Earning trusthow rules and regulation can help development of virtual currencies

Erik Wilgenhof Plante, Chief Compliance Officer

Can Bitcoin replace money?

• Decentralized• Pseudonymous• Not regulated• Susceptible to hacks, fraud and theft

Bitcoin is scary/risky isn’t it?

• In 2014 Mt Gox, a Virtual Currency Exchange based in Tokyo announced that around 850,000 bitcoins belonging to customers and the company were missing and likely stolen

• The value of the Bitcoin was more than $450 million

• Only $200 million has been “found” so far

And it isn’t over yet

• In 2015 Bitcoin exchange MyCoin disappeared with over $398 million in customer funds

• MyCoin promised clients a HK$1 million ($128,976) return over a 4-month period based on a HK$400,000 investment that would produce 90 bitcoins on maturity

• Apple introduced the “App Store” in July 2008 as a digital distribution platform for mobile apps on the iPad, iPhone and iPod Touch

• In March 2012, the number of apps downloaded reached 25 billion

Two cases that don’t involved Bitcoin

• In 2011 an invasion of Chinese apps with no function appeared in the app store

• The apps garnered attention because they were bought so many times that they appeared in the list of highest grossing apps

• After Apple removed the apps it turned out that Chinese money launderers had issued the apps

• Even the fact that Apple received 30% of the revenue didn’t deter the criminals

A Case of Bad Apples

• In 2013 Amazon contacted eBay that a possible fraudulent use of the platform had occurred.

• eBay investigated and found that a Vietnamese criminal organisation had posted new electronic items on eBay

• When a buyer “won” the items, the item was bought on Amazon using a stolen credit card

The eBay of Tonkin Incident (1/2)

• The buyer would pay through PayPal

• Since the buyer received the item without knowing it was part of a crime, eBay would never receive a complaint until Amazon contacted eBay

• Amazon only found out when the credit card company contacted Amazon to report that the card was stolen

The eBay of Tonkin Incident (2/2)

• Modern criminals are highly organised• They are using online systems to remain anonymous• They know how to use multiple service providers and

how they interconnect• They know exactly where the weak points are and

how to exploit them• The rely on speed and stay under the radar• Maximizing profit until discovery

What can we learn from this?

Terrorist financing, another treat?

The risk of virtual crime

• The financial world has been dealing with increased regulation for a few decades

• 9/11 and the financial crisis have contributed significantly to the compliance burden (and cost) of banks

• Authorities have shown zero tolerance for money laundering and terrorist financing

• If Bitcoin is to succeed, regulation is unavoidable

Is Bitcoin still unregulated?

• Tax authorities have issued guidance on Bitcoin transactions

• The guidance varies per country. Some consider the transactions taxable, some levy sales tax on the sale of Bitcoin and some on the services connected with Bitcoin

• FinCen has issued a statement saying that Bitcoin processors and exchanges may be considered money services businesses under US law

Is Bitcoin still unregulated?

• On December 13, 2013, the European Banking Authority (EBA), the regulatory agency of the EU responsible for advising EU institutions on banking, e-money regulation, and payments, issued a warning on the dangers associated with transactions, such as buying, holding, or trading virtual currencies.  

• Other laws and regulations may apply; privacy laws, data security regulations, consumer protection laws

Regulation will kick in soon

• In March 2014, the Monetary Authority of Singapore (MAS) announced its intention to regulate virtual currency intermediaries for money laundering and terrorist financing risks, making it one of the first countries in the world to do so

• On July 17, 2014 the New York Department of Financial Services (DFS) issued a proposal for a regulatory framework

• Other regulators have announced that they are considering regulation

The New York ‘Bit License” key requirements

• Safeguarding consumer assets• Virtual currency receipts• Consumer complaint policies• Consumer disclosures• Anti-Money Laundering compliance• KYC• SAR reporting• Cyber security• Dedicated compliance and security officers• Capital requirements• Disaster recovery

Rise of the Acronyms

• Anti Bribery and Corruption• Bitcoin can be used to transfer or hide the proceeds of

corruption• Countries where corruption is rife happen to be large

Bitcoin markets• Proceeds of bribery and corruption are mostly transferred

out of the country • Countering Terrorist Financing

• Terrorist organisations like ISIS have researched the use of Bitcoin

• Law enforcement organisations have little to no expertise in this area

Rise of the Acronyms

• Anti Money Laundering• Money laundering is “the process of making illegally-

gained proceeds (‘dirty money’) appear legal (‘clean’)• Includes tax evasion• Bitcoin shares a lot of the characteristics of cash, which is

still king with criminals• A 2014 report by AUSTRAC concluded that Bitcoin could be

used to launder the proceeds of crime but that there are significant drawback. The limited size of the market and the limited acceptance rate of Bitcoin would make Bitcoin less interesting for large laundering operations

Not just for banks anymore

• Speed up the time between client acquisition and actually product sales

• Increase client satisfaction• Cross selling• Risk mitigation• Decrease client cycle time

Proper onboarding will help

• Client experience needs to be top of mind for everyone

• A bad onboarding experience can lead to prospects dropping out

• Onboarding institutional clients can be very complicated

• Compliance requirements are seen as a burden• Regulators start by looking at your onboarding

process

Why proper onboarding is important

Behavioral detection to prevent fraud and money laundering

Outlier Detection

Time between transactions

Tran

sacti

on a

mou

nt= account

= within set parameters

Transaction filtering to prevent terrorist financing

Filtering stages

All transactions in scope for filtering

Matches

Potential hits

Hits

Potential Violations

Violations

(automated) filtering by system

Filtering process

Sanctions Team process

(manual) assessment by RTSC (internal) analysis by CAAML Officer

(internal) analysis by Sanctions Team

(external) analysis by regulator

Results of activity Filtering stages

All transactions in scope for filtering

Matches

Potential hits

Hits

Potential Violations

Violations

(automated) filtering by system

Filtering process

Sanctions Team process

(manual) assessment by RTSC (internal) analysis by CAAML Officer

(internal) analysis by Sanctions Team

(external) analysis by regulator

Results of activity

The future of transaction monitoring

• Risk based monitoring• Transaction filtering using IP addresses• Use algorithms to detect false documents• Use AI to detect suspicious patterns• Analyse transactions on the Blockchain• Encrypted and anonymous audit chain• Automatic exchange of information

From Secrecy to Confidentiality

Regulation is here to stay

• Open dialogue with the regulator and the financial industry

• Pro-active approach on regulation

• We need more lawyers, bankers and compliance officers!

Erik Wilgenhof Planteerik@itbit.com