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United States Government Accountability Office: 
GAO: 

Report to the Committee on Homeland Security and Governmental Affairs, 
U.S. Senate: 

May 2014: 

Virtual Currencies: 

Emerging Regulatory, Law Enforcement, and Consumer Protection 
Challenges: 

GAO-14-496: 

GAO Highlights: 

Highlights of GAO-14-496, a report to the Committee on Homeland 
Security and Governmental Affairs, U.S. Senate. 

Why GAO Did This Study: 

Virtual currencies-—digital representations of value that are not 
government-issued-—have grown in popularity in recent years. Some 
virtual currencies can be used to buy real goods and services and 
exchanged for dollars or other currencies. One example of these is 
bitcoin, which was developed in 2009. Bitcoin and similar virtual 
currency systems operate over the Internet and use computer protocols 
and encryption to conduct and verify transactions. While these virtual 
currency systems offer some benefits, they also pose risks. For 
example, they have been associated with illicit activity and security 
breaches, raising possible regulatory, law enforcement, and consumer 
protection issues. GAO was asked to examine federal policy and 
interagency collaboration issues concerning virtual currencies. 

This report discusses (1) federal financial regulatory and law 
enforcement agency responsibilities related to the use of virtual 
currencies and associated challenges and (2) actions and collaborative 
efforts the agencies have undertaken regarding virtual currencies. To 
address these objectives, GAO reviewed federal laws and regulations, 
academic and industry research, and agency documents; and interviewed 
federal agency officials, researchers, and industry groups. 

What GAO Found: 

Virtual currencies are financial innovations that pose emerging 
challenges to federal financial regulatory and law enforcement 
agencies in carrying out their responsibilities, as the following 
examples illustrate: 

* Virtual currency systems may provide greater anonymity than 
traditional payment systems and sometimes lack a central intermediary 
to maintain transaction information. As a result, financial regulators 
and law enforcement agencies may find it difficult to detect money 
laundering and other crimes involving virtual currencies. 

* Many virtual currency systems can be accessed globally to make 
payments and transfer funds across borders. Consequently, law 
enforcement agencies investigating and prosecuting crimes that involve 
virtual currencies may have to rely upon cooperation from 
international partners who may operate under different regulatory and 
legal regimes. 

* The emergence of virtual currencies has raised a number of consumer 
and investor protection issues. These include the reported loss of 
consumer funds maintained by bitcoin exchanges, volatility in bitcoin 
prices, and the development of virtual-currency-based investment 
products. For example, in February 2014, a Tokyo-based bitcoin 
exchange called Mt. Gox filed for bankruptcy after reporting that it 
had lost more than $460 million. 

Federal financial regulatory and law enforcement agencies have taken a 
number of actions regarding virtual currencies. In March 2013, the 
Department of the Treasury’s Financial Crimes Enforcement Network 
(FinCEN) issued guidance that clarified which participants in virtual 
currency systems are subject to anti-money-laundering requirements and 
required virtual currency exchanges to register with FinCEN. 
Additionally, financial regulators have taken some actions regarding 
anti-money-laundering compliance and investor protection. For example, 
in July 2013, the Securities and Exchange Commission (SEC) charged an 
individual and his company with defrauding investors through a bitcoin-
based investment scheme. Further, law enforcement agencies have taken 
actions against parties alleged to have used virtual currencies to 
facilitate money laundering or other crimes. For example, in October 
2013, multiple agencies worked together to shut down Silk Road, an 
online marketplace where users paid for illegal goods and services 
with bitcoins. 

Federal agencies also have begun to collaborate on virtual currency 
issues through informal discussions and interagency working groups 
primarily concerned with money laundering and other law enforcement 
matters. However, these working groups have not focused on emerging 
consumer protection issues, and the Consumer Financial Protection 
Bureau (CFPB)-—whose responsibilities include providing consumers with 
information to make responsible decisions about financial 
transactions—-has generally not participated in these groups. 
Therefore, interagency efforts related to virtual currencies may not 
be consistent with key practices that can benefit interagency 
collaboration, such as including all relevant participants to ensure 
they contribute to the outcomes of the effort. As a result, future 
interagency efforts may not be in a position to address consumer risks 
associated with virtual currencies in the most timely and effective 
manner. 

What GAO Recommends: 

GAO recommends that CFPB take steps to identify and participate in 
pertinent interagency working groups addressing virtual currencies, in 
coordination with other participating agencies. CFPB concurred with 
this recommendation. 

View [hyperlink, http://www.gao.gov/products/GAO-14-496]. For more 
information, contact Lawrance L. Evans, Jr. at (202) 512-8678 or 
evansl@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Federal Agencies Face Emerging Challenges in Carrying Out 
Responsibilities Related to the Use of Virtual Currencies: 

Agencies Have Taken Some Actions on Virtual Currencies, but 
Interagency Working Groups Have Not Focused on Consumer Risks: 

Conclusions: 

Recommendation for Executive Action: 

Agency Comments: 

Appendix I: How Bitcoins Enter into Circulation and Are Used in 
Transactions: 

Appendix II: Interagency Working Groups that Have Addressed Virtual 
Currency Issues: 

Appendix III: Comments from the Consumer Financial Protection Bureau: 

Appendix IV: Comments from the National Credit Union Administration: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Table: 

Table 1: Interagency Working Groups that Have Addressed Virtual 
Currency Issues, as of April 2014: 

Figures: 

Figure 1: Ways to Obtain and Spend Bitcoins: 

Figure 2: Bitcoin Price Index in U.S. Dollars, January 1, 2013 through 
March 31, 2014: 

Figure 3: Screen Shot of the Silk Road Website: 

Figure 4: How Bitcoins Enter into Circulation and Are Used in 
Transactions: 

Abbreviations: 

BSA: Bank Secrecy Act: 

BSAAG: Bank Secrecy Act Advisory Group: 

CFPB: Consumer Financial Protection Bureau: 

CFTC: Commodity Futures Trading Commission: 

DATA: Digital Asset Transfer Authority: 

DEA: Drug Enforcement Administration: 

DHS: Department of Homeland Security: 

DOJ: Department of Justice: 

ECTF: Electronic Crimes Task Forces: 

EFTA: Electronic Fund Transfer Act: 

FATF: Financial Action Task Force: 

FBI: Federal Bureau of Investigation: 

FDIC: Federal Deposit Insurance Corporation: 

FFIEC: Federal Financial Institutions Examination Council: 

FinCEN: Financial Crimes Enforcement Network: 

HSI: Homeland Security Investigations: 

ICE: U.S. Immigration and Customs Enforcement: 

IOC-2: International Organized Crime Intelligence and Operations 
Center: 

IRS: Internal Revenue Service: 

NCUA: National Credit Union Administration: 

OCC: Office of the Comptroller of the Currency: 

SEC: Securities and Exchange Commission: 

TOR: The Onion Router: 

USAID: United States Agency for International Development: 

VCET: Virtual Currency Emerging Threats Working Group: 

[End of section] 

United States Government Accountability Office: 
GAO:
441 G St. N.W. 
Washington, DC 20548: 

May 29, 2014: 

The Honorable Thomas R. Carper: 
Chairman: 
The Honorable Tom A. Coburn: 
Ranking Member: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

While not widely used or accepted, virtual currencies, such as 
bitcoin, have grown in popularity in recent years and have emerged for 
some as potential alternatives to traditional currencies issued by 
governments. Virtual currencies operate over the Internet and, in some 
cases, may be used to buy real goods and services and exchanged for 
traditional currencies. They offer potential benefits over traditional 
currencies, including lower transaction costs and faster funds 
transfers. Because some virtual currency transactions provide greater 
anonymity than transactions using traditional payment systems, law 
enforcement and financial regulators have raised concerns about the 
use of virtual currencies for illegal activities. Additionally, recent 
cases involving the loss of funds from virtual currency exchanges have 
highlighted potential consumer protection issues. 

You asked us to examine potential policy issues related to virtual 
currencies and the status of federal agency collaboration in this 
area. This report focuses on the federal financial regulatory agencies 
and selected federal law enforcement agencies that have a role in 
protecting the U.S. financial system and investigating financial 
crimes.[Footnote 1] Specifically, this report addresses (1) agency 
responsibilities related to the use of virtual currencies and the 
emerging challenges these currencies pose to the agencies; and (2) 
actions the agencies have taken in response to the emergence of 
virtual currencies, including interagency collaborative efforts. We 
selected the law enforcement agencies included in our review based on 
their involvement in investigating virtual-currency-related crimes and 
participation in interagency collaborative efforts and congressional 
hearings on virtual currency issues. 

To describe agency responsibilities related to the use of virtual 
currencies and the emerging challenges these currencies pose, we 
reviewed the following agency information: testimony and written 
statements from relevant congressional hearings, written responses to 
congressional questions, unclassified intelligence assessments, 
financial reports, training presentations, and descriptions of 
missions and responsibilities from agencies' websites.[Footnote 2] We 
also reviewed prior GAO reports, Congressional Research Service 
reports, and relevant laws and regulations, including the Bank Secrecy 
Act (BSA) and related anti-money laundering provisions such as Title 
III of the USA PATRIOT Act, to gain an understanding of agencies' 
responsibilities in administering and enforcing anti-money-laundering 
laws and regulations, as well as in investigating and prosecuting 
financial and other crimes.[Footnote 3] In addition, we reviewed 
academic articles and papers from industry stakeholders. Further, we 
interviewed officials from the following federal financial regulatory 
and law enforcement agencies: 

* The Board of Governors of the Federal Reserve System (Federal 
Reserve); 

* The Bureau of Consumer Financial Protection (also known as the 
Consumer Financial Protection Bureau or CFPB); 

* The Commodity Futures Trading Commission (CFTC); 

* The Department of Homeland Security (DHS), including U.S. 
Immigration and Customs Enforcement-Homeland Security Investigations 
(ICE-HSI) and the U.S. Secret Service (Secret Service); 

* The Department of Justice (DOJ), including the Criminal Division and 
two of its components--the Asset Forfeiture and Money Laundering 
Section and Computer Crime and Intellectual Property Section--and the 
Federal Bureau of Investigation (FBI); 

* The Department of the Treasury (Treasury), including the Financial 
Crimes Enforcement Network (FinCEN) and the Office of the Comptroller 
of the Currency (OCC); 

* The Federal Deposit Insurance Corporation (FDIC); 

* The National Credit Union Administration (NCUA); and: 

* The Securities and Exchange Commission (SEC). 

Additionally, we interviewed an academic whose research focused on 
virtual currencies and industry stakeholders, including the Bitcoin 
Foundation, the Digital Asset Transfer Authority (DATA), and the 
National Money Transmitters Association, which represent the interests 
of a large number of virtual currency and money transmission 
businesses. 

To examine the actions and collaborative efforts federal agencies have 
undertaken in response to the emergence of virtual currencies, we 
reviewed agency information, including FinCEN's regulatory guidance 
and administrative rulings on the applicability of BSA to virtual 
currency participants, testimony and written statements from the 
previously mentioned congressional hearings, written responses to 
congressional questions, intelligence assessments, a CFPB query of its 
Consumer Complaint Database, and press releases.[Footnote 4] We also 
interviewed officials from the agencies listed previously to obtain 
further information on the actions they have taken to address the 
emergence of virtual currencies and their efforts to collaborate with 
other federal agencies on this issue. Additionally, we interviewed the 
academic and industry stakeholders noted previously, as well as the 
Digital Economy Task Force, to determine the extent to which private 
sector groups were involved in interagency collaborative efforts. 
[Footnote 5] We reviewed GAO's key practices on collaboration and 
assessed whether interagency collaborative efforts related to virtual 
currencies were consistent with practices concerning the inclusion of 
relevant participants.[Footnote 6] 

We conducted this performance audit from November 2013 to May 2014 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

Virtual currencies are financial innovations that have grown in number 
and popularity in recent years. While there is no statutory definition 
for virtual currency, the term refers to a digital representation of 
value that is not government-issued legal tender. Unlike U.S. dollars 
and other government-issued currencies, virtual currencies do not 
necessarily have a physical coin or bill associated with their 
circulation. While virtual currencies can function as a unit of 
account, store of value, and medium of exchange, they are not widely 
used or accepted. Some virtual currencies can only be used within 
virtual economies (for example, within online role-playing games) and 
may not be readily exchanged for government-issued currencies such as 
U.S. dollars, euro, or yen. Other virtual currencies may be used to 
purchase goods and services in the real economy and can be converted 
into government-issued currencies through virtual currency exchanges. 
In previous work, we described the latter type of virtual currencies 
as "open flow."[Footnote 7] Open-flow virtual currencies have received 
considerable attention from federal financial regulatory and law 
enforcement agencies, in part because these currencies interact with 
the real economy and because depository institutions (for example, 
banks and credit unions) may have business relationships with 
companies that exchange virtual currencies for government-issued 
currencies. Throughout the remainder of this report, we use the term 
virtual currencies to mean open-flow virtual currencies, unless 
otherwise stated.[Footnote 8] 

Virtual currency systems, which include protocols for conducting 
transactions in addition to digital representations of value, can 
either be centralized or decentralized. Centralized virtual currency 
systems have a single administering authority that issues the currency 
and has the authority to withdraw the currency from circulation. In 
addition, the administrating authority issues rules for use of the 
currency and maintains a central payment ledger. In contrast, 
decentralized virtual currency systems have no central administering 
authority. Validation and certification of transactions are performed 
by users of the system and therefore do not require a third party to 
perform intermediation activities. 

A prominent example of a decentralized virtual currency system is 
bitcoin. Bitcoin was developed in 2009 by an unidentified programmer 
or programmers using the name Satoshi Nakamoto. According to industry 
stakeholders, bitcoin is the most widely circulated decentralized 
virtual currency. The bitcoin computer protocol permits the storage of 
unique digital representations of value (bitcoins) and facilitates the 
assignment of bitcoins from one user to another through a peer-to-
peer, Internet-based network.[Footnote 9] Each bitcoin is divisible to 
eight decimal places, enabling their use in any kind of transaction 
regardless of the value. Users' bitcoin balances are associated with 
bitcoin addresses (long strings of numbers and letters) that use 
principles of cryptography to help safeguard against inappropriate 
tampering with bitcoin transactions and balances.[Footnote 10] When 
users transfer bitcoins, the recipient provides their bitcoin address 
to the sender, and the sender authorizes the transaction with their 
private key (essentially a secret code that proves the sender's 
control over their bitcoin address). Bitcoin transactions are 
irrevocable and do not require the sender or receiver to disclose 
their identities to each other or a third party. However, each 
transaction is registered in a public ledger called the "blockchain," 
which maintains the associated bitcoin addresses and transaction 
dates, times, and amounts. Users can define how much additional 
information they require of each other to conduct a transaction. 

