Bitcoin Legislation and Investigation – A Proposal For the US Law Maker


The advent of bitcoin, and digital currencies in general, unleashed a myriad of problems that emerged from the anonymity associated with cryptocurrency transactions, thus raising concerns related to money laundering. Legislators and law enforcement agencies are currently struggling to mitigate the money laundering issues affiliated with cryptocurrencies and several other digital currencies. In the face of these threats, government agencies have issued different opinions concerning how digital currencies can be defined within a conventional financial framework.

Legislators opinions regarding the nature of bitcoins are contradictive to each other. Bitcoin has various definitions within different legislative jurisdictions; it is viewed as currency, commodity, property and commodity money. On the other hand, prosecutorial agencies are having hard time trying to fit cryptocurrency exchanges under the umbrella of money service businesses’ (MSB) regulations. A recent study presented a thorough analysis of scholarly references, case law, government publications and present trade data to formulate a solution to minimize money laundering via bitcoin and other forms of digital currencies. The study uncovered an urgent need for a clear, appropriate definition of bitcoin within the context of the US Federal law to facilitate investigations of suspected illegal uses of digital currencies. Moreover, the study also revealed the need for a new US legislation for digital currencies which addresses the risks of money laundering and terrorism financing.

Some researchers have previously shown that digital currency legislation has to go hand in hand with MSB regulations to rein peer-to-peer cryptocurrency exchanges. Furthermore, FinCENs purview with various forms of financial crimes represents a unique position to aid in various investigations related to digital currencies. FinCEN has to formulate a blockchain analysis tool to assist various law enforcement agencies throughout investigations concerning bitcoin and other cryptocurrencies.

Results and Recommendations of the Study:

The study revealed the present shortcomings and discrepancies that exist between US policies, regulations, regulator guidance and legislations that address money laundering. The study showed that digital currencies in general, and bitcoin in particular, can simplify money laundering operations within the US. Bitcoin, Monero and Dash are currently used on the deep web for illicit commerce. Additionally, bitcoin can exploit the Bank Secrecy Act (BSA) and related regulations, which representa the United States’ primary anti-money laundering (AML) legislation.

The researchers have proven that conventional law enforcement techniques are inadequate to neutralize the threats imposed by bitcoin. The majority of law enforcement agencies lack the knowledge, skills and experience to address various digital currency threats. On the other hand, investigation of crimes related to digital currencies, especially cryptocurrencies, represents a hard task for some law enforcement agencies. FinCEN has to boost investigative efforts in the digital currency ecosystem. The study recommended the following:

New Definition of entities:

To address more appropriate legislations for digital currencies, a new definition is needed for entities that act as an MSB for digital currencies. The study proposed a novel designation for these entities, which sets them apart from MSBs as a Digital Currency Business (DCB), which would designate cryptocurrency exchangers as separate businesses and exclude them from the MSB designation under 18 U.S.C § 1960. DCB will include businesses that perform any of the following forms of transactions:

1- Transfer digital currencies

2- Buy/Sell digital currencies for profit

3- Perform mixing transactions with cryptocurrencies

4- Engage in transactions that involve property exchange in a manner that resembles a currency exchange.

The study presented the definition of DCB activities correlate with the “Bitlicense” bill. Bitlicense defines business activities related to virtual currencies as:

a- Individuals or entities that receive virtual currencies for transmission purposes

b- Keeping virtual currencies of others for storage or saving purposes

c- Acting as a business exchange service for buying and selling of virtual currencies

d- Issuing, controlling and/or administering virtual currencies.

Given the fact that the activities described in Bitlicense are very specific, misinterpretation regarding the requirements of the license is minimized. However, the DCP adaptation necessitates including the designation of digital currency business activity.

New Legislation:

The study proved that the main money laundering threat associated with bitcoin stems from unregulated P2P cryptocurrency exchanges. The researchers emphasized the need for a new legislation, specific to unlicensed P2P cryptocurrency exchanges, to neutralize money laundering threats related to cryptocurrencies. The proposed legislation should be formulated in view of the key points of 18 U.S.C. § 1960 as well as Bitlicense including:

  • All DCBs should register with FinCEN similarly to MSB
  • Any foreign DCBs, carrying out business operations with US customers, should follow DCB’s domestic regulations
  • DCBs should follow the registration requirements of the MSB requirements of individual states, whenever a similar DCB provision is non-existent in the state in question.

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