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Digital currencies provide an ideal money laundering instrument because they facilitate international payments without the transmittal services of traditional financial institutions.1 Such currencies allow direct access to a remote payment mechanism and can be used to launder illicit funds by sending instant international remittances via the Internet. Many components of the digital currency system are incorporated in offshore and foreign jurisdictions not subject to U.S. regulations; however, their services are accessed in the United States through the Internet. As such, transactions can be completed with less fear of documentation, identification, or law enforcement suspicion. Such emerging electronic payment systems are vulnerable to money laundering and terrorist financing.
Digital currencies are privately owned online payment systems that allow international payments, which are often denominated in the standard weights for gold and precious metals.2 Each digital currency functions as one transnational currency; however, none of these are recognized as currencies by the U.S. government.3 Most digital currencies claim to be backed by precious metals such as gold, silver, platinum, and palladium; however, very few can independently prove such backing. Several digital currencies claim to be backed by specific national currencies. Metal-backed digital currency accounts are allegedly valued based on the backing commodity's fluctuating "spot price" at the time of funding or withdrawal; digital gold currencies (DGCs)4 are by far the most popular type. Metal does not physically change hands in transactions; rather, the transfer is an accounting entry in which only the designation of ownership changes (similar to a stockholder whose shares represent a portion of a company's holdings). According to the Global Digital Currency Association (GDCA), digital currency transactions account for billions of dollars each year--digital gold currency transactions alone increased from approximately $3 billion in 2004 to approximately $10 billion in 2006.
The digital currency system is composed of issuers, digital currency exchangers (DCEs),5 and the individuals (including merchants) who conduct transactions. Digital currency issuers frequently own or control a digital currency and are generally responsible for maintaining the precious metals used to back currencies or--in the case of currencies not backed by metals or national currencies--managing pooled bank accounts in which users' funds are maintained until withdrawn. Issuers typically process digital currency transactions and maintain online records of users' activities, including funding, spending, fees, and withdrawals. Digital currency exchangers (DCEs) facilitate funding of and withdrawals from digital currency accounts as well as conversion of one digital currency to another. Such exchangers and issuers are usually independent entities; however, an issuer may have a corporate affiliation with one particular DCE. Many DCEs claim to accept any national currency (U.S. dollars, euros, yen, etc.) in exchange for digital currencies, as well as a variety of other payment methods. Because digital currencies operate independently, payments issued by a specific digital currency can be accepted only by merchants or individuals who accept that digital currency, unless the payment is first converted to the appropriate digital currency through a DCE.
1. Digital
currency account holders may have indirect contact with a depository
institution through the digital currency's operating (or "pooled") account.
2. Gold, platinum, silver, and palladium are denominated according to the
International Organization for Standardization (ISO) 4217 codes. ISO encourages
standardization in order to promote interoperability of international systems.
3.
According
to the U.S. Department of the Treasury publication U.S. Money
Laundering Threat Assessment, currency is something monetized by a monetizing
authority, generally a central bank. Rather than being used as currency,
precious metals are used as a part of a barter exchange (one party agrees to
exchange a quantity of gold for various goods or services).
4.
Also
known as electronic gold currencies (EGCs) or electronic gold.
5.
Also
known as exchange agents, exchange providers, exchangers, or market
makers. Digital currency exchangers (DCEs) are called market makers because they
act like wholesalers in the stock market, making a profit from the bid/offer
spread. (The bid price is what individuals can sell their shares for; the offer
price is what they can buy them for. The bid is always lower than the offer
price, and the difference between them is the spread.)
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