Because peer-to-peer bitcoin transactions do not require the 
disclosure of information about a user's identity, they give the 
participants some degree of anonymity. In addition, computer network 
communication can be encrypted and anonymized by software to further 
hide the identity of the parties in transactions.[Footnote 11] 
However, the transactions are not completely anonymous because the 
time and amount of each transaction and the associated bitcoin 
addresses are permanently recorded in the blockchain. As a result, 
peer-to-peer bitcoin transactions are sometimes described as 
"pseudonymous." The anonymity of bitcoin is also limited by data 
analysis techniques that can potentially link bitcoin addresses to 
personal identities. For example, information about a customer's 
identity may be recorded when an individual exchanges dollars for 
bitcoins, and this information may be combined with data from the 
blockchain to determine the identities of participants in bitcoin 
transactions. In addition, researchers have developed methods to 
determine identities of parties involved in some bitcoin transactions 
by analyzing clusters of transactions between specific addresses. 
[Footnote 12] 

Bitcoins are created and entered into circulation through a process 
called mining. Bitcoin miners download free software that they use to 
solve complex math problems. Solving these problems verifies the 
validity of bitcoin transactions by grouping several transactions into 
a block and mathematically proving that the transactions occurred and 
did not involve double spending of a bitcoin. On average, this process 
takes about 10 minutes. When a miner or group of miners (mining pools) 
solves a problem, the bitcoin network accepts the block of 
transactions as valid and creates new bitcoins and awards them to the 
successful miner or mining pool.[Footnote 13] (For a diagram on how 
bitcoins enter into circulation through mining, how transactions are 
conducted, and how miners verify transactions, see app. I.) Over time, 
the computer processing power needed to mine new bitcoins has 
increased to the point where mining requires specialized computer 
hardware and has become increasingly consolidated into large mining 
pools. 

In addition to mining new bitcoins, users can also acquire bitcoins 
already in circulation by accepting bitcoins as gifts or payments for 
goods or services, purchasing them at bitcoin kiosks (sometimes 
referred to as bitcoin automated teller machines), or purchasing them 
on third-party exchanges. These exchanges allow users to exchange 
traditional currencies such as U.S. dollars for bitcoins, and exchange 
bitcoins back to traditional currencies. Individuals may store their 
bitcoins in a "virtual wallet" (a program that saves bitcoin 
addresses) on their computer or other data storage device, or use an 
online wallet service provided by an exchange or third-party virtual 
wallet provider. To spend their bitcoins, individuals can buy goods or 
services from other bitcoin users. They may also make purchases from 
online businesses that either accept bitcoins directly or use third-
party payment processors that take payments in bitcoins from buyers 
and provide businesses the payments in the form of a traditional 
currency or a combination of bitcoins and traditional currency. Figure 
1 shows various ways that individuals can obtain and spend bitcoins. 

Figure 1: Ways to Obtain and Spend Bitcoins: 

[Refer to PDF for image: illustration] 

Bob’s virtual wallet: 

Obtaining bitcoins: 

Exchanges: Virtual currency exchange converts Bob’s traditional 
currency, such as U.S. dollars, into bitcoins and transfers them to a 
bitcoin address in his virtual wallet. Exchanges also convert bitcoins 
into traditional currencies. 

Other bitcoin users: Bitcoin users transfer bitcoins directly to a 
bitcoin address in Bob’s virtual wallet as a gift or for payment of 
goods or services. 

Bitcoin kiosks: Bob deposits traditional currency into a bitcoin 
kiosk. The kiosk sends bitcoins from its operator’s bitcoin address to 
a bitcoin address in Bob’s virtual wallet. 

Mining: Bob installs bitcoin mining software on his computer, which is 
used to solve complex math problems for the bitcoin network. If Bob 
successfully solves the problems, he receives newly created bitcoins. 

Spending bitcoins: 

Other bitcoin users: Bob transfers bitcoins directly to bitcoin 
addresses in the virtual wallets of other bitcoin users as a gift or 
as payment for goods or services. 

Businesses accepting bitcoins directly: To pay for goods or services, 
Bob transfers bitcoins directly to bitcoin addresses of businesses 
that accept payment in bitcoins. 

Businesses accepting bitcoins through payment processors: To pay for 
goods or services, Bob transfers bitcoins to a business’s payment 
processor. The processor converts the bitcoins into traditional 
currency and remits the traditional currency to the business. In some 
cases, the processor converts only a portion of the bitcoins into 
traditional currencies. 

Source: GAO. 

[End of figure] 

Due to limitations in available data, the size of the bitcoin market 
is unclear.[Footnote 14] Nonetheless, some data exist that may provide 
some context for the size of this market: 

* According to statistics from the bitcoin blockchain, as of March 31, 
2014, approximately 12.6 million bitcoins were in circulation. 
[Footnote 15] 

* At exchange rates as of March 31, 2014 (about $458 per bitcoin), the 
total value of the approximately 12.6 million bitcoins in circulation 
was about $5.6 billion.[Footnote 16] For perspective, the total amount 
of U.S. currency held by the public and in transaction deposits 
(mainly checking accounts) at depository institutions was about $2.7 
trillion as of March 2014.[Footnote 17] 

* Bitcoin exchange rates against the U.S. dollar have changed 
dramatically over time (see fig. 2). According to one bitcoin price 
index, the price was about $13 per bitcoin in the beginning of January 
2013 and rose to more than $1,100 by the beginning of December 2013. 
Prices subsequently fell to about $522 in mid-December 2013 and have 
fluctuated between roughly $450 and $950 since then.[Footnote 18] 

* From April 2013 through March 2014, the number of bitcoin 
transactions per day ranged from about 29,000 to 102,000.[Footnote 19] 
In comparison, the Federal Reserve Banks processed an average of 44 
million commercial Automated Clearing House (a traditional payment 
processor) transactions per day in 2013.[Footnote 20] 

Figure 2: Bitcoin Price Index in U.S. Dollars, January 1, 2013 through 
March 31, 2014: 

[Refer to PDF for image: line graph] 

Dollars per bitcoin, by month and day: 

2013: 

1/1: $13; 
1/10: $14; 
1/20: $16; 
2/1: $20; 
2/10: $24; 
2/20: $30; 
3/1: $35; 
3/10: $46; 
3/20: $64; 
4/1: $104; 
4/10: $165; 
4/20: $127; 
5/1: $116; 
5/10: $118; 
5/20: $122; 
6/1: $129; 
6/10: $106; 
6/20: $111; 
7/1: $85; 
7/10: $85; 
7/20: $86; 
8/1: $96; 
8/10: $93; 
8/20: $105; 
9/1: $128; 
9/10: $121; 
9/20: $123; 
10/1: $125; 
10/10: $126; 
10/20: $163; 
11/1: $199; 
11/10: $312; 
11/20: $573; 
12/1: $947; 
12/4: $1,147; 
12/10: $990; 
12/18: $522; 
12/20: $623; 

2014: 

1/1: $770; 
1/6: $951; 
1/10: $885; 
1/20: $871; 
2/1: $853; 
2/10: $680; 
2/20: $552; 
3/1: $564; 
3/10: $626; 
3/20: $587; 
3/31: $458. 

Source: GAO analysis of data from [hyperlink, 
http://www.coindesk.com/price/] (accessed on Apr. 1, 2014). 

Note: The index is a composite price calculated as the simple average 
of bitcoin prices across leading global exchanges that meet certain 
criteria. The values are expressed in current U.S. dollars. 

[End of figure] 

While bitcoin is the most widely used virtual currency, numerous 
others have been created. For example, dozens of decentralized virtual 
currencies are based on the bitcoin protocol such as Litecoin, 
Auroracoin, Peercoin, and Dogecoin. Similar to the bitcoin market, the 
size of the market for these virtual currencies is unclear. However, 
as of March 31, 2014, the total reported value of each of these 
currencies was less than $400 million (ranging from about $33 million 
for Dogecoin to about $346 million for Litecoin).[Footnote 21] Other 
virtual currencies that have been created are not based on the bitcoin 
protocol. One of the more prominent examples is XRP, which is used 
within a decentralized payment system called Ripple. Ripple allows 
users to make peer-to-peer transfers in any currency. A key function 
of XRP is to facilitate the conversion from one currency to another. 
For example, if a direct conversion between Mexican pesos and Thai 
baht is not available, the pesos can be exchanged for XRP, and then 
the XRP for baht. As of March 31, 2014, the total value of XRP was 
$878 million.[Footnote 22] 

Virtual currencies have drawn attention from federal agencies with 
responsibilities for protecting the U.S. financial system and its 
participants and investigating financial crimes. These include, but 
are not limited to, CFPB, CFTC, DHS, DOJ, SEC, Treasury, and the 
prudential banking regulators. The prudential banking regulators are 
the FDIC, Federal Reserve, NCUA, and OCC. Within Treasury, FinCEN has 
a particular interest in the emergence of virtual currencies because 
of concerns about the use of these currencies for money laundering and 
FinCEN's role in combating such activity.[Footnote 23] Additionally, 
because virtual currencies (like government-issued currencies) can 
play a role in a range of financial and other crimes, including cross-
border criminal activity, key components of DOJ and DHS have an 
interest in how virtual currencies are used. Relevant DOJ components 
include the Criminal Division (which oversees the Computer Crime and 
Intellectual Property Section and the Asset Forfeiture and Money 
Laundering Section), the FBI, and the Offices of the U.S. Attorneys 
(U.S. Attorneys). Relevant DHS components include the Secret Service 
and ICE-HSI. 

Federal Agencies Face Emerging Challenges in Carrying Out 
Responsibilities Related to the Use of Virtual Currencies: 

While federal agencies' responsibilities with respect to virtual 
currency are still being clarified, some virtual currency activities 
and products have implications for the responsibilities of federal 
financial regulatory and law enforcement agencies. Virtual currencies 
have presented these agencies with emerging challenges as they carry 
out their different responsibilities. These challenges stem partly 
from certain characteristics of virtual currency systems, such as the 
higher degree of anonymity they provide compared with traditional 
payment systems and the ease with which they can be accessed globally 
to make payments and transfer funds across borders. 

Some Virtual Currency Activities and Products May Have Implications 
for Federal Agencies' Responsibilities: 

Although virtual currencies are not government-issued and do not 
currently pass through U.S. banks, some activities and products that 
involve virtual currencies have implications for the responsibilities 
of federal financial regulatory and law enforcement agencies. These 
activities and products encompass both legitimate and illegitimate 
uses of virtual currencies. Examples of legitimate uses include buying 
virtual currencies and registered virtual-currency-denominated 
investment products. Examples of illegitimate uses include money 
laundering and purchasing illegal goods and services using virtual 
currencies. 

FinCEN: 

FinCEN administers BSA and its implementing regulations.[Footnote 24] 
The goal of BSA is to prevent financial institutions from being used 
as intermediaries for the transfer or deposit of money derived from 
criminal activity and to provide a paper trail to assist law 
enforcement agencies in their money laundering investigations. To the 
extent that entities engaged in money transmission conduct virtual 
currency transactions with U.S. customers or become customers of a 
U.S. financial institution, FinCEN has responsibilities for helping 
ensure that these entities comply with BSA and anti-money-laundering 
regulations.[Footnote 25] 

FinCEN regulations set forth requirements for money services 
businesses, which include financial institutions and other entities 
engaged in money transmission.[Footnote 26] FinCEN guidance states 
that the agency's regulations regarding money services businesses 
apply to virtual currency exchangers and administrators.[Footnote 27] 
FinCEN applies its regulations to "convertible virtual currency," 
which either has an equivalent value in real currency or acts as a 
substitute for real currency. FinCEN regulations require money 
services businesses to assess their exposure to money laundering and 
terrorist financing and establish risk mitigation plans in the form of 
anti-money-laundering programs.[Footnote 28] Additionally, money 
services businesses are required to maintain transaction records. For 
example, for money transfers that are $3,000 or more, money services 
businesses must obtain information on the transmitter, the recipient, 
and the transaction itself, and pass on such information to other 
intermediary financial institutions in any subsequent fund 
transmissions. Money services businesses are also required to monitor 
transactions and file reports on large currency transactions and 
suspicious activities. In addition, certain financial institutions 
must establish a written customer identification program that includes 
procedures for obtaining minimum identification information from 
customers who open an account, such as date of birth, a government 
identification number, and physical address.[Footnote 29] Further, 
financial institutions must file currency transaction reports on 
customer cash transactions exceeding $10,000 that include information 
about the account owner's identity and occupation.[Footnote 30] 

FinCEN also supports the investigative and prosecutive efforts of 
multiple federal and state law enforcement agencies through its 
administration of the financial transaction reporting and 
recordkeeping requirements mandated or authorized under BSA. In 
addition, FinCEN has the authority to take enforcement actions, such 
as assessing civil money penalties, against financial institutions, 
including money services businesses, that violate BSA requirements. 

