Money Laundering and Funding Terror Using Bitcoin

Convertible Virtual Currency and Other Digital Currency

Products
by P. Carl Mullan ([email protected])
12/04/2014
Disclosures
The information presented in this paper examines potential money laundering situations and
possible terror funding scenarios which utilize Bitcoin convertible virtual currency and other
digital currency products. The research attempts to identify US laws and regulations that are
ineffective in supervising or regulating the movement of funds through new Internet digital
currency products and emerging mobile payment devices.
Despite the fact that many of Bitcoin's US regulatory burdens still lay ahead, most Bitcoin
companies in the United States are committed to operating as legal, regulated financial
businesses. However, some individuals and companies, in the US and around the world, do not
share that commitment. Many parties engaged in business with US customers are located in
faraway jurisdictions and have no reason or desire to become properly licensed in the United
States. These bad actors are focused on circumventing important US financial regulations and
ignoring both federal and state law. Finally, there are many existing US regulations that miss the
mark and miserably fail in supervising and securing the movement of digital currency in and out
of the US.
The intent of presenting this information is to focus attention on specific Bitcoin digital currency
markets, products, businesses and individuals that are engaged in the unsupervised and
unlicensed money transmitting business. Discussion is also directed at unveiling ineffective rules
and blind spots in US laws that permit the free and unobstructed cross-border movement of
cash equivalents (Bitcoin).
These situations and examples accurately depict how easy it is to move money anonymously using
non-bank digital currency products. This information details methods which individuals are using
today which allow them to circumvent US financial regulations and engage in criminal activity
(including possible terror funding). This paper does not promote or condone illegal activity. The
material is presented with a desire to change and strengthen existing regulations and prevent
illegal activity.
The situations presented were modeled using real people, businesses, banks and popular digital
currency products. In order to accurately represent real world situations, the legal names of
companies, persons, banks, websites, and businesses were included in this paper. Anyone doubting
the possibility of these transactions occurring today can gain proof by following the detailed
research. The reference material includes screenshots, diagrams and documents attached as
exhibits.
The conclusions drawn from this information, may suggest that current US financial regulations
are not yet compatible with modern digital currency products or US Bitcoin activity.
This paper does not promote or condone illegal activity. The material is presented with the desire
to change and strengthen existing US regulations and prevent illegal activity.

Introduction
This paper examines everyday methods of moving funds and laundering money through
Bitcoin convertible virtual currency, Bitcoin exchange agents and common digital
currency trading techniques. Attention is focused on the lack of existing enforcement in

the US and the inadequate US financial regulations governing both Bitcoin products and
those engaged in the transfer and exchange of Bitcoin.
Bitcoin functions as a type of electronic cash. Bitcoin does not have the common features
of electronic online payment systems or mobile payment systems. Because of
decentralized features, Bitcoin transactions function very much like cash payments.
The United States has strict laws and regulations governing the movement of cash. In the
US, it is a crime to transfer or deposit a large amount of cash through any financial
institution without properly reporting the movement of this money. It is also a crime in
America to cross the border, either entering or exiting the US, with a large amount of
cash or cash equivalents including value held on prepaid cards or stored value devices.
Large cash transactions and the movement of cash across US borders are strictly
monitored and subject to federal reporting requirements.
Despite the fact that Bitcoin acts as an electronic version of cash, proper state and federal
regulations for supervising the exchange of Bitcoin and the cross border reporting of
large Bitcoin transactions are non-existent.
The speed at which an individual in the US can exchange cash into Bitcoin and
circumvent existing cash reporting requirements is eye opening.
It is alarming to learn of the unlicensed, unregistered and unsupervised Bitcoin agents,
traders, banks and exchanges in America that are engaged in Bitcoin financial
transactions seemingly unbound by any US financial federal or state regulations.
In order to properly grow and flourish as a new method of payment, Bitcoin and other
new decentralized currency products need a healthy US consumer regulatory
environment. For this market to develop, there are many changes which need to occur in
how government agencies attempt to control decentralized digital currency.
At this time, the United States needs to develop a much stronger regulatory pathway
forward for all digital currency products. This path must be geared towards convenience
and the expanding the American consumer market. Regulations do not need to restrict
legal consumer markets.
Bitcoin exchange agents and consumer services, including the Bitcoin Foundation, need
to take the initiative and propose new more modern comprehensive guidance and
solutions. Those digital currency professionals, liaising with regulators, need to look
outside the US for examples of successful workable regulatory structures which can be
imported and modeled from foreign digital currency providers. Several of these existing
foreign structures translate well to the US market. Additionally, new technical solutions
have recently emerged that, if developed in the US, could fast track new comprehensive
digital currency regulatory solutions.
Old US banking regulations have not proven to be a good match for new technology and

