Virtual currencies, such as Bitcoin, have legitimate uses and the potential to improve payment efficiency, the inter-governmental body that sets global anti-money laundering standards has found.However, in a report on the potential risks of virtual currencies, the Financial Action Task Force also found that the anonymity and lack of oversight involved in the trading of these currencies means that they are also vulnerable to money laundering and terrorism financing.FATF's report dealt with "digital representations of value that can be traded digitally and function as mediums of exchange, units of account and stores of value."What makes a virtual currency different from real money is that it does not have legal tender status and fulfils its functions only by agreement within the community of users.Some virtual currencies, such as Bitcoin and Second Life Linden Dollars, are convertible, which means they have an equivalent value in real currency and can be exchanged for real currency.Among the legitimate uses of virtual currencies, FATF found they had the potential to reduce transaction costs for payments and funds transfers. They may support financial inclusion by being used for low-cost international remittance.For example, Bitcoin functions as a global currency that can avoid exchange fees and is processed with lower charges than traditional credit and debit cards.FATF said: "Virtual currency may facilitate micro-payments, allowing businesses to sell items online that currently cannot be sold at an appropriately low unit cost because of the transaction costs of conventional payment networks."However, FATF found that virtual currencies that can be exchanged for real money or other virtual currencies are potentially vulnerable to money laundering and terrorist financing. This is because they allow greater anonymity: sender and recipient are usually not identified and there is no identification protocol in currencies such as Bitcoin. There is usually no central oversight body, nor any requirement to keep transaction records.The global reach of most virtual currencies increases potential AML/CTF risks.The report provided details of some recent cases involving money laundering operations using virtual currencies. In May last year the US Department of Justice charged Liberty Reserve, a Costa Rica based money transmitter, and seven of its principals and employees with operating an unregistered remittance business and laundering US$6 billion of illicit proceeds. Liberty Reserve was alleged to have been set up to enable criminals to conduct anonymous and untraceable financial transactions. Liberty had its own currency, Liberty Dollars, which were transferred into US dollars. It was said to have had one million users and to have conducted more than 55 million transactions before it was cut off from the US financial system. Account names were false and deposits and withdrawals were transmitted indirectly through unlicensed remittance businesses operating in countries that did not have AML regimes.In another case, drugs website Silk Road was found to have charged commissions of eight to 15 per cent of transaction values. Silk Road offered various "anonymisers", including a "tumbler", which involved sending payments through a random series of dummy transactions before settling an account.