Prudential Banking Regulators: 

The prudential banking regulators--FDIC, Federal Reserve, NCUA, and 
OCC--provide oversight of depository institutions' compliance with BSA 
and anti-money-laundering requirements. Therefore, these regulators 
are responsible for providing guidance and oversight to help ensure 
that depository institutions that have opened accounts for virtual 
currency exchanges or other money services businesses have adequate 
anti-money-laundering controls for those accounts.[Footnote 31] In 
April 2005, FinCEN and the prudential banking regulators issued joint 
guidance to banking organizations (depository institutions and bank 
holding companies) to clarify BSA requirements with respect to money 
services businesses and to set forth the minimum steps that banking 
organizations should take when providing banking services to these 
businesses.[Footnote 32] As part of safety and soundness or targeted 
BSA compliance examinations of depository institutions, the prudential 
banking regulators assess compliance with BSA and related anti-money-
laundering requirements using procedures that are consistent with 
their overall risk-focused examination approach.[Footnote 33] In 
examining depository institutions for BSA compliance, the regulators 
review whether depository institutions (1) have developed anti-money-
laundering programs and procedures to detect and report unusual or 
suspicious activities possibly related to money laundering; and (2) 
comply with the technical recordkeeping and reporting requirements of 
BSA.[Footnote 34] While most cases of BSA noncompliance are corrected 
within the examination framework, regulators can take a range of 
supervisory actions, including formal enforcement actions, against the 
entities they supervise for violations of BSA and anti-money-
laundering requirements. These formal enforcement actions can include 
imposing civil money penalties and initiating cease-and-desist 
proceedings.[Footnote 35] 

Consumer Financial Protection Bureau: 

CFPB is an independent entity within the Federal Reserve that has 
broad consumer protection responsibilities over an array of consumer 
financial products and services, including taking deposits and 
transferring money. CFPB is responsible for enforcing federal consumer 
protection laws, and it is the primary consumer protection supervisor 
over many of the institutions that offer consumer financial products 
and services. CFPB also has authority to issue and revise regulations 
that implement federal consumer financial protection laws, including 
the Electronic Fund Transfer Act[Footnote 36] and title X of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). 
[Footnote 37] CFPB officials stated that they are reviewing how these 
responsibilities are implicated by consumer use (or potential consumer 
use) of virtual currencies. 

Other relevant CFPB responsibilities concerning virtual currencies 
include accepting and handling consumer complaints, promoting 
financial education, researching consumer behavior, and monitoring 
financial markets for new risks to consumers. For example, under 
authorities provided by the Dodd-Frank Act, CFPB maintains a Consumer 
Complaint Database and helps monitor and assess risks to consumers in 
the offering or provision of consumer financial products or services. 
[Footnote 38] CFPB also issues consumer advisories to promote clarity, 
transparency, and fairness in consumer financial markets. 

Securities and Exchange Commission: 

SEC regulates the securities markets--including participants such as 
securities exchanges, broker-dealers, investment companies, and 
investment advisers--and takes enforcement actions against individuals 
and companies for violations of federal securities laws. SEC's mission 
is to protect investors; maintain fair, orderly, and efficient 
markets; and facilitate capital formation. Virtual currencies may have 
implications for a number of SEC responsibilities. For example, SEC 
has enforcement authority for violations of federal securities laws 
prohibiting fraud by any person in the purchase, offer, or sale of 
securities. SEC enforcement extends to virtual-currency-related 
securities transactions. Additionally, when companies offer and sell 
securities (including virtual-currency-related securities), they are 
subject to SEC requirements to either register the offering with SEC 
or qualify for a registration exemption. SEC reviews registration 
statements to ensure that potential investors receive adequate 
information about the issuer, the security, and the offering. Further, 
if a registered national securities exchange wanted to list a virtual-
currency-related security, it could only do so if the listing complied 
with the exchange's existing rules or the exchange had filed a 
proposed rule change with SEC to permit the listing. 

Virtual currencies may also have implications for other SEC 
responsibilities, as the following examples illustrate: 

* SEC has examination authority for entities it regulates, including 
registered broker-dealers, to ensure compliance with federal 
securities laws, SEC rules and regulations, and BSA requirements. 
According to SEC officials, if a broker-dealer were to accept payments 
in virtual currencies from customers, this could raise potential anti-
money-laundering issues that the broker-dealer would have to account 
for. 

* SEC also regulates and has examination authority over investment 
advisers subject to its jurisdiction.[Footnote 39] Under the 
Investment Advisers Act of 1940, investment advisers are fiduciaries. 
[Footnote 40] To the extent that an investment adviser recommends 
virtual currencies or virtual-currency-related securities, the 
investment adviser's federal fiduciary duty would govern this conduct. 

* If registered broker-dealers held virtual currencies for their own 
account or an account of a customer, SEC would have to determine how 
to treat the virtual currencies for purposes of its broker-dealer 
financial responsibility rules, including the net capital rule. 
[Footnote 41] 

Commodity Futures Trading Commission: 

CFTC has the authority to regulate financial derivative products and 
their markets, including commodity futures and options.[Footnote 42] 
In addition, CFTC investigates and prosecutes alleged violations of 
the Commodity Exchange Act and related regulations.[Footnote 43] 
CFTC's mission is to protect market users and the public from fraud, 
manipulation, abusive practices, and systemic risk related to 
derivatives subject to the Commodity Exchange Act. CFTC's 
responsibilities with respect to virtual currencies depend partly on 
whether bitcoin or other virtual currencies meet the definition of a 
commodity under the Commodity Exchange Act.[Footnote 44] CFTC 
officials said the agency would not make a formal determination on 
this issue until market circumstances require one. According to CFTC, 
such circumstances could include virtual-currency derivatives emerging 
or being offered in the United States or CFTC becoming aware of the 
existence of fraud or manipulative schemes involving virtual 
currencies. The officials said that if prospective derivatives that 
are backed by or denominated in virtual currencies that CFTC 
determines to be commodities emerge, CFTC's regulatory authorities 
would apply to those derivatives just as they would for any other 
derivative product subject to CFTC's jurisdiction. To carry out its 
regulatory responsibilities, CFTC would, among other things, evaluate 
the derivatives to ensure they were not susceptible to manipulation, 
review applications for new exchanges wishing to offer such 
derivatives, and examine exchanges offering these derivatives to 
ensure compliance with the applicable commodity exchange laws. 

Similar to SEC, CFTC has examination authority for BSA compliance--in 
this case directed at futures commission merchants and other futures 
market intermediaries--and acceptance of virtual currency payments by 
these entities could raise BSA compliance concerns.[Footnote 45] Like 
SEC, CFTC would also have to make determinations about the capital 
treatment of virtual currencies if these entities held virtual 
currencies for their own account or an account of a customer. 

Departments of Homeland Security and Justice: 

Law enforcement agencies, including but not limited to DHS and DOJ 
component agencies and offices, have responsibilities to investigate a 
variety of federal crimes that may involve the use of virtual 
currencies and to support the prosecution of those who commit these 
crimes. Like traditional currencies, virtual currencies can facilitate 
a range of criminal activities, including fraud schemes and the sale 
of illicit goods and services, that may fall under the purview of 
federal law enforcement agencies. 

The emergence of virtual currencies has had particular significance 
for financial crimes. According to DOJ officials, the main law 
enforcement interests with respect to virtual currencies are to (1) 
deter and prosecute criminals who use virtual currency systems to 
launder money (that is, move or hide money that either facilitates or 
is derived from criminal or terrorist activities); and (2) investigate 
and prosecute virtual currency services that themselves violate money 
transmission and money laundering laws.[Footnote 46] A number of DOJ 
and DHS components, including the FBI, ICE-HSI, and Secret Service, 
investigate financial crimes as part of their broader 
responsibilities. In addition, DOJ's Asset Forfeiture and Money 
Laundering Section prosecutes money laundering violations, and DOJ and 
DHS manage the seizure and forfeiture of assets that represent the 
proceeds of, or were used to facilitate, federal crimes. Key laws that 
may apply to the use of virtual currencies in financial crimes include 
BSA, as amended by Title III of the USA PATRIOT Act, and anti-money-
laundering statutes.[Footnote 47] 

Additionally, because virtual currencies operate over the Internet, 
they have implications for agency components that investigate and 
prosecute computer crimes (also called cybercrimes). For example, 
DOJ's Computer Crime and Intellectual Property Section stated that 
virtual currencies can be attractive to entities that seek to 
facilitate or conduct computer crimes over the Internet, such as 
computer-based fraud and identity theft. The section's 
responsibilities include improving legal processes for obtaining 
electronic evidence and working with other law enforcement agencies in 
improving the technological and operational means for gathering and 
analyzing electronic evidence. The FBI, Secret Service, and ICE-HSI 
also investigate computer crimes. 

Virtual Currencies Present Regulatory, Law Enforcement, and Consumer 
Protection Challenges: 

The emergence of virtual currencies presents challenges to federal 
agencies responsible for financial regulation, law enforcement, and 
consumer and investor protection. These challenges stem partly from 
certain characteristics of virtual currencies, such as the higher 
degree of anonymity they provide and the ease with which they can be 
sent across borders. In addition, the growing popularity of virtual 
currencies has highlighted both risks and benefits for agencies to 
consider in carrying out their responsibilities. 

Greater Anonymity: 

As previously noted, some virtual currency systems may provide a 
higher degree of anonymity than traditional payment systems because 
they do not require the disclosure of personally identifiable 
information (that is, information that can be used to locate or 
identify an individual, such as names or Social Security numbers) to 
transfer funds from one party to another. When transferring funds in 
the amount of $3,000 or more between the bank accounts of two 
individuals, the banks involved are required by FinCEN regulations to 
obtain and keep the names and other information of the individuals, as 
well as information on the transaction itself.[Footnote 48] The 
customer identification information collected by the banks helps 
create a paper trail of financial transactions that law enforcement 
agencies can use to detect illegal activity, such as money laundering 
or terrorist financing, and to identify and apprehend criminals. 
[Footnote 49] However, in a transfer between two individuals using 
bitcoins (or a similar type of decentralized virtual currency) no 
personally identifiable information is necessarily disclosed either to 
the two individuals or a third-party intermediary.[Footnote 50] As a 
result, virtual currencies may be attractive to parties seeking to 
protect personally identifiable information, maintain financial 
privacy, buy or sell illicit goods and services, or move or conceal 
money obtained by illegal means. Further, virtual currency exchangers 
or administrators may be used to facilitate money laundering if they 
do not collect identifying information from customers and retain other 
transaction information. For these reasons, law enforcement and 
federal financial regulatory agencies have indicated that virtual 
currencies can create challenges for agencies in detecting unlawful 
actions and the entities that carry them out. For example, the FBI has 
noted that because bitcoin does not have a centralized entity to 
monitor and report suspicious activity and process legal requests such 
as subpoenas, law enforcement agencies face difficulty in detecting 
suspicious transactions using bitcoins and identifying parties 
involved in these transactions. 

Cross-Jurisdictional Nature: 

Because they operate over the Internet, virtual currencies can be used 
globally to make payments and funds transfers across borders. In 
addition, according to agency officials, many of the entities that 
exchange traditional currencies for virtual currencies (or vice versa) 
are located outside of the United States. If these exchangers have 
customers located in the United States, they must comply with BSA and 
anti-money-laundering requirements. Due to the cross-jurisdictional 
nature of virtual currency systems, federal financial regulatory and 
law enforcement agencies face challenges in enforcing these 
requirements and investigating and prosecuting transnational crimes 
that may involve virtual currencies. For example, law enforcement may 
have to rely upon cooperation from international partners to conduct 
investigations, make arrests, and seize criminal assets. Additionally, 
violators, victims, and witnesses may reside outside of the United 
States, and relevant customer and transaction records may be held by 
entities in different jurisdictions, making it difficult for law 
enforcement and financial regulators to access them. Further, virtual 
currency exchangers or administrators may operate out of countries 
that have weak legal and regulatory regimes or that are less willing 
to cooperate with U.S. law enforcement. 

Balancing Risks and Benefits: 

Virtual currency industry stakeholders have noted that virtual 
currencies present both risks and benefits that federal agencies need 
to consider in regulating entities that may be associated with virtual-
currency-related activities. As previously noted, the risks include 
the attractiveness of virtual currencies to those who may want to 
launder money or purchase illicit goods and services. Another emerging 
set of risks involves consumer and investor protection--in particular, 
whether consumers and investors understand the potential drawbacks of 
buying, holding, and using virtual currencies or investing in virtual-
currency-based securities. Consumers may not be aware of certain 
characteristics and risks of virtual currencies, including the 
following: 

* Lack of bank involvement. Virtual currency exchanges and wallet 
providers are not banks. If they go out of business, there may be no 
specific protections like deposit insurance to cover consumer losses. 
[Footnote 51] 

* Stated limits on financial recourse. Some virtual currency wallet 
providers purport to disclaim responsibility for consumer losses 
associated with unauthorized wallet access. In contrast, credit and 
debit card networks state that consumers have no liability for 
fraudulent use of accounts. 

* Volatile prices. The prices of virtual currencies can change quickly 
and dramatically (as shown previously in fig. 2). 

Additionally, an SEC official told us that virtual-currency-based 
securities may be attracting individuals who are younger and less 
experienced than typical investors. The official expressed concern 
that younger investors may lack the sophistication to properly assess 
the risks of such investments and the financial resources to recover 
from losses on the investments, including losses resulting from fraud 
schemes.[Footnote 52] 

While virtual currencies present risks to consumers and investors, 
they also provide several potential benefits to consumers and business. 

* Cost and speed. Decentralized virtual currency systems may, in some 
circumstances, provide lower transaction costs and be faster than 
traditional funds transfer systems because the transactions do not 
need to go through a third-party intermediary. The irrevocable feature 
of virtual currency payments may also contribute to lower transaction 
costs by eliminating the costs of consumer chargebacks.[Footnote 53] 
Industry stakeholders have noted that cost and time savings may be 
especially significant for international remittances (personal funds 
immigrants send to their home countries), which sometimes involve 
seizable fees and can take several days. In addition, industry 
stakeholders have indicated that the potentially lower costs of 
virtual currency transactions--for example, relative to credit and 
debit cards--may facilitate the use of micropayments (very small 
financial transactions) as a way of selling items such as online news 
articles, music, and smartphone applications. 

* Financial privacy. To the extent that bitcoin (or other virtual 
currency) addresses are not publicly associated with a specific 
individual, peer-to-peer virtual currency transactions can provide a 
greater degree of financial privacy than transactions using 
traditional payment systems, because no personally identifiable 
information is exchanged.[Footnote 54] 

* Access. Because virtual currencies can be accessed anywhere over the 
Internet, they are a potential way to provide basic financial services 
to populations without access to traditional financial institutions, 
such as rural populations in developing countries.[Footnote 55] 
However, the potential benefit hinges on access to the Internet, which 
these populations may not have, and may be offset by the lack of 
protections against losses noted previously. 

