Regulation and Compliance - Bitcoin Conference Thailand 2014

itBit Online Bitcoin Marketplace Presentation
Virtual currencies; a regulatory roundup.
Erik Wilgenhof Plante – Chief Compliance Officer – itBit Pte.Ltd.
A short history of virtual money
In 1971 or 1972, Stanford students using
Arpanet accounts at Stanford University's
Artificial Intelligence Laboratory engaged in a
commercial transaction with their counterparts
at Massachusetts Institute of Technology.
Before Amazon, before eBay, the first act of ecommerce was a drug deal. The students used
the network to quietly arrange the sale of an
undetermined amount of marijuana.
Virtual Financial Crime
Drug lords and other bad guys found a new way to
launder money: via online "virtual world" games
that have thousands of players worldwide
"Drug cartels are having great success laundering
money and buying property in scores of different
nations by using Internet games"
Virtual Financial Crime
• In 2008 a money laundering operation (working with gold farmers and
MMO account thieves) was busted while trying to move $38 million
between Korea and China.
• The money laundering ring reportedly sold game money illegally
produced in China using cheap labor and virus programs. They are
believed to have taken a commission of three to five percent of the
money traded to purchase game money."
• Games that attract Gold Farmers include World of Warcraft, League
of Legends and Runescape.
Crime as a service
• Liberty Reserve was a Costa Rica-based website that billed itself as
the "oldest, safest and most popular payment processor ... serving
millions all around a world".
• In 2011, Liberty Reserve was linked to attempts to sell thousands of
stolen Australian bank account numbers and British bank cards. In
2012, a group of hackers attempted to blackmail anti-virus software
company Symantec into transferring $50,000 into a Liberty Reserve
• The site had over one million users when it was shut down by the
United States government. Prosecutors argued that due to lax security,
alleged criminal activity largely went undetected, which ultimately led to
them seizing the service in May 2013.
• Liberty Reserve purposely used “willful blindness” by not requiring any
form of identification at all.
Silk Road; the online market for criminals
• Silk Road was an online
trading place that let
anonymous users trade drugs
and illegal services using
• On October 2, 2013, Ross
William Ulbricht, alleged by
the FBI to be the owner of
Silk Road and the person
behind the pseudonym
"Dread Pirate Roberts," was
arrested in San Francisco.
• The site was seized but
alternate sites have already
sprung up
Virtual Currencies Bitcoin vs. Altcoins
Bitcoin is a distributed, peer-to-peer digital currency that functions
without the intermediation of any central authority. The concept
was introduced in a 2008 paper by a pseudonymous developer
known as "Satoshi Nakamoto
There are currently 127 different altcoins on the market. To name
a few:
• Litecoin
• Namecoin
• PP coin
• Dogecoin
All cryptocurrencies have one factor in common with fiat
currencies: users need to trust the source
Hundreds of real life legitimate vendors already accept Bitcoin.
Who is active in Bitcoin?
Payment Startups
Financial Service
Hedge Funds
Basically the same people that are “active” in “money”!
Is Bitcoin going bad?
Regulatory Focus / Concerns
• Bitcoin faces regulatory push in Senate Banking Committee
• China’s PBOC bans financial companies from Bitcoin
• India and Thailand banning Bitcoin outright
Hacking / Theft
• Bitcoin payment processor BIPS was attacked, over
$1million stolen
• Hackers steal $1.2m of bitcoins from
• Bitcoin exchange Mt Gox files for bankruptcy after losing
744,408 bitcoins in a theft which went undetected for years
Bitcoin Bubble / Currency Failure
• Greenspan says Bitcoin a ‘bubble’ without intrinsic currency
Potential Risks of Virtual Currencies
• $4.1m goes missing as Chinese bitcoin trading platform Global
Bond Limited (GBL) vanishes
• Alleged Bitcoin Ponzi scheme faces SEC suit
Money Laundering
• The ‘Silk Road’ is shut down, and the owner is in custody.
Feds confiscated 144K bitcoins, worth $133m
• Charlie Shrem, a Bitcoin executive arrested was for money
laundering. The vice chairman of the Bitcoin Foundation and
CEO of BitInstant was charged by U.S. prosecutors with
conspiring to commit money laundering by helping to funnel
cash to illicit online drugs bazaar Silk Road.
Legitimate Compliance Concerns
Virtual currencies like Bitcoin have
characteristics that are attractive for
criminal users.
• High level of anonymity
• Portability
• Easy transferable
• Easy to conceal
Regulatory Roundup
Senior members of the Foreign Exchange Administration and Policy
Department advised that “due to lack of existing applicable laws,
capital controls and the fact that Bitcoin straddles multiple financial
facets... Bitcoin activities are illegal in Thailand".
However, since February 15, 2014, according to a letter from the Bank
of Thailand, the current situation is that Bitcoin can be traded in
Thailand so long as it’s only converted to/from Thai baht. So Bitcoin
cannot be used as a way of converting foreign currencies in the nation.
