Australia's anti-money laundering regulator has warned remittance providers that they must comply with anti-money laundering and counter-terrorist financing obligations if they use unregulated cryptocurrencies such as bitcoin to transfer funds between customers.
The Australian Transaction Reports and Analysis Centre is also concerned that some bitcoin operators may be unaware the AML/CTF regime applies if they begin to provide designated remittance services.
Nonetheless, bitcoin has emerged as one potential solution to the challenges in the remittance sector, where many operators have been "de-banked", as big banks desert the sector because of concerns over reputation risk.
Sources said Bank of Queensland was the final major institution to begin winding down its relationships with remitters. Only smaller credit unions and mutuals are still opening domestic bank accounts for remittance providers, but lack a correspondent banking network so are unable to arrange remittances overseas.
This means many remitters are facing closure, or have closed already, and bitcoin is not the panacea its proponents claim.
The Australian Remittance and Currency Providers Association, the industry association for remitters, said it had not considered bitcoin as a solution to "the de-banking issue."
Some of the more tech-savvy remitters, however, are reportedly considering the use of bitcoin, which remains unregulated from an AML/CTF perspective as it does not meet the definition of "e-currency" under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.
Lawyers said remitters would still have to remain registered with AUSTRAC, even though bitcoin is unregulated, because the AML/CTF Act regime had been drafted to capture a wide range of remittance activities, including elusive activities such as hawala.
Paddy Oliver, lawyer and managing director of Lexcel Consulting, said the AML/CTF Act defined "money or property", "transfer" and "arrangement" very broadly in relation to remittance activities for this reason. Remitters needed to bear in mind that regulators would look at the substance of their money transfer arrangements, not the specific "medium of exchange" used to transfer funds.
AUSTRAC's warning about remittances using bitcoin has come at the same time as some major recent developments in the bitcoin sector. Some big bitcoin players are moving into the traditional remittance arena, including Australian-listed company digitalBTC.
The company announced this month the launch of a new product aimed at "disrupting" the US$583 billion remittance market. The product, dubbed AirPocket, is designed to enable individuals to act as remittance agents simply by providing a smart phone and a small cash float.
Zhenya Tsvetnenko, digitalBTC's executive chairman, said the product would use the blockchain technology as a cheap and effective transaction ledger but funds would be transferred via traditional banking channels, not as bitcoin.
digitalBTC is ASX-listed but the platform will focus first on the South and North American remittance corridor, which means it will not need to register as a remittance network provider with AUSTRAC.
Tsvetnenko said digitalBTC had registered with the Financial Crimes Enforcement Network and secured all the necessary approvals to operate as a money services business in the United States.
Bitcoin providers have been calling for cryptocurrencies to be regulated within the AML/CTF regime, to give them some degree of certainty about the investments they are making in the technology, sources said.
Liz Atkins, executive general manager at AUSTRAC, said that the issue was being assessed as part of the current wider review of Australia's AML/CTF regime, which began in December 2013 with the release of terms of reference and an issues paper.
Atkins said that AUSTRAC, together with various other government bodies, was investigating how policymakers should respond to bitcoin.
In the meantime, companies that facilitate bitcoin transfers need to determine whether they qualify as remittance providers under the AML/CTF regime. Atkins said remitters needed to be mindful that the structure of their operations would determine whether they were providing a designated service.
"While cryptocurrencies such as bitcoin are not currently subject to AML/CTF regulation per se, the remittance activities would be," she said.
Although the legislation had anticipated virtual currencies, it was drafted in a way that only captured "e-currencies" that were backed either directly or indirectly by precious metal or bullion.
Atkins said cryptographic currencies such as bitcoin did not clearly fall within this definition. "Virtual currency exchanges also do not clearly fall within the current list of 'designated services' within the AML/CTF Act," she said.
"This list determines whether a business activity is regulated under the AML/CTF regime."
Austrac's guidance states that a reporting entity will be providing a designated remittance arrangement if it:
- accepts an instruction to transfer money or property under a designated remittance arrangement (regardless of whether or not it actually accepts money and/or property as part of this instruction);
- makes money or property available, or arranges for it to be made available, to an ultimate recipient as a result of a designated remittance arrangement;
- operates a network that provides a platform or operation system to facilitate transferring money or property under a designated remittance arrangement.
This is an edited version of a report that was first published by the Compliance Complete Service of Thomson Reuters Accelus.