Federal agency officials have acknowledged the need to consider both 
the risks and benefits of virtual currencies in carrying out their 
responsibilities. For example, the Director of FinCEN has testified 
that the emergence of virtual currencies has prompted consideration of 
vulnerabilities that these currencies create in the financial system 
and how illicit actors will take advantage of them. However, she also 
noted that innovation is an important part of the economy and that 
FinCEN needs to have regulation that mitigates concerns about illicit 
actors while minimizing regulatory burden. Similarly, the former 
Acting Assistant Attorney General for DOJ's Criminal Division has 
testified that law enforcement needs to be vigilant about the criminal 
misuse of virtual currency systems while recognizing that there are 
many legitimate users of those services. Balancing concerns about the 
illicit use of virtual currencies against the potential benefits of 
these technological innovations will likely be an ongoing challenge 
for federal agencies. 

Agencies Have Taken Some Actions on Virtual Currencies, but 
Interagency Working Groups Have Not Focused on Consumer Risks: 

Federal financial regulators and law enforcement agencies have taken a 
number of actions related to the emergence of virtual currencies, 
including providing regulatory guidance, assessing anti-money-
laundering compliance, and investigating crimes and violations that 
have been facilitated by the use of virtual currencies. However, 
interagency working groups addressing virtual currencies have not 
focused on consumer protection and have generally not included CFPB. 

FinCEN Has Issued Rules, Guidance, and Administrative Rulings 
Regarding Virtual Currencies: 

FinCEN has taken a number of actions in recent years to establish and 
clarify requirements for participants in virtual currency systems. For 
example, in July 2011, FinCEN finalized a rule that modified the 
definitions of certain money services businesses.[Footnote 56] Among 
other things, the rule states that persons who accept and transmit 
currency, funds, or "other value that substitutes for currency," are 
considered to be money transmitters.[Footnote 57] Additionally, in 
March 2013, FinCEN issued guidance that clarified the applicability of 
BSA regulations to participants in certain virtual currency systems. 
[Footnote 58] The FinCEN guidance classified virtual currency 
exchangers and administrators as money services businesses and, more 
specifically, as money transmitters.[Footnote 59] The guidance also 
specified that virtual currency users are not money services 
businesses.[Footnote 60] As a result, the guidance clarified that 
virtual currency exchangers and administrators must follow 
requirements to register with FinCEN as money transmitters; institute 
risk assessment procedures and anti-money-laundering program control 
measures; and implement certain recordkeeping, reporting, and 
transaction monitoring requirements, unless an exception to these 
requirements applies.[Footnote 61] According to FinCEN officials, as 
of December 2013, approximately 40 virtual currency exchangers or 
administrators had registered with FinCEN. 

In 2014, in response to questions from industry stakeholders, FinCEN 
issued administrative rulings to clarify the types of participants to 
which the March 2013 guidance applies.[Footnote 62] In January 2014, 
FinCEN issued rulings stating that the way in which a virtual currency 
is obtained is not material, but the way in which a person or 
corporation uses the virtual currency is. As a result, the rulings 
specify that two kinds of users are not considered money transmitters 
subject to FinCEN's regulations: miners who use and convert virtual 
currencies exclusively for their own purposes and companies that 
invest in virtual currencies exclusively as an investment for their 
own account.[Footnote 63] However, the rulings specify that these two 
kinds of users may no longer be exempt from FinCEN's money transmitter 
requirements if they conduct their activities as a business service 
for others. The rulings also note that transfers of virtual currencies 
from these types of users to third parties should be closely 
scrutinized because they may constitute money transmission. In April 
2014, FinCEN issued another administrative ruling, which states that 
companies that rent computer systems for mining virtual currencies are 
not considered money transmitters subject to FinCEN's regulations. 
[Footnote 64] 

FinCEN has also taken additional steps to help ensure that companies 
required to register as money services businesses under FinCEN's March 
2013 virtual currency guidance have done so. According to FinCEN 
officials, FinCEN has responded to letters from companies seeking 
clarification about their requirements. Also, officials told us that 
FinCEN has proactively informed other companies that they should 
register as money services businesses. 

Some Financial Regulators Have Taken Actions Concerning Anti-Money-
Laundering and Securities Law Compliance: 

As part of their oversight activities, NCUA and SEC have addressed 
situations involving virtual currencies, and other federal financial 
regulators have had internal discussions regarding virtual currencies. 
NCUA has had two supervisory situations in which credit unions were 
involved with activity related to virtual currencies. These situations 
emerged after reviews of credit unions found that their anti-money-
laundering and antifraud measures needed to be revised in light of 
activity involving virtual currency exchanges. 

* In 2013, NCUA issued a preliminary warning letter to a federal 
credit union that provided account services to money services 
businesses that also served as bitcoin exchanges. The warning letter 
was based on various conditions that NCUA determined could undermine 
the credit union's stability. For example, the credit union did not 
have adequate anti-money-laundering controls in place for its money 
services business accounts. Further, the letter stated that the credit 
union should not have served money services businesses that were not 
part of the credit union's strategic plan, and that serving these 
businesses was not consistent with the credit union's charter, which 
called for serving the local community. The warning letter required 
the credit union to immediately cease all transactions with these 
money services business accounts and establish an appropriate BSA and 
anti-money-laundering infrastructure. As a result, the credit union 
ceased such activity and strengthened its BSA and anti-money-
laundering compliance program. 

* In 2012, NCUA provided support to a state regulator's review of a 
credit union's commercial customer. The state regulator found that 
this commercial customer was a payment processor--that is, a payment 
network that allows any business or person to send, request, and 
accept money--that had customers that were bitcoin exchanges. 
According to NCUA, the state regulator worked with the credit union to 
ensure that its BSA compliance program was adequate to monitor and 
address the risks associated with payment processors that serve 
bitcoin exchanges. The state regulator also worked to ensure that the 
payment processor's risk management practices included sufficient 
antifraud and anti-money-laundering measures. The payment processor 
subsequently suspended all accounts that served virtual currency 
exchanges. 

In addition, SEC has taken enforcement action against an individual 
and entity that are alleged to have defrauded investors through a 
bitcoin-denominated Ponzi scheme.[Footnote 65] The agency has also 
issued related investor alerts, has begun to review a registration 
statement from an entity that wants to offer virtual-currency-related 
securities, and is monitoring for potential securities law violations 
related to virtual currencies. 

* In July 2013, SEC charged an individual and his company, Bitcoin 
Savings and Trust, with offering and selling securities in violation 
of the antifraud and registration provisions of securities laws. 
[Footnote 66] Specifically, SEC alleges that the founder and operator 
defrauded investors through a bitcoin-denominated Ponzi scheme. The 
founder and operator allegedly promised investors up to 7 percent 
weekly interest. However, he allegedly used bitcoins from new 
investors to make purported interest payments and cover investor 
withdrawals on outstanding trust investments, diverted investors' 
bitcoins for day trading in his personal account on a bitcoin currency 
exchange, and exchanged investors' bitcoins for U.S. dollars to pay 
for personal expenses. SEC also alleges that Bitcoin Savings and Trust 
raised at least 700,000 bitcoins in investor funds, which amounted to 
more than $4.5 million based on the average price of bitcoin in 2011 
and 2012 when the investments were offered and sold. This case was 
still unresolved as of April 14, 2014. 

* SEC's Office of Investor Education and Advocacy has issued two 
investor alerts on virtual currencies.[Footnote 67] The first alert, 
issued in July 2013, warned about fraudulent investment schemes that 
may involve bitcoin and other virtual currencies.[Footnote 68] The 
second alert, issued in May 2014, addressed fraud and other investment 
risks related to virtual currencies.[Footnote 69] 

* SEC staff have begun to review a registration statement from a 
company that wants to conduct a public offering of virtual-currency-
related securities and has received notice of a company offering a 
private virtual-currency-related security, relying upon an exemption 
from registration. In July 2013, the Winklevoss Bitcoin Trust filed a 
registration statement for an initial public offering of its 
securities. The Trust is structured similarly to an exchange-traded 
fund and will hold bitcoins as its only assets.[Footnote 70] The Trust 
filed amended registration statements in October 2013 and February 
2014, but the registration statement remains pending as of April 14, 
2014, meaning that the Trust is not yet permitted to sell its 
securities in a public offering. Also, in October 2013, Bitcoin 
Investment Trust, a bitcoin-denominated pooled investment fund 
affiliated with SecondMarket, Inc. and available only to accredited 
investors, filed a notice with SEC indicating that it had sold 
securities in an exempt offering in reliance on Rule 506(c) of the 
Securities Act.[Footnote 71] Rule 506(c) allows an issuer to raise an 
unlimited amount of money, but imposes restrictions on who can invest 
in the offering and requires the issuer to take reasonable steps to 
verify that those investing are accredited investors.[Footnote 72] 

* SEC staff are also monitoring the Internet and other sources, such 
as referrals from other agencies, for potential securities law 
violations involving bitcoin and other virtual currencies. 

Further, all of the federal financial regulatory agencies we 
interviewed have had internal discussions on how virtual currencies 
work and what implications the emergence of virtual currencies might 
have for their responsibilities. While agencies generally told us that 
their conversations have been informal and ad hoc, some efforts have 
been more organized: 

* In 2013, the Federal Reserve took several steps to share information 
on virtual currencies among the Board of Governors and the 12 Federal 
Reserve Banks. Among other things, the Board of Governors' BSA and 
anti-money-laundering specialist conference included a session focused 
on FinCEN's virtual currency guidance and recent law enforcement 
actions. The Board of Governors also circulated general information 
about virtual currencies within the Federal Reserve System to use in 
answering questions from media and the public about virtual currencies 
and federal financial regulatory actions to date. 

* In 2013, SEC formed an internal Digital Currency Working Group, 
which aims to foster information sharing internally and externally. 
According to SEC, the working group consists of approximately 50 
members from among SEC's divisions and offices. 

* In 2012, FinCEN held three internal information-sharing events on 
virtual currencies. These events covered issues including how virtual 
currencies compare to traditional currencies and risks related to 
emerging payment systems such as virtual currencies. 

Law Enforcement Agencies Have Taken Actions against Parties Alleged to 
Have Used Virtual Currencies to Facilitate Crimes: 

Law enforcement agencies have taken actions against parties involved 
in the illicit use of virtual currencies to facilitate crimes. These 
parties have included administrators and users of centralized virtual 
currency systems designed to facilitate money laundering or other 
crimes, parties who have used virtual currencies to buy or sell 
illicit goods and services online, and virtual currency exchanges and 
online payment processors operating without the proper licenses. 

* In 2013 and 2014, law enforcement agencies took actions against Silk 
Road, a black market website that allegedly accepted bitcoin as the 
sole payment method for the purchase of illegal goods and services. 
The website contained over 13,000 listings for controlled substances 
as well as listings for malicious software programs, pirated media 
content, fake passports, and computer hacking services (see fig.3). 
The FBI; Drug Enforcement Administration (DEA); IRS; ICE-HSI; the 
Bureau of Alcohol, Tobacco, Firearms, and Explosives; the Secret 
Service; the U.S. Marshals Service; and Treasury's Office of Foreign 
Assets Control investigated the case together, along with officials 
from New York as well as Australia, Iceland, Ireland, and France. In 
September and October 2013, law enforcement shut down the Silk Road 
website and seized approximately 174,000 bitcoins, which the FBI 
reported were worth approximately $34 million at the time of seizure. 
[Footnote 73] In February 2014, DOJ indicted Silk Road's alleged owner 
and operator on charges including narcotics conspiracy, engaging in a 
continuing criminal enterprise, conspiracy to commit computer hacking, 
and money laundering conspiracy. 

* In May 2013, law enforcement agencies seized the accounts of a U.S.-
based subsidiary of Mt. Gox, a now-defunct Tokyo-based virtual 
currency exchange with users from multiple countries including the 
United States, on the basis that the subsidiary was operating as an 
unlicensed money services business. The seizure included U.S. bank 
accounts of Mt. Gox that were held by a private bank and Dwolla, an 
online payment processor that allegedly allowed users to buy and sell 
bitcoins on Mt. Gox. According to ICE-HSI, Mt. Gox had moved funds 
into numerous online black markets, the bulk of which were associated 
with the illicit purchase of drugs, firearms, and child pornography. 
At the direction of the U.S. Attorney's office, ICE-HSI ordered Dwolla 
to stop all payments to Mt. Gox and seized $5.1 million from the Mt. 
Gox subsidiary's U.S. accounts. 

* Also in May 2013, law enforcement agencies shut down Liberty 
Reserve, a centralized virtual currency system that was allegedly 
designed and frequently used to facilitate money laundering and had 
its own virtual currency. Secret Service, ICE-HSI, and IRS 
investigated the case together, along with officials from 16 other 
countries. To shut down the site, FinCEN identified Liberty Reserve as 
a financial institution of primary money laundering concern under 
section 311 of the USA PATRIOT Act, effectively cutting it off from 
the U.S. financial system.[Footnote 74] DOJ then charged Liberty 
Reserve with operating an unlicensed money transmission business and 
with money laundering for facilitating the movement of more than $6 
billion in illicit proceeds.[Footnote 75] As of April 2014, this 
investigation had produced $40 million in seizures and had resulted in 
the arrests of five individuals. 

* In April 2013, law enforcement agencies filed a civil asset 
forfeiture complaint against Tcash Ads Inc., an online payment 
processor that allegedly enabled users to make purchases anonymously 
from virtual currency exchanges, with operating an unlicensed money 
services business. Additionally, law enforcement agencies seized the 
bank accounts of Tcash Ads Inc. The Secret Service worked on the case 
with FinCEN and DOJ's Asset Forfeiture and Money Laundering Section. 

* From October 2010 through November 2012, law enforcement agencies 
convicted three organizers of a worldwide conspiracy to use a network 
of virus-controlled computers that deployed e-mail spam designed to 
manipulate stock prices. The organizers paid the spammers $1.4 million 
for their illegal services via the centralized virtual currency e-Gold 
and wire transfers. Charges included conspiring to further securities 
fraud using spam, conspiring to transmit spam through unauthorized 
access to computers, and four counts of transmission of spam by 
unauthorized computers. 

Figure 3: Screen Shot of the Silk Road Website: 

[Refer to PDF for image: screen shot] 

Source: U.S. Immigration and Customs Enforcement. 

[End of figure] 

Law enforcement agencies have also taken other actions to help support 
investigations involving the illicit use of virtual currencies, 
including the following examples. 

