With the latest buzz about bitcoins – a decentralized, digital currency just a few years old – it is extremely important for the banking industry to understand their use and impact. A bitcoin is a form of virtual currency that allows payment through a peer-to-peer network. Bitcoins are not tangible like cash and cannot be deposited into a bank account. However, they can be exchanged to a local currency and those funds can be deposited into a bank account similar to any other transaction. This poses a high risk for money laundering and banks should be aware of ways to monitor the risk.
A bitcoin can be purchased with cash, credit cards or bank transfers in person or online through digital transactions. In-person transactions can occur by finding a local bitcoin seller through specified websites. Digital transactions by credit card or bank transfer can occur through use of a virtual wallet or designated websites. A bitcoin wallet application can be downloaded onto a desktop or a mobile device. As previously mentioned, they can also be exchanged for conventional currency. Similar to cash, bitcoins can be used to pay for goods and services where accepted and to transfer funds between users.
Bitcoins are used by and can benefit merchants as well as individuals. For merchants, there is no payment wait time since the availability of funds is instant. Further, unlike with credit cards, there are no fees for using bitcoins. Also, all transactions are tracked and documented for public access on a block chain, which is a record of every bitcoin transaction. There is no minimum amount for any transaction and, as a result, merchants can charge as little as an equivalent of a penny for goods and services.
For individuals, there is no personal information attached to a transaction (i.e. a routing or Social Security number). This anonymity potentially can reduce fraud related to identity theft. Another advantage is that the user is able to make or receive payments only when prompted. Thus, there is more control and the virtual wallet cannot be automatically debited, similar to a credit card or bank account with automatic payments set up. Also, there is minimal verification necessary in order to sign up and use a bitcoin virtual wallet.
Along with the benefits, there are disadvantages to bitcoins. A major one is that there are no set regulations around their use. In addition, because it is not a widely-accepted currency, there is uncertainty about what a bitcoin is and how to properly use it.
Bitcoins operate independently of banks, which may have a negative impact on their volume of customer activity if the usage becomes more commonly accepted. Currently, they can pose a higher risk of money laundering since the source of funds are typically unknown. Thus, it is easier for criminals to utilize bitcoin exchanges to launder illicit funds.
Following are important areas where The Mercadien Group can assist your bank with bitcoin-related activity:
- Assess risk of customers utilizing bitcoins;
- Monitor bitcoin activity through customer transactions; and
- Perform customer due diligence (CDD) at account opening and maintain enhanced due diligence (EDD) on an on-going basis.