management are also emerging at a fast pace. Failure to meet the regulations may lead to severe consequences like criminal or civil penalties, in case the money is laundered through the virtual currencies system.
Various governmental and regulatory bodies are paying more attention to virtual currencies. Individuals and organizations that deal with virtual currencies must consider two important aspects. Firstly, is the individual or the firm a money services business (MSB) and secondly what should be done to maintain compliance with the AML requirements.The U.S. Financial Crimes Enforcement Network (FinCEN) has issued guidance on virtual currency. As per the regulations, the people and the entities that deal with virtual currencies must register as an MSB and maintain compliance with the relevant regulations. The guidance also categorizes the entities involved in the virtual currency system into three groups:
- User: an individual that obtains virtual currencies for purchasing goods and services.
- Exchanger: an individual involved in the exchange of virtual currenies for real currency.
- Administrator: an individual involved in the issuing (circulating) of virtual currencies and who has the authority to redeem such currencies (withdrawing from circulation).
As per the FinCEN guidance, convertible virtual currenies administrators and exchangers, accepting and transmitting a convertible virtual currency or buying or selling convertible virtual currencies are regarded as money transmitters and must comply with the laws and regulations related to MSBs.
For establishing effective programs to maintain AML compliance there are a few considerations that must be taken into account. There must be a designated individual for leading and maintaining the program as well as establishing a control framework. Companies having a strong risk framework could strengthen their governance by addressing emerging risks due to non-compliance with regulations. On the other hand, newer companies need to have resources for establishing the governance framework for AML compliance. A virtual currency MSB needs to establish a comprehensive governance, risk, and compliance structure, develop customer due to diligence platform, perform risk assessment, monitor transactions, ensure proper recordkeeping, provide a proper reporting system and provide training.
Apart from the regulatory requirements for virtual currency MSBs, other financial organizations must also work on managing money laundering risks related to their customers that are involved in the virtual currency system.