* The FBI has produced numerous criminal intelligence products 
addressing virtual currencies. These intelligence products have 
generally focused on cases involving the illicit use of virtual 
currencies, ways in which virtual currencies have been or could be 
used to facilitate crimes, and the related challenges for law 
enforcement. The FBI shares these products with foreign, state, and 
local law enforcement partners as appropriate. 

* Through standing bilateral agreements governing the exchange of law 
enforcement information, ICE-HSI is arranging meetings with various 
international partners to exchange intelligence and garner operational 
support on virtual currency issues. 

* ICE-HSI also developed the Illicit Digital Economy Program, which 
aims to target the use of virtual currencies for money-laundering 
purposes by defining and organizing the primary facets of the digital 
economy, building internal capacity, training and developing agents 
and analysts, engaging other agencies, and promoting public-private 
partnerships. 

Interagency Working Groups Have Begun to Address Virtual Currencies, 
but Have Not Emphasized Consumer Risks or Generally Included CFPB: 

Federal agency efforts to collaborate on virtual currency issues have 
involved creating a working group specifically focused on virtual 
currency, leveraging existing interagency mechanisms, and sharing 
information through informal interagency channels. For example, in 
2012, the FBI formed the Virtual Currency Emerging Threats Working 
Group (VCET), an interagency working group that includes other DOJ 
components, FinCEN, ICE-HSI, SEC, Secret Service, Treasury, and other 
relevant federal partners. The purpose of VCET is to leverage members' 
expertise to address new virtual currency trends, address potential 
implications for law enforcement and the U.S. intelligence community, 
and mitigate the cross-programmatic threats arising from illicit 
actors' use of virtual currency systems. The VCET meets about once 
every 3 months. 

Federal agencies have also begun to discuss virtual currency issues in 
existing interagency working groups that address broader topics such 
as money laundering, electronic crimes, and the digital economy, as 
follows: 

* The BSA Advisory Group--which is chaired by FinCEN and includes the 
prudential banking regulators, Treasury, federal and state law 
enforcement and regulatory agencies, and industry representatives--has 
addressed virtual currency issues in a number of ways. In May 2013, 
FinCEN provided a briefing on bitcoin, and in December 2013 three 
stakeholders from the virtual currency industry gave presentations on 
their business models and regulatory challenges. In addition, the BSA 
Advisory Group invited a representative of the virtual currency 
industry to join the group in 2014. 

* The Federal Financial Institutions Examination Council (FFIEC) Bank 
Secrecy Act/Anti-Money-Laundering Working Group--which is currently 
chaired by OCC and includes the prudential banking regulators and 
CFPB--is in the process of revising the current (2010) FFIEC BSA/Anti-
Money Laundering Examination Manual.[Footnote 76] The revisions 
related to virtual currencies may include information on FinCEN's 
March 2013 guidance and regulatory expectations that depository 
institutions should undertake a risk assessment with a particular 
focus on the money laundering risks posed by new products and services. 

* The Secret Service-sponsored Electronic Crimes Task Forces (ECTF) 
includes 35 Secret Service field offices; federal law enforcement 
agencies such as ICE-HSI; and members of the private sector, academia, 
and state and local law enforcement.[Footnote 77] This group's mission 
is to prevent, detect, and investigate electronic crimes, including 
those involving virtual currency. This group has conducted computer 
forensics and other investigative activity on various virtual 
currencies and made arrests of individuals who have used virtual 
currencies as part of their criminal activities. This group has also 
held quarterly meetings on virtual currencies to discuss legal and 
regulatory issues and trends in crimes involving virtual currencies. 

* The Digital Economy Task Force was established in 2013 by Thomson 
Reuters (a multinational media and information firm) and the 
International Centre for Missing & Exploited Children.[Footnote 78] 
This task force includes members from both the public and private 
sectors. Task force members from the federal government include 
representatives from the FBI, ICE-HSI, Secret Service, the Department 
of State, and the United States Agency for International Development. 
This group published a report in March 2014 on the benefits and 
challenges of the digital economy.[Footnote 79] Among other things, 
the report recommended continuing private and public research into the 
digital economy and illegal activities, investing in law enforcement 
training, rethinking investigative techniques, fostering cooperation 
between agencies, and promoting a national and global dialogue on 
policy related to virtual currencies. 

A number of other existing interagency working groups have discussed 
or addressed virtual currency issues to some extent. See appendix II 
for more information on these groups. 

Federal agencies have also started to collaborate outside of these 
working groups to help improve their knowledge of issues related to 
the emergence of virtual currencies and share pertinent information 
with various agencies. 

* FinCEN and SEC have hosted meetings with industry representatives 
and consultants to discuss how virtual currency systems such as 
bitcoin and Ripple work and what legal, regulatory, technology, and 
law enforcement issues they present. These agencies have invited 
officials from other federal agencies to these sessions. 

* FinCEN consulted with financial regulators and law enforcement 
agencies as it was formulating its March 2013 guidance on virtual 
currencies. These agencies included CFPB, CFTC, DEA, FBI, ICE-HSI, 
IRS, the prudential banking regulators, SEC, and the Secret Service. 

* SEC notified CFTC of its review of the Winklevoss Bitcoin Trust 
registration statement. 

* FinCEN issued a Networking Bulletin on cryptocurrencies in March 
2013 to provide details to law enforcement agencies and assist them in 
following money moving between virtual currency channels and the 
traditional U.S. financial system. Among other things, the bulletin 
addressed the role of entities that facilitate the purchase and 
exchange of virtual currencies and the types of records these entities 
maintain that could be useful to investigative officials. Also, the 
Networking Bulletin elicited information from its recipients, which in 
turn helped FinCEN issue additional analytical products of a tactical 
nature to inform law enforcement operations. FinCEN has also shared 
this information with several regulatory and foreign financial 
intelligence unit partners. 

* CFPB officials said they had recently conferred on virtual currency 
issues with a number of domestic and international regulators, 
including the Federal Reserve Bank of San Francisco, the Federal Trade 
Commission, NCUA, OCC, Treasury, New York State's Department of 
Financial Services, and the European Banking Authority. In addition, 
the officials said they had met with industry participants on these 
issues and conferred with interested academic and consumer group 
stakeholders, as well as law firms, consultancies, and industry 
associations. 

Although there are numerous interagency collaborative efforts that 
have addressed virtual currency issues in some manner, interagency 
working groups have not focused on consumer protection issues. Rather, 
as previously discussed, these efforts have focused on BSA and anti-
money-laundering controls and investigations of crimes in which 
virtual currencies have been used. In addition, CFPB's involvement in 
interagency working groups that address virtual currencies has been 
limited. GAO's key practices on collaboration state that it is 
important to include relevant participants in interagency 
collaborative efforts in order to ensure, among other things, that 
these participants contribute knowledge, skills, and abilities to the 
outcomes of the effort.[Footnote 80] In addition, these key practices 
state that once an interagency group has been established, it is 
important to reach out to potential participants who may have a shared 
interest in order to ensure that opportunities for achieving outcomes 
are not missed.[Footnote 81] CFPB might be a relevant participant in a 
broader set of collaborative efforts on virtual currencies because 
virtual currency systems provide a new way of making financial 
transactions, and CFPB's responsibilities include ensuring that 
consumers have timely and understandable information to make 
responsible decisions about financial transactions.[Footnote 82] 
Further, CFPB's strategic goals include helping consumers understand 
the costs, risks, and tradeoffs of financial decisions and surfacing 
financial trends and emergent risks relevant to consumers. 

Although interagency working groups addressing virtual currencies have 
not focused on consumer protection issues, recent events have 
highlighted the risks individuals face in buying and holding these 
currencies. For example, notable examples of bitcoin thefts by 
computer hackers have occurred in the past few years, including the 
theft of more than 35,000 bitcoins from a virtual wallet provider in 
April 2013 and 24,000 bitcoins from a bitcoin exchange in September 
2012.[Footnote 83] More recently, in February 2014, Mt. Gox filed for 
bankruptcy, stating that a security breach resulted in the loss of 
850,000 bitcoins, the vast majority of which belonged to its 
customers. These bitcoins were worth more than $460 million when Mt. 
Gox filed for bankruptcy.[Footnote 84] Mt. Gox subsequently reported 
that it had found 200,000 of these bitcoins in an unused virtual 
wallet. 

Certain parties have taken actions to inform consumers about the 
potential risks associated with virtual currencies, but these actions 
have occurred outside of federal interagency efforts and have not 
included CFPB. In April 2014, the Conference of State Bank Supervisors 
and the North American Securities Administrators Association issued 
joint model consumer guidance to assist state regulatory agencies in 
educating consumers about virtual currencies and the risks of 
purchasing, exchanging, and investing in virtual currencies.[Footnote 
85] Additionally, from February through April 2014, a number of states 
issued consumer alerts about virtual currencies.[Footnote 86] On the 
international front, the European Banking Authority issued a warning 
to consumers in December 2013 about the risks involved in buying or 
holding virtual currencies.[Footnote 87] 

Federal interagency working groups addressing virtual currency issues 
have not focused on consumer protection, and CFPB has generally not 
participated in these groups, for a number of potential reasons. For 
example, the extent to which individuals using virtual currencies are 
speculative investors or ordinary consumers is unclear, and CFPB has 
received few consumer complaints about these currencies.[Footnote 88] 
In addition, incidents involving the use of virtual currencies for 
illicit purposes have made money laundering and other law enforcement 
issues primary concerns, and existing interagency working groups are 
primarily composed of agencies that share responsibilities for these 
matters. However, emerging consumer risks indicate that interagency 
collaborative efforts may need to place greater emphasis on consumer 
protection issues in order to address the full range of challenges 
posed by virtual currencies. Additionally, without CFPB's 
participation, interagency working groups are not fully leveraging the 
expertise of the lead consumer financial protection agency, and CFPB 
may not be receiving information that it could use to assess the risks 
that virtual currencies pose to consumers. 

Conclusions: 

Bitcoin and other virtual currencies are technological innovations 
that provide users with certain benefits but also pose a number of 
risks. Because virtual currencies touch on the responsibilities of 
multiple federal agencies, addressing these risks will require 
effective interagency collaboration. Thus far, interagency efforts 
have had a law enforcement focus, reflecting the attractiveness of 
virtual currencies to those who may want to launder money or purchase 
black market items. If virtual currencies become more widely used, 
other types of regulatory and enforcement issues may come to the 
forefront. For example, recent events suggest that consumer protection 
is an emerging risk, as evidenced by the loss or theft of bitcoins 
from exchanges and virtual wallet providers and consumer warnings 
issued by nonfederal and non-U.S. entities. However, federal 
interagency working groups addressing virtual currencies have thus far 
not emphasized consumer-protection issues, and participation by the 
federal government's lead consumer financial protection agency, CFPB, 
has been limited. Therefore, these efforts may not be consistent with 
key practices that can benefit interagency collaboration, such as 
including all relevant participants to ensure that their knowledge, 
skills, and abilities contribute to the outcomes of the effort. As a 
result, future interagency efforts may not be in a position to address 
consumer risks associated with virtual currencies in the most timely 
and effective manner. 

Recommendation for Executive Action: 

To help ensure that federal interagency collaboration on virtual 
currencies addresses emerging consumer protection issues, we recommend 
that the Director of CFPB (1) identify which interagency working 
groups could help CFPB maintain awareness of these issues or would 
benefit from CFPB's participation; and (2) decide, in coordination 
with the agencies already participating in these efforts, which ones 
CFPB should participate in. 

Agency Comments: 

We provided a draft of this report to CFPB, CFTC, DOJ, DHS, FDIC, the 
Federal Reserve, NCUA, OCC, SEC, and Treasury for review and comment. 
CFPB and NCUA provided written comments, which are reprinted in 
appendixes III and IV. In addition, CFPB, CFTC, DHS, DOJ, the Federal 
Reserve, NCUA, OCC, SEC, and Treasury provided technical comments, 
which we incorporated into the report where appropriate. 

In its letter, CFPB concurred with our recommendation to identify and 
participate in pertinent interagency working groups addressing virtual 
currencies. CFPB stated that, to date, these groups have primarily 
focused on BSA concerns, anti-money-laundering controls, and the 
investigation of crimes involving virtual currencies. CFPB said that, 
as a result, its participation in these working groups has been 
limited. CFPB also stated that as consumer protection concerns have 
increased in recent months, its own work on virtual currencies and the 
work of other financial regulators in this area could benefit from a 
collaborative approach. 

In its letter, NCUA said that the report provides a clear discussion 
of the risks related to virtual currencies as well as a survey of 
current efforts in the regulatory community to address the related 
policy issues. NCUA also expressed support for increasing emphasis on 
consumer protection issues pertaining to virtual currencies. 

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies of this report 
to CFPB, CFTC, DOJ, DHS, FDIC, the Federal Reserve, NCUA, OCC, SEC, 
Treasury, interested congressional committees and members, and others. 
This report will also be available at no charge on our website at 
[hyperlink, http://www.gao.gov]. 

If you or your staff have any questions concerning this report, please 
contact me at (202) 512-8678 or evansl@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. GAO staff who made major contributions 
to this report are listed in appendix V. 

Signed by: 

Lawrance L. Evans, Jr.
Director, Financial Markets and Community Investment: 

[End of section] 

Appendix I: How Bitcoins Enter into Circulation and Are Used in 
Transactions: 

This appendix shows how bitcoins enter into circulation through 
"mining," how transactions are conducted, and how miners verify 
transactions (see figure 4). 

Figure 4: How Bitcoins Enter into Circulation and Are Used in 
Transactions: 

[Refer to PDF for image: illustration] 

Bitcoin Miners: 
Bitcoin miners essentially serve two purposes: 1) generating new 
bitcoins to enter into circulation and 2) verifying transactions by 
ensuring that they occurred and did not involve double spending of a 
bitcoin. Over time, the computer processing power needed to mine new 
bitcoins has increased to the point where mining requires specialized 
computer hardware and has become increasingly consolidated into large 
mining pools. 

1. Mining: 
Bitcoins are created and first enter into circulation through a 
process known as mining. Bitcoin miners install software on their 
computers, which they use to solve complex math problems that verify 
transactions for the bitcoin network. The miner or mining pool that 
successfully solves the problems is rewarded with newly created 
bitcoins. 

