Bitcoin is hot…literally. One of the new wave of virtual currencies that bypass traditional banking systems, Bitcoin is rising in popularity. And it’s not just popular with the average consumer, since organized crime has figured out how to use it to efficiently launder money. For this reason, the U.S. has begun to apply the anti money laundering (AML) rules initially written to govern traditional financial organizations to all digital cash companies.

If you haven’t heard of Bitcoin, you will. Bitcoin experienced massive growth in Q4 2013, and is just one of a number of companies populating a new financial genre: cryptocurrency, or digital encrypted currency. So how does it work? An alternative to cash, Bitcoin is a decentralized, virtual currency that was developed to facilitate all financial activities carried out over the Internet. The currency units consist of a series of numbers that can be traded between accounts, or “wallets,” for services or goods; when it launched in 2009, Bitcoin transactions happened without any government interference (or oversight).

That’s all changing, though, because regulatory agencies such as the Financial Crimes Enforcement Network (FinCEN), the SEC and even the FBI noted that Bitcoin can and is easily being used for a host of illegal activities. Last March, FinCEN issued a ruling that placed cryptocurrency offerings in the same business category as money services – meaning that Bitcoin and its competitors must now follow the same government regulations intended for money transfer companies such as Western Union.

In April 2013, the Department of Homeland Security (DHS) froze the Bitcoin exchange account of Japan-based Mt. Gox – held at Wells Fargo – alleging that it broke AML regulations. In August, almost two dozen Bitcoin payment companies in New York were issued subpoenas in an effort to ensure their AML prevention measures were adequate.

We can expect to see much more in 2014. FinCEN is still evaluating how to best apply AML regulations to cryptocurrency organizations. For now, it is intent on making businesses aware of their reporting responsibilities. But the more the U.S. Government applies regulatory scrutiny to Bitcoin and other cryptocurrency transactions, the more they become legitimized.

(Want to learn more? Alacer’s AML experts will be attending the 19th Annual AML & Financial Crimes Conference, being held March 16-19 at the Westin Diplomat in Hollywood, FL. Send an email to me at Richard@alacergroup.com to arrange a chat.)

by Richard Paxton