Bank of Thailand says it has no plans to expand the laws to regulate
Jaturong Jantarangs, the Bank of Thailand's senior
director of the payment systems policy department,
said a company providing bitcoin exchange against
the baht does not require approval or a licence
from the central bank because bitcoin and other
virtual currencies are not recognised as legal
tender in Thailand. However, it has to comply with
other related laws such as the Civil and
Commercial Code, Consumer , and Anti-Money
Laundering Regulations, he said.
• Singapore plans to regulate virtual-currency intermediaries
including operators of Bitcoin exchanges and vending machines
• They will start with Anti-Money Laundering and Terrorist
Financing rules
“Consumers and businesses should take note of the broader risks
that dealing in virtual currencies entails and should exercise the
necessary caution” MAS Deputy Managing Director Ong Chong Tee
The Managing Director of the Monetary
Authority of Singapore (MAS), Ravi Menon,
has commented on bitcoin and digital
currencies in an interview, saying they
“have a role to play” in the future.
“It is hard to divine how technology and
practices will evolve, 20 or 30 years from
now. I would say virtual currencies have a
role to play”
Bank Indonesia takes a neutral stance after first issuing a statement
that Bitcoin may break banking regulations
“Noting the Law no. 7 of 2011 on Currency and the Law no. 23 of 1999
which was amended several times, most recently by Act no. 6 In 2009,
Bank Indonesia states that the virtual currency bitcoin and others do
not constitute currency or legal tender in Indonesia.
People are encouraged to be careful of bitcoin and other virtual
currencies. All risks related to ownership/use of bitcoin will be borne by
the owner/user of the virtual currency bitcoin and others.”
The State Bank of Vietnam released a warning statement on 28
February 2014 which states that the use of virtual currency Bitcoin
and other similar means of payment is not legally recognized and
protected, according to the current law on currency and banking in
Vietnam, and that investment in such the currencies was potentially
very risky.
“Credit institutions are not allowed to use the virtual currency Bitcoin
and other similar currencies as a means of payment or the provision
of services to customers. Organizations and individuals should not
invest, hold or perform transactions involving the virtual currency
Bitcoin and other similar property as this is a potentially very risky
and not protected by law defense"
The Phnom Penh Post is reported that the Cambodian government, or
at least the central bank there, will not recognize Bitcoin as a
“[The National Bank of Cambodia] will not recognize a currency that
is not issued or backed by a government,” director-general Chea
Serey said in a statement. “Bitcoin’s issuer is not a central bank of
any jurisdiction.”
On 6 March 2014, BSP issued a statement on risks associated with
Bitcoin trading and usage. Bitcoin exchanges are not regulated by BSP
at the moment. BSP will be monitoring the possibility of Bitcoin usage
in money laundering and other illegal purposes.
“It has come to the attention of the Bangko Sentral ng Pilipinas (BSP) that
virtual currencies like Bitcoin are now being exchanged in the Philippines. The
public is hereby warned that such exchanges are not regulated by the BSP or
by any regulatory authority in the country at this time. Thus, there are no
existing regulations which would specifically protect consumers from financial
losses if an organization that exchanges or holds virtual currencies fails or
goes out of business. Moreover, there is no assurance that the value Bitcoin
or any virtual currency would be stable. In fact, its value can be highly volatile.
The BSP will be closely monitoring developments on these virtual currencies
particularly on their possible use for money laundering and other illegal
purposes, and will adopt appropriate measures as needed.”
Bank Negara Malaysia (BNM) issued a statement in January 2014 that
Bitcoin is not recognized as a legal tender in Malaysia. The central bank
will not regulate Bitcoin operations at the moment and users should
aware of the risks associated with Bitcoins usage.
• In June 2013, the Reserve Bank of India (RBI) issued a notice
acknowledging that virtual currencies posed legal, regulatory and
operational challenges. In August 2013, a spokesperson wrote in an email
that Bitcoin was under observation.
• On 24 December 2013, the Reserve Bank of India issued an advisory to
the Indian public not to indulge in buying or selling of virtual currencies,
including Bitcoins.[28] Following the announcement Bitcoin operators in the
country began suspending operations.[29]
• The first raid in India was undertaken a couple of days later
in Ahmedabad by the Enforcement Directorate (ED) on the office of the
website,, that provided a platform to trade in this virtual
currency. The preliminary investigations found it to be in violation of
the Foreign Exchange Management Act (FEMA).
• On 28 December 2013, the Deputy Governor of the RBI, K. C.
Chakrabarty, made a statement that RBI had no plans to regulate Bitcoins.
Immediate and long term concerns
• Virtual currencies are in their infancy but maturing rapidly
• To be accepted and operate in the main stream, virtual currencies need a
solid compliance framework
• The current lack of regulations and the different views of regulators is
challenging and creates risk
• Lack of regulation and sensational press has created a bad image of the
virtual currency industry
• Traditional financial institutions see virtual currencies as a fad or as a
• The compliance and AML community has a unique chance to shape the
future by engaging regulators and traditional financial institutions.
Designing a Bitcoin proof Compliance
• Integration of risk and compliance systems
• Automated and centralized onboarding
• Focus on account behavior
• Closed loop systems
• Exchange of information
• “Colored” coins
But most of all: dialogue