2. Addresses and Wallets: 
Bill’s bitcoin balances are associated with his bitcoin addresses 
(long strings of numbers and letters). Bill stores his bitcoin 
addresses in his virtual wallet (a program that saves bitcoin 
addresses on a user’s computer or other data storage device, or online 
via a wallet service provided by an exchange or third-party virtual 
wallet provider). Bitcoin users can have multiple wallets, and each 
wallet can hold multiple bitcoin addresses. 

3. Making a Peer-to-Peer Purchase with Bitcoins: 
Bill wants to buy a t-shirt from Carol, who accepts bitcoins. To 
conduct the transaction, Carol provides her bitcoin address to Bill, 
and Bill authorizes the transaction with his private key (essentially 
a secret code that proves Bill’s control over his bitcoin address). 

4. Verifying the Transaction: 
Bill and Carol’s transaction is bundled into blocks with other 
transactions and verified by bitcoin miners. Within minutes, Bill’s 
bitcoins are assigned to Carol’s address and the transaction is 
registered in a public ledger called the “blockchain.” The miner or 
mining pool that successfully solved the math problems to verify the 
block containing Bill and Carol’s transaction is rewarded with newly 
created bitcoins. 

Source: GAO. 

[End of figure] 

[End of section] 

Appendix II: Interagency Working Groups that Have Addressed Virtual 
Currency Issues: 

In this appendix, we present some of the interagency working groups 
(including task forces and other interagency collaborative bodies) 
that have discussed virtual currency issues, and in some cases, taken 
specific actions. This list is based on information we obtained from 
the federal financial regulatory and law enforcement agencies we met 
with and is not intended to be an exhaustive list. 

Table 1: Interagency Working Groups that Have Addressed Virtual 
Currency Issues, as of April 2014: 

Working group: Bank Secrecy Act Advisory Group (BSAAG); 
Participating agencies: FinCEN (lead); CFTC; DEA; DOJ Criminal 
Division; FBI; FDIC; Federal Reserve; ICE-HSI; IRS; NCUA; OCC; 
Office of National Drug Control Policy; SEC; Secret Service; and U.S. 
Postal Service; as well as representatives of financial institutions; 
trade groups; self-regulatory organizations; and state regulatory 
agencies; 
Mission and goals: This public-private group serves as a means by 
which the Secretary of the Treasury receives advice on the manner in 
which reporting requirements in BSA should be modified to enhance the 
ability of law enforcement agencies to use the information. It also 
informs private sector representatives of law enforcement's uses of 
BSA reports provided by financial institutions; 
Ways in which group addressed virtual currencies: Meetings have 
covered issues related to virtual currencies: 
* The May 2013 meeting included a briefing on the bitcoin virtual 
currency system; 
* The December 2013 meeting included a panel of virtual currency 
industry representatives who discussed business models and regulatory 
compliance challenges; 
* In April 2014, a meeting of the BSAAG Illicit Finance Committee 
included a presentation on vulnerabilities and challenges related to 
virtual currencies, as well as opportunities to enhance collective 
anti-money-laundering efforts and information sharing; 
In addition, BSAAG invited a representative of the virtual currency 
industry to join the group in 2014. 

Working group: Digital Economy Task Force; 
Participating agencies: Thomson Reuters and the International Centre 
for Missing & Exploited Children (lead); FBI; ICE-HSI; Secret Service; 
Department of State; and United States Agency for International 
Development (USAID); as well as members of the private sector and 
academia; 
Mission and goals: This group's mission is to educate the public, work 
collaboratively across stakeholder groups, and balance the convenience 
of the digital currencies with controls to combat illegal activity; 
Ways in which group addressed virtual currencies: Created in September 
2013, this task force has formed working groups on such issues as 
safeguarding human rights; regulation; interagency coordination; and 
law enforcement. In March 2014, the task force published a report on 
the benefits and challenges of the digital economy.[A] Among other 
things, the report recommended private and public sector efforts to 
continue research into the digital economy and illegal activities; 
investing in law enforcement training; rethinking investigative 
techniques; fostering cooperation between agencies; and promoting a 
national and global dialogue on policy. 

Working group: Electronic Crimes Task Forces (ECTF) and Working Groups; 
Participating agencies: 35 Secret Service field offices (lead) and 
federal law enforcement agencies such as ICE-HSI, as well as members 
of the private sector, academia, and state and local law enforcement; 
Mission and goals: The mission of these groups is to prevent, detect, 
and investigate various forms of electronic crime, including potential 
terrorist attacks against critical infrastructure and financial 
payment systems; 
Ways in which group addressed virtual currencies: ECTFs address issues 
concerning virtual currencies as one of a variety of subjects related 
to the investigations into electronic crime. Specifically, ECTFs have: 
* conducted computer forensics and other investigative activity 
concerning various virtual currencies; 
* made arrests of individuals who have used virtual currencies as part 
of their criminal activities; and; 
* discussed virtual currencies at quarterly meetings, covering topics 
such as types of virtual currencies and related legal and regulatory 
issues, trends in criminal uses, and methods for conducting 
investigations. 

Working group: Federal Financial Institutions Examination Council 
(FFIEC) BSA/Anti-Money-Laundering Working Group[B]; 
Participating agencies: OCC (rotating chair), CFPB; FDIC; Federal 
Reserve; NCUA; and the State Liaison Committee are voting members[C]; 
Mission and goals: FFIEC prescribes uniform principles, standards, and 
report forms for the federal examination of financial institutions by 
the prudential banking regulators--FDIC, Federal Reserve, NCUA, and 
OCC--and makes recommendations to promote uniformity in the 
supervision of financial institutions. Within this context, the FFIEC 
BSA/Anti-Money-Laundering Working Group's mission is to enhance 
coordination of BSA/anti-money-laundering training, guidance, and 
policy; 
Ways in which group addressed virtual currencies: The BSA/Anti-Money-
Laundering Working Group is leading the revision of the current (2010) 
FFIEC BSA/Anti-Money Laundering Examination Manual. Revisions related 
to virtual currencies may include information on FinCEN's March 2013 
guidance; a brief note describing Internet-based electronic cash, 
which includes virtual currency; and regulatory expectations that 
banks should undertake a risk assessment with a particular focus on 
the money-laundering risks posed by new products, services, and 
technologies. 

Working group: Financial Action Task Force (FATF); 
Participating agencies: FATF is an international intergovernmental 
organization with 36 member countries, including the U.S. Treasury as 
the lead agency of the U.S. delegation. Other U.S. delegation 
participants include DOJ's Asset Forfeiture and Money Laundering 
Section; DHS (including ICE-HSI); SEC; IRS; and the Department of 
State; 
Mission and goals: This group sets standards and promotes effective 
implementation of legal, regulatory, and operational measures for 
combating money laundering, and the financing of terrorism and 
proliferation; 
Ways in which group addressed virtual currencies: 
* In February 2014, FATF developed a discussion paper on virtual 
currencies, which described virtual currency systems, participants, 
and some of the major virtual currencies such as bitcoin, and proposed 
a common set of terms and conceptual framework for analyzing virtual 
currencies. The paper also discussed the potential legitimate uses of 
virtual currencies, the risks these currencies may pose, and the 
different regulatory approaches countries are taking to address 
virtual currencies. The U.S. delegation prepared the paper together 
with delegations from Australia, Canada, Russia, and the United 
Kingdom. As of April 2014, the discussion paper was not yet public; 
* In March 2014, FATF included a discussion of virtual currencies as 
part of the Private Sector Consultative Forum, which included experts 
on virtual currencies. The group discussed how virtual currencies and 
their exchangers operate; the associated money laundering and 
terrorist financing risks; what measures countries and financial 
institutions are taking to assess and mitigate those risks; and what 
regulatory approaches are currently being taken. 

Working group: Interagency Bank Fraud Enforcement Working Group; 
Participating agencies: DOJ (Criminal Division lead, as well as the 
Asset Forfeiture and Money Laundering Section, Executive Office for 
U.S. Attorneys, Executive Office for U.S. Trustees, and FBI); CFPB; 
CFTC; Department of Housing and Urban Development; DHS (ICE-HSI and 
Secret Service); Export-Import Bank; Farm Credit Administration; 
FDIC; Federal Housing Finance Agency; Federal Reserve; IRS; NCUA; OCC; 
SEC; Treasury (Bureau of Public Debt, FinCEN, Office of Inspector 
General, Office of General Counsel, Office of Critical Infrastructure 
Protection, Office of Financial Stability, and Special Inspector 
General for the Troubled Asset Relief Program); U.S. Postal Inspection 
Service; and the District of Columbia Department of Insurance, 
Securities, and Banking; 
Mission and goals: This group's mission is to share information on 
significant trends, developments, and other issues in financial 
institution fraud and, as appropriate, identify and carry out projects 
of common interest to the working group's members; 
Ways in which group addressed virtual currencies: The working group 
has occasionally discussed virtual currencies in the past year. 
Discussions to date have aimed to educate and inform members about 
virtual currencies. Planned activities include a presentation on the 
IRS notice addressing the status of virtual currencies under federal 
tax law; 
Within the Interagency Bank Fraud Working Group, the Payments Fraud 
Working Group has also addressed virtual currencies. The June 2013 
meeting included presentations on e-Gold, the Liberty Reserve 
indictment, and FinCEN's guidance on how BSA regulations apply to 
participants in certain virtual currency systems. 

Working group: International Organized Crime Intelligence and 
Operations Center (IOC-2); 
Participating agencies: DOJ (lead, including the Bureau of Alcohol, 
Firearms and Explosives; Criminal Division, DEA, and FBI); DHS (ICE-
HSI and Secret Service); IRS-Criminal Investigation; Department of 
Labor (Office of Inspector General); Department of State (Bureau of 
Diplomatic Security); and U.S. Postal Inspection Service; 
Mission and goals: This group's mission is to significantly disrupt 
and dismantle transnational criminal organizations posing the greatest 
threat to the United States. The group does so by (1) deconflicting 
and analyzing transnational organized crime information and 
intelligence; (2) disseminating information and intelligence to 
support law enforcement operations, investigations, prosecutions, and 
forfeiture proceedings; and (3) coordinating jurisdictional and 
multiagency operations, investigations and prosecutions; 
Ways in which group addressed virtual currencies: IOC-2 supports 
member-agency investigations of both virtual currency administrators 
that are suspected of violating U.S. law and individuals who are 
suspected of using virtual currencies to commit crimes. Specifically, 
IOC-2 assists its member agencies by: 
* sharing investigative details that will serve to deconflict current 
investigative and prosecutorial targets; 
* identifying current trends in the illicit use of virtual currencies; 
* sharing best practices in developing investigative and prosecutorial 
strategies; 
* discussing investigative challenges and solutions; 
* identifying tools, points of contact, and other areas of interest 
that offer assistance and serve as force multipliers in supporting 
virtual currency investigations and prosecutions; and; 
* creating cross-agency relationships for future cooperation and 
coordination on virtual currency issues, investigations, and 
prosecutions. 

Working group: Terrorist Finance Working Group's New Payments Systems 
Ad Hoc Working Group; 
Participating agencies: Department of State (lead, including the 
Bureaus of Economic and Business Affairs, Counterterrorism, and 
International Narcotics and Law Enforcement Affairs); Department of 
Defense; DOJ (Asset Forfeiture and Money Laundering Section; Criminal 
Division; DEA; FBI; National Security Division; and Office of Overseas 
Prosecutorial Development, Assistance and Training); FDIC; Federal 
Trade Commission; ICE-HSI; IRS-Criminal Investigation; Treasury 
(FinCEN, Office of Terrorism and Financial Intelligence, and Office of 
Technical Assistance), and USAID; 
Mission and goals: The larger working group's mission is to coordinate 
counter-terrorism-financing and anti-money-laundering training and 
technical assistance programs to countries deemed most vulnerable to 
terrorist financing; Within this context, the New Payments Ad Hoc 
Working Group's mission is two-fold: (1) to help ensure that foreign 
partners providing assistance and capacity building have a baseline 
understanding of new payment systems and the counter-terrorism-
financing and anti-money-laundering risks and vulnerabilities that 
they may pose, and (2) to collaborate with other federal agencies and 
appropriate public and private sector entities to develop training and 
technical assistance programs in line with international standards set 
by groups such as FATF; 
Ways in which group addressed virtual currencies: The New Payments Ad 
Hoc Working Group, which formed in 2013 and meets every two to three 
months, has addressed the use of virtual currencies at several 
meetings. Topics have included: 
* briefings on virtual currencies, how they operate, and risks; 
* the set of common virtual currency vocabulary terms proposed in the 
FATF's discussion paper on virtual currencies; 
* trainings that ad hoc working group participants plan to offer 
through 2015 on counter-terrorism-financing and anti-money-laundering 
risks associated with virtual currencies; 
* workshops that the Department of State, USAID, and other ad hoc 
working group participants offered in 2013 and 2014 on new payment 
systems--including virtual currencies--to foreign partners in the East 
Africa, Southeast Asia, Latin America, and the Caribbean; 
* the ways in which other interagency collaborative groups--such as 
the Egmont Group, which is composed of FinCEN and financial 
intelligence units from other countries--are addressing virtual 
currencies. 

Working group: Virtual Currencies Emerging Threats Working Group; 
Participating agencies: DOJ (FBI lead and other DOJ components); 
FinCEN; ICE-HSI; SEC; Treasury; Secret Service; and other relevant 
federal partners; 
Mission and goals: To address the illicit use of virtual currencies; 
Ways in which group addressed virtual currencies: This group leverages 
members' expertise to address new virtual currency trends, address 
potential implications for law enforcement and the U.S. intelligence 
community, and mitigate the cross-programmatic threats arising from 
illicit actors' use of virtual currency systems. 

Source: GAO analysis of agency interviews and documents, as well as 
websites of interagency collaborative efforts. 

[A] Digital Economy Task Force, The Digital Economy: Potential, 
Perils, and Promises (Mar. 2014). 

[B] FDIC, the Federal Reserve, and NCUA told us that the FFIEC 
Taskforce on Supervision, and the Taskforce's Information Technology 
Subgroup, have also discussed virtual currencies. 

[C] The FFIEC State Liaison Committee includes representatives from 
the Conference of State Bank Supervisors, the American Council of 
State Savings Supervisors, and the National Association of State 
Credit Union Supervisors. Other FFIEC BSA/Anti-Money-Laundering 
Working Group non-voting members include CFTC; FinCEN; IRS; SEC; 
Treasury's Office of Foreign Assets Control; and Treasury's Office of 
Terrorist Financing and Financial Crimes. 

[End of table] 

[End of section] 

Appendix III: Comments from the Consumer Financial Protection Bureau: 

CFPB: 
Consumer Financial Protection Bureau: 
1700 G Street, NW. 
Washington, DC 20552: 

May 6, 2014: 

Lawrence Evans Jr. 
Director, Financial Markets and Community Investment: 
U.S. Government Accountability Office: 
441 G. Street NW: 
Washington, DC 20548: 

Dear Mr. Evans, 

Thank you for the opportunity to review and comment on the report: 
Virtual Currencies - Emerging Regulatory, Law Enforcement, and 
Consumer Protection Challenges, covering policy issues related to 
virtual currencies and the status of federal agency collaboration in 
this area. 

As you note in the report, federal agencies have begun to collaborate 
on virtual currency issues through informal discussions and formal 
interagency working groups. In that regard, the Consumer Financial 
Protection Bureau (the "CFPB" or the "Bureau") has conferred on virtual
currency issues with a number of domestic and international 
regulators, including the Federal Reserve Bank of San Francisco, the 
Federal Trade Commission, the National Credit Union Administration, 
the Office of the Comptroller of the Currency, New York State's 
Department of Financial Services, the European Banking Authority, and 
the U.S. Department of the Treasury. We have similarly met with 
academic and consumer group stakeholders, law firms, consultancies,
industry associations, and industry participants. 

To date, formal interagency working groups addressing virtual 
currencies have focused primarily on Bank Secrecy Act concerns, anti-
money-laundering controls, and the investigation of crimes in
which virtual currencies may have been used. Accordingly, the CFPB's 
participation in these formal working groups has necessarily been 
limited, and our work has focused on more informal consultations with 
a consumer protection perspective. 

As noted in GAO's report, attention to potential consumer protection 
concerns in the virtual currency space has intensified in recent 
months. The Bureau believes that its own work on virtual currency and 
the work of other financial regulators will benefit from a 
collaborative response to these concerns, thus we concur with the 
report's recommendation that the Bureau identify interagency working 
groups addressing virtual currencies where CFPB's participation could
enhance its own work in this area and could contribute valuable 
consumer protection expertise to these efforts. We look forward to 
increasing our involvement in formal working groups as they engage on 
specific issues relating to consumer protection. 

Sincerely, 

Signed by: 

William Wade-Gery: 
Acting Assistant Direct: 
Card and Payment Markets: 

[End of section] 

Appendix IV: Comments from the National Credit Union Administration: 

National Credit Union Administration: 
Executive Director: 
1775 Duke Street: 
Alexandria, VA 22314-3428: 
703-518-6320: 

May 1, 2014: 

Lawrance L. Evans, Jr. 
Director, Financial Markets and Community Investment: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, D.C. 20548: 

Dear Mr. Evans: 

We reviewed the U.S. General Accountability Office’s report entitled 
Virtual Currencies: Emerging Regulatory, Law Enforcement, and Consumer 
Protection Challenges (GAO-14-496). 

The report provides clear discussion of the risks related to virtual 
currencies as well as a survey of current efforts in the regulatory 
community to address the related policy issues. We support the report’
s recommendation to increase emphasis on consumer protection issues 
going forward. In NCUA’s limited dealings with virtual currencies, we 
have consistently focused on consumer protection as well as safety and 
soundness. 

Thank you for the opportunity to comment. 

Sincerely, 

Signed by: 

Mark Treichel: 
Executive Director: 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Lawrance L. Evans, Jr. (202) 512-8678 or evansl@gao.gov. 

Staff Acknowledgments: 

In addition to the contact named above, Steve Westley (Assistant 
Director), Bethany Benitez, Chloe Brown, Anna Chung, Tonita Gillich, 
José R. Peña, and Robert Pollard made key contributions to this 
report. Also contributing to this report were Jennifer Schwartz, Jena 
Sinkfield, Ardith Spence, Andrew Stavisky, and Sarah Veale. 

[End of section] 

Footnotes: 

[1] Other federal agencies that were outside the scope of this report, 
such as the Internal Revenue Service (IRS), have responsibilities 
related to virtual currencies. For example, as we reported in May 
2013, IRS is responsible for ensuring taxpayer compliance for all 
economic areas, including virtual economies and currencies. For more 
information, see GAO, Virtual Economies and Currencies: Additional IRS 
Guidance Could Reduce Tax Compliance Risks, [hyperlink, 
http://www.gao.gov/products/GAO-13-516] (Washington, D.C.: May 15, 
2013). In March 2014, IRS determined that virtual currencies will be 
treated as property for purposes of U.S. federal taxes. Therefore, 
general tax principles that apply to property transactions apply to 
transactions using virtual currency. See IRS Notice 2014-21. 

[2] We reviewed testimony and agency statements from two congressional 
hearings: the November 18, 2013, U.S. Senate Committee on Homeland 
Security and Governmental Affairs hearing "Beyond Silk Road: Potential 
Risks, Threats, and Promises of Virtual Currencies," and the November 
19, 2013, U.S. Senate Committee on Banking, Housing, and Urban Affairs 
hearing, "The Present and Future Impact of Virtual Currency." 

[3] Pub. L. No. 91-508, 84 Stat. 1114 (1970) (codified as amended at 
12 U.S.C. §§ 1829(b), 1951-1959; 31 U.S.C. §§ 5311-5330); Pub. L. No. 
107-56, 115 Stat. 272 (2001) (codified as amended in scattered 
sections of U.S.C.). 

[4] FinCEN, Application of FinCEN's Regulations to Persons 
Administering, Exchanging, or Using Virtual Currencies, FIN-2013-G001, 
March 18, 2013; FinCEN, Application of FinCEN's Regulations to Virtual 
Currency Mining Operations, FIN-2014-R001, January 30, 2014; FinCEN, 
Application of FinCEN's Regulations to Virtual Currency Software 
Development and Certain Investment Activity, FIN-2014-R002, January 
30, 2014; and FinCEN, Application of Money Services Business 
Regulations to the Rental of Computer Systems for Mining Virtual 
Currencies, FIN-2014-R007, April 29, 2014. 

[5] The Digital Economy Task Force was established in 2013 by Thomson 
Reuters (a multinational media and information firm) and the 
International Centre for Missing & Exploited Children to explore the 
benefits and risks of the emerging digital economy, including the use 
of virtual currency. This task force includes members from both the 
public and private sectors. 

[6] GAO, Managing for Results: Key Considerations for Implementing 
Interagency Collaborative Mechanisms, [hyperlink, 
http://www.gao.gov/products/GAO-12-1022] (Washington, D.C.: Sept. 27, 
2012) and Managing for Results: Implementation Approaches Used to 
Enhance Collaboration in Interagency Groups, [hyperlink, 
http://www.gao.gov/products/GAO-14-220] (Washington, D.C.: Feb. 14, 
2014). 

[7] [hyperlink, http://www.gao.gov/products/GAO-13-516]. In that 
report we described "closed-flow" virtual currencies as those that can 
be used only within a game or virtual environment and cannot be cashed 
out for dollars or other government-issued currencies. We also 
described hybrid virtual currencies as those that have characteristics 
of both open-and closed-flow currencies--for example, such currencies 
can be used to buy real goods and services but are not exchangeable 
for government-issued currencies. 

[8] Some stakeholders with whom we spoke said they preferred the term 
digital currency to virtual currency, due partly to the connotation 
that something which is virtual cannot be used in the real world. We 
use the term virtual currency to be consistent with terminology used 
in prior GAO work and in key federal guidance on participants in 
virtual currency systems. 

[9] A peer-to-peer network allows users to share data directly and 
conduct permitted activities without a central server. 

[10] Cryptography is a branch of mathematics that is based on the 
transformation of data and can be used to provide security services 
such as confidentiality and authentication. Bitcoin and other virtual 
currencies that use cryptography are sometimes called cryptocurrencies. 

[11] According to industry observers, examples of technologies used to 
increase the privacy of participants in virtual currency transactions 
include (1) anonymizing networks, which use a distributed network of 
computers to conceal the real Internet address of users, such as The 
Onion Router (TOR); (2) "tumblers" such as BitcoinBath and BitLaundry 
that combine payments from multiple users to obstruct identification 
through the blockchain; and (3) alternative virtual currencies such as 
Zerocoin and Anoncoin that aim to make transactions fully anonymous. 

[12] See Sarah Meiklejohn, et al, "A Fistful of Bitcoins: 
Characterizing Payments Among Men with No Names," ;Login: , vol. 38 
no. 6 (2013), available at [hyperlink, 
https://www.usenix.org/system/files/login/articles/03_meiklejohn-
online.pdf]. 

[13] By design, there will be a maximum of 21 million bitcoins in 
circulation once all bitcoins have been mined, which is projected to 
occur in the year 2140. Once all bitcoins have been mined, miners will 
be rewarded for solving the math problems that verify the validity of 
bitcoin transactions through fees rather than bitcoins. 

[14] Given these limitations, we did not test the reliability of data, 
such as the data generated from the bitcoin network, but we are 
providing some figures to provide context for the possible size of the 
bitcoin market and other virtual currency markets. 

[15] [hyperlink, http://blockchain.info]. (Accessed on Mar. 31, 2014.) 
Due to data limitations, it is difficult to calculate the velocity, or 
the rate at which bitcoins are spent, and the number of transactions 
between unique users in a given time period. 

[16] For data on bitcoin price, see [hyperlink, 
https://www.coindesk.com]. (Accessed on Apr. 1, 2014.) For data on the 
total value and number of bitcoins in circulation, see [hyperlink, 
https://blockchain.info]. (Accessed on Mar. 31, 2014.) 

[17] See Federal Reserve Statistical Release H.6 "Money Stock 
Measures" (Apr. 10, 2014) at [hyperlink, 
http://www.federalreserve.gov/releases/h6/current/H6.pdf]. 

[18] [hyperlink, https://www.coindesk.com]. (Accessed on Apr.1, 2014.) 
This index is a composite price calculated as the simple average of 
bitcoin prices across leading global exchanges that meet certain 
criteria. 

[19] [hyperlink, https://blockchain.info]. (Accessed on Apr. 1, 2014.) 

[20] Federal Reserve. See [hyperlink, 
http://www.federalreserve.gov/paymentsystems/fedach_yearlycomm.htm]. 
(Accessed on Apr. 1, 2014.) 

[21] [hyperlink, https://coinmarketcap.com]. (Accessed on Apr. 1, 
2014.) 

[22] [hyperlink, https://coinmarketcap.com].(Accessed on Apr. 1, 2014.) 

[23] Money laundering is the process of disguising or concealing the 
source of funds acquired illicitly to make the acquisition appear 
legitimate. 

[24] Pub. L. No. 91-508, 84 Stat. 1114 (1970) (codified as amended at 
12 U.S.C. §§ 1829(b), 1951-1959; 31 U.S.C. §§ 5311-5330); 31 C.F.R. 
chap. X. In 1994, the Secretary of the Treasury delegated overall 
authority for enforcement of, and compliance with, BSA and its 
implementing regulations related to money laundering to the Director 
of FinCEN. In the same year, the Secretary also delegated BSA 
examination authority to the prudential banking regulators. 31 C.F.R. 
§ 1010.810(b)(1)-(5). 

[25] FinCEN shares this responsibility with IRS, to which FinCEN has 
delegated examination authority for money services businesses. See 31 
C.F.R. § 1010. 810(b)(8). IRS activities were outside the scope of our 
review. FinCEN has also delegated examination authority for BSA 
compliance to a number of other federal agencies, including the 
prudential banking regulators, CFTC, and SEC. See 31 C.F.R. § 
1010.810(b). These agencies can also use their independent authorities 
to examine entities under their supervision for compliance with 
applicable BSA and anti-money-laundering requirements and regulations. 

[26] Under 31 C.F.R. § 1010.100(ff)(1)-(7), money services businesses 
are generally defined as any of the following: (1) currency dealer or 
exchanger, (2) check casher, (3) issuer or seller of traveler's checks 
or money orders, (4) provider or seller of prepaid access, (5) money 
transmitter, and (6) the U.S. Postal Service. FinCEN's regulations 
define a money transmitter as a person that provides money 
transmission services, or any other person engaged in the transfer of 
funds. 31 C.F.R. § 1010.100(ff)(5)(i).The term money transmission 
services means the "acceptance of currency, funds, or other value that 
substitutes for currency to another location or person by any means." 
Id. 

[27] FinCEN, Application of FinCEN's Regulations to Persons 
Administering, Exchanging, or Using Virtual Currencies, FIN-2013-G001, 
March 18, 2013. FinCEN defines an exchanger as a person engaged as a 
business in the exchange of virtual currency for real currency, funds, 
or other virtual currency. Id. FinCEN defines an administrator as a 
person engaged as a business in issuing (putting into circulation) a 
virtual currency, and who has the authority to redeem (to withdraw 
from circulation) such virtual currency. Id. An administrator or 
exchanger that (1) accepts and transmits a convertible virtual 
currency, or (2) buys or sells convertible virtual currency for any 
reason is a money transmitter under FinCEN's regulations. 

[28] 31 C.F.R. § 1022.210, subpart C. 

[29] 31 C.F.R. § 1020.220(a)(2)(i). Under the USA PATRIOT Act, 
financial institutions also must implement appropriate, specific, and, 
where necessary, enhanced, due diligence for correspondent accounts 
and private banking accounts established in the United States for non-
U.S. persons. 31 U.S.C. § 5318(i). 

[30] 31 U.S.C. § 5313(a); 31 C.F.R. § 1010.311. 

[31] In addition, officials from the prudential banking regulators 
either stated or acknowledged that they would have authority to 
regulate a supervised entity that issued virtual currency, or cleared 
or settled transactions related to virtual currency. 

[32] FinCEN, Interagency Interpretive Guidance on Providing Banking 
Services to Money Services Businesses Operating in the United States, 
April 26, 2005. FinCEN concurrently issued guidance to money services 
businesses that identified and explained the types of information and 
documentation that money services businesses were expected to have and 
provide to banking organizations. Bank holding companies are companies 
that own or control one or more banks. In the United States, most 
banks insured by FDIC are owned or controlled by a bank holding 
company. 

[33] Under the risk-focused approach, those activities judged to pose 
the highest risk to an institution are to receive the most scrutiny by 
examiners. 

[34] See 12 U.S.C. § 1786(q), § 1818(s) (federal banking agencies must 
promulgate regulations requiring insured depository institutions and 
credit unions to establish procedures regarding BSA compliance; 
regulators' examinations must include review of BSA compliance 
procedures); see also procedures for monitoring BSA compliance: 12 
C.F.R. § 208.63 (Federal Reserve), 12 C.F.R. § 326.8 (FDIC), 12 C.F.R. 
§ 748.2 (NCUA), and 12.C.F.R. § 21.21 (OCC). 

[35] A civil money penalty is a punitive fine assessed for the 
violation of a law or regulation or for other misconduct. A cease-and-
desist proceeding is a formal process that may result in an order that 
a party halt certain activities or practices; the order may also 
require the party to take affirmative action to correct the conditions 
resulting from the practices. See 12 U.S.C. § 1786(e), § 1818(b). 

[36] Pub. L. No. 90-321, 92 Stat. 3728 (1978) (codified as amended at 
15 U.S.C. §§ 1693-1693r). CFPB issues and enforces Regulation E, which 
implements the Electronic Fund Transfer Act (EFTA). EFTA establishes 
basic rights, liabilities, and responsibilities of consumers who use 
electronic fund transfer services and of financial institutions that 
offer these services. 

[37] Pub. L. No. 111-203, § 1021(c)(5), 124 Stat. 1376, 1980 (2010) 
(codified at 12 U.S.C. § 5511(c)(5)). For example, section 1032(a) of 
the Dodd-Frank Act confers authority on CFPB "to prescribe rules to 
ensure that the features of any consumer financial product or service, 
both initially and over the term of the product or service, are fully, 
accurately, and effectively disclosed to consumers in a manner that 
permits consumers to understand the costs, benefits, and risks 
associated with the product or service, in light of the facts and 
circumstances." 12 U.S.C. § 5532(a). In prescribing such disclosure 
rules, section 1032 requires the Bureau to "consider available 
evidence about consumer awareness, understanding of, and responses to 
disclosures or communications about the risks, costs, and benefits of 
consumer financial products or services." 12 U.S.C. § 5532(c). 

[38] Pub. L. No. 111-203, § 1013(b)(3), § 1021(c), 124 Stat. 1376, 
1969, 1980 (2010) (codified at 12 U.S.C. §§ 5493(b)(3), 5511(c)). 

[39] 15 U.S.C. §§ 80b-2(a)(11), 80b-11(g)-(h). 

[40] See 15 U.S.C. § 80b-6(1)-(2); SEC v. Capital Gains Research 
Bureau, Inc., et al., 375 U.S. 180 (1963). 

[41] 17 C.F.R. § 240.15c3-1. SEC's net capital rule requires all 
broker-dealers to maintain a minimum level of net capital consisting 
of highly liquid assets. Assets that are not liquid are deducted in 
full when computing net capital. 

[42] 7 U.S.C. § 2. Financial derivatives are financial instruments 
whose value is based on one or more underlying reference items. They 
are used to hedge risk or to exchange a floating rate of return for a 
fixed rate of return. In the virtual currency context, a derivative 
might be used to reduce exposure to volatility in virtual currency 
exchange rates. 

[43] 7 U.S.C. §§ 1-26; 17 C.F.R. chap. I. 

[44] The Commodity Exchange Act defines a commodity as certain 
agricultural goods and "all services, rights, and interests (except 
motion picture box office receipts, or any index, measure, value or 
data related to such receipts) in which contracts for future delivery 
are presently or in the future dealt in." 7 U.S.C. § 1a(9). 

[45] Futures commission merchants are entities that solicit or accept 
orders for the purchase or sale of a commodity for future delivery on 
or subject to the rules of any exchange and that accept payment from 
or extend credit to those whose orders are accepted. 

[46] One example would be a centralized virtual currency system that 
allowed users to make untraceable funds transfers. 

[47] Pub. L. No. 91-508, 84 Stat. 1114 (codified as amended at 12 
U.S.C. §§ 1829(b), 1951-1959; 31 U.S.C. §§ 5311-5330); Pub. L. No. 107-
56, tit. III, 115 Stat. 272, 296-342 (International Money Laundering 
Abatement and Anti-Terrorist Financing Act of 2001) (codified at 31 
U.S.C. §§ 5301-5318A) (to prevent, detect, and prosecute international 
money laundering); see also Money Laundering Suppression Act of 1994, 
Pub. L. No. 103-325, §§ 401-413, 108 Stat. 2160, 2243-2255 (codified 
at 31 U.S.C. § 5330 and scattered sections of U.S.C.) (requires money 
transmitting businesses to register with Treasury). 

[48] 31 C.F.R. § 1020.410. 

[49] Financial institutions are also required to obtain customer 
information to satisfy "know-your-customer" or "customer due 
diligence" identification programs as part of their anti-money 
laundering obligations, and financial institutions must subject 
certain bank accounts held by non-U.S. persons to enhanced due 
diligence procedures. See 31 U.S.C. § 5318(i). 

[50] However, in a virtual currency transfer between individuals 
through a third-party intermediary (such as a virtual currency 
exchange), personally identifiable information is required to be 
collected if the transaction is for $3,000 or more. This requirement 
became effective in 2011. We discuss this requirement in the next 
section of this report. 

[51] We discuss examples of such losses in the next section of this 
report. 

[52] The next section of this report discusses an example of a fraud 
scheme involving a virtual-currency-based security. 

[53] A chargeback is a payment reversal initiated by a consumer due, 
for example, to nondelivery of a purchased product. 

[54] As previously noted, that privacy may be lost if a connection is 
established between a bitcoin address and its owner. 

[55] Some industry observers have suggested that virtual currency 
system protocols may have applications beyond financial transactions. 
For example, just as the bitcoin protocol transfers and records 
ownership rights to currency, it could, in theory, be used to transfer 
and record ownership rights to stocks, among other things. 

[56] Bank Secrecy Act Regulations; Definitions and Other Regulations 
Relating to Money Services Businesses, 76 Fed. Reg. 43585 (July 21, 
2011). 

[57] 31 C.F.R. § 1010.100(ff)(5)(i)(A). 

[58] FinCEN, Application of FinCEN's Regulations to Persons 
Administering, Exchanging, or Using Virtual Currencies, FIN-2013-G001, 
March 18, 2013. This guidance addresses convertible virtual currency--
that is, virtual currency which either has an equivalent value in real 
currency or acts as a substitute for real currency. 

[59] According to FinCEN, virtual currency exchangers and 
administrators with U.S. customers must comply with BSA requirements, 
such as instituting anti-money-laundering controls, even if they are 
based outside of the United States. 

[60] FinCEN's guidance defines a virtual currency user as "a person 
who obtains convertible virtual currency and uses it to purchase real 
or virtual goods or services on the user's own behalf." Although a 
user is not considered to be a money transmitter, FinCEN warns that a 
user's activities must still comply with other federal and state laws 
and regulations. 

[61] Most states also regulate money services businesses and some have 
taken steps to address virtual currencies. For example, New York is 
developing licensing and regulatory requirements specific to virtual 
currency exchanges and Texas has issued a memorandum describing how 
current licensing requirements apply to virtual currency exchanges. 
FinCEN coordinates with its state counterparts to encourage 
application of FinCEN's guidance on virtual currencies as part of this 
process. 

[62] FinCEN, Application of FinCEN's Regulations to Virtual Currency 
Mining Operations, FIN-2014-R001, January 30, 2014, and FinCEN, 
Application of FinCEN's Regulations to Virtual Currency Software 
Development and Certain Investment Activity, FIN-2014-R002, January 
30, 2014. 

[63] For example, a company that purchases and sells virtual 
currencies whenever such purchases and sales make investment sense 
according to the company's business plan is acting as a virtual 
currency user, not a virtual currency exchange. 

[64] FinCEN, Application of Money Services Business Regulations to the 
Rental of Computer Systems for Mining Virtual Currencies, FIN-2014-
R007, April 29, 2014. 

[65] A Ponzi scheme is a type of investment fraud that involves the 
payment of purported returns to existing investors from funds 
contributed by new investors. 

[66] Securities and Exchange Commission v. Shavers, No. 413-CV-416 
(E.D. Texas Aug. 6, 2013). 

[67] In addition, in March 2014, the Financial Industry Regulatory 
Authority, a self-regulatory organization for the securities industry, 
issued an investor alert about the risks of buying, using, and 
speculating in virtual currencies and the potential for related scams. 
See [hyperlink, 
http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/FraudsAndS
cams/P456458.] Also, in April 2014, the North American Securities 
Administrators Association issued an investor advisory on virtual 
currencies, related investment risks, and the types of investments 
that might involve virtual currencies. See [hyperlink, 
http://www.nasaa.org/30631/informed-investor-advisory-virtual-
currency]. 

[68] [hyperlink, http://www.investor.gov/news-alerts/investor-
alerts/investor-alert-ponzi-schemes-using-virtual-currencies]. 

[69] [hyperlink, http://www.investor.gov/news-alerts/investor-
alerts/investor-alert-bitcoin-other-virtual-currency-related-
investments]. 

[70] Exchange-traded funds are commonly structured as open-end 
investment companies and offer investors a proportionate share in a 
pool of stocks, bonds, and other assets. 

[71] Rule 506(c) is one of the exemptive rules under Regulation D that 
allow some businesses to offer and sell their securities without 
having to register the offer and sale of securities with SEC. 
Regulation D is designed to (1) simplify the previously existing rules 
and regulations, (2) eliminate any unnecessary restrictions that those 
rules and regulations place on small business issuers, and (3) achieve 
uniformity between state and federal exemptions to facilitate capital 
formation consistent with protecting investors. 

[72] 17 C.F.R. § 230.506(c). Accredited investors include, among 
others, individuals whose net worth is more than $1 million (not 
including the value of their primary residence) or whose individual 
income exceeds at least $200,000 for the most recent 2 years (or joint 
income with a spouse exceeding $300,000 for those years) and a 
reasonable expectation of the same income level in the current year. 
It also includes certain types of entities, such as insurance 
companies, banks, and corporations with assets exceeding $5 million. 
17 C.F.R. § 230.501(a). 

[73] As of March 31, 2014, these bitcoins were worth about $80 
million, according to bitcoin prices from [hyperlink, 
https://www.coindesk.com]. 

[74] 31 U.S.C. § 5318A. Section 311 of the USA PATRIOT Act grants the 
Secretary of the Treasury the authority, upon finding that reasonable 
grounds exist for concluding that a foreign jurisdiction, institution, 
class of transaction, or type of account is of "primary money 
laundering concern," to require domestic financial institutions and 
financial agencies to take certain "special measures" to address the 
primary money laundering concern. 

[75] This case is being prosecuted jointly by the DOJ Criminal 
Division's Asset Forfeiture and Money Laundering Section and the U.S. 
Attorney's Office for the Southern District of New York. 

[76] FFIEC is a formal interagency body empowered to prescribe uniform 
principles, standards, and report forms for the federal examination of 
financial institutions by the Federal Reserve, FDIC, NCUA, OCC, and 
CFPB, and to make recommendations to promote uniformity in the 
supervision of financial institutions. 

[77] The Secret Service was mandated by the USA PATRIOT Act to 
establish a nationwide network of Electronic Crimes Task Forces. Pub. 
L. 107-56, § 105, 115 Stat 272, 277 (2001) (codified at 18 U.S.C. § 
3056 note). The goal of the network is to bring together federal, 
state, and local law enforcement, as well as prosecutors, private 
industry, and academia to prevent, detect, and investigate various 
forms of electronic crime. 

[78] The International Centre for Missing & Exploited Children is a 
nonprofit corporation that leads a movement to protect children from 
sexual exploitation and abduction. The Centre is involved in virtual 
currency issues because of connections between digital technologies 
that facilitate anonymity and commercial child pornography, sexual 
exploitation, and sex trafficking. 

[79] Digital Economy Task Force, The Digital Economy: Potential, 
Perils, and Promises (March 2014). 

[80] GAO, Managing for Results: Key Considerations for Implementing 
Interagency Collaborative Mechanisms, [hyperlink, 
http://www.gao.gov/products/GAO-12-1022] (Washington, D.C.: Sept. 27, 
2012). 

[81] GAO, Managing for Results: Implementation Approaches Used to 
Enhance Collaboration in Interagency Groups, [hyperlink, 
http://www.gao.gov/products/GAO-14-220] (Washington, D.C.: Feb. 14, 
2014). 

[82] CFPB (via the Office of Financial Education) is responsible for 
educating and empowering consumers to make better-informed financial 
decisions. Pub. L. No. 111-203, § 1013(d), 124 Stat. 1376, 1970 (2010). 

[83] Congressional Research Service, Bitcoin: Questions, Answers, and 
Analysis of Legal Issues (Washington, D.C.: Dec. 20, 2013). 

[84] Data from Coindesk.com. These bitcoins were worth approximately 
$390 million as of March 31, 2014. [hyperlink, 
https://www.coindesk.com]. 

[85] For the Conference of State Bank Supervisors and the North 
American Securities Administrators Association joint model consumer 
guidance, see [hyperlink, 
http://www.csbs.org/legislative/testimony/Documents/ModelConsumerGuidanc
e--Virtual%20Currencies.pdf]. 

[86] These states include Alabama, California, Florida, Hawaii, 
Maryland, Massachusetts, Nevada, Washington, and Wisconsin. 

[87] European Banking Authority, Warning to Consumers on Virtual 
Currencies, EBA/WRG/2013/01, Dec. 12, 2013. See [hyperlink, 
http://www.eba.europa.eu/-/eba-warns-consumers-on-virtual-currencies]. 

[88] CFPB's complaint intake system is not specifically geared towards 
virtual currency complaints. However, in February 2014, CFPB ran a 
query of its Consumer Complaint Database to determine the number of 
complaints that had mentioned virtual currency or bitcoin and found 
that only 14 out of about 290,000 complaints met that condition. 

[End of section] 

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