global digital currency products. Other countries such as the United Kingdom and Russia
offer working digital currency solutions which can be adapted for the US market. These
solutions deliver vast benefits to the law enforcement community, Bitcoin merchants and
consumers. This type of governance, when paired with new technology could soothe US
Bitcoin growing pains.
A well regulated and safe Bitcoin consumer marketplace should always be preferred over
today's mysterious and uncertain regulatory environment. This paper takes a look at some
issues plaguing Bitcoin in the United States. There are solutions to these US Bitcoin
issues available at this time.
Prepaid Access
The capacity to transact large anonymous fund transfers online or through a mobile
device from remote locations makes Bitcoin decentralized convertible virtual currency a
desirable tool for criminals engaging in money laundering and the anonymous cross
border movement of funds.
In 2007, the US Government published the National Money Laundering Strategy which
made clear and useful statements regarding prepaid access (prepaid debit cards).
...an emerging cash alternative for both legitimate consumers and money
launderers alike. A U.S. Immigration and Customs Enforcement official cited a
case example where hundreds of [prepaid cards] were found concealed in a
compartment similar to those used to conceal cash, drugs and other contraband.
The cards are also being used by criminal organizations to cover expenses
incurred by their couriers as they transport cash, drugs and other contraband
across the country... 1
The Credit Card Accountability Responsibility and Disclosure Act of 2009 or simply the
"CARD Act" is a federal statute passed by the US Congress and signed into law on May
22, 2009. That legislation again recognized the movement of illegal funds through
prepaid access.
"Congress enacted the requirements of the CARD Act because of the potential to
substitute prepaid access for cash and other monetary instruments as a means to
smuggle the proceeds of illegal activity into and out of the United States, as
various reports and cases have suggested. In a May 13, 2009 statement, Senator
Collins, introducing the amendment that added Section 503 to the CARD Act,
stated:
[S]tored value cards have been used and are being used by Mexican drug cartels
to smuggle their drug revenues back to Mexico. The Department of Justice
estimates that up to $24 billion in cash is smuggled into Mexico each year from
1U.S Department of the Treasury, (2007). 2007 National Money Laundering Strategy. Washington, DC: U.S Department of
the Treasury, p.39.

the United States and these stored value cards are one of the means by which the
cash is smuggled back into Mexico. Stored value cards can be loaded
anonymously by individuals who are involved in criminal enterprises, such as
drug trafficking. The cards are then physically smuggled across the border and
can be used to withdraw large quantities of cash from ATMs.2
Clearly, the US Congress, along with other federal law enforcement groups is concerned
that when moving money earned from the sale of narcotics across the border and out of
the US, transnational criminal organizations are substituting prepaid access products, in
place of bulk cash. Because Bitcoin is a digital cash product and shares many of the same
features of prepaid cards, it is reasonable to conclude that Bitcoin convertible virtual
currency, in the hands of transnational criminal organizations, poses a similar risk of
being used for the illegal & anonymous cross border transfer of funds.
FinCEN seeks to eliminate anonymous international flows of money by identifying the
vehicles, including prepaid access, which enable these illegal cross-border transfers. The
US Treasury Department was a key proponent of the BSA, in advocating closing the
"prepaid card loophole" in border reporting requirements.
Since the 1970's, all persons crossing the border in or out of the United States have had to
report cash and monetary instruments exceeding $10,000. This is accomplished using
FinCEN Form 105, the Report of International Transportation of Currency or Monetary
Instruments (CMIR).
In order to combat the flow of illegal funds leaving the US, which have been loaded onto
prepaid debit cards, new regulations were recently added including tangible prepaid
access devices to the list of currency and monetary instruments that consumers must
report.
In 2011, FinCEN amended the regulations issued under 31 U.S.C. 5316, namely
the definition of "monetary instrument" at 31 CFR 1010.100(dd) and the
international transport of currency and monetary instrument reporting requirement
at 31 CFR 1010.340, to include tangible prepaid access devices. FinCEN's
expanded legal definition of monetary instruments includes items deemed to be
"similar materials."3
Prepaid access devices are similar material to the items listed in the definition
of a monetary instrument in 31 U.S.C. 5312(b)(3), "travelers checks, bearer
negotiable instruments, bearer investment securities, bearer securities, and stock
2

U.S Department of the Treasury, (2014). 31 CFR Part 1010 RIN 1506-AB13 Financial Crimes Enforcement
Network; Amendment to the Bank Secrecy Act Regulations - Definition of "Monetary Instrument". Washington, DC:
U.S Department of the Treasury, FinCEN, p.5.
ibid

with title passing upon delivery," in that they can be used as a substitute for
currency, the funds they provide access to are accessible by the bearer of the
device, and they can be transferred from person to person without a record of the
chain of title. 4
Travelers would therefore be obliged to aggregate any value that can be
accessed through such a tangible device for purposes of determining if they
have crossed the $10,000 threshold and required to submit the relevant report
(FinCEN Form 105, known as a CMIR). See 31 CFR 1010.340.5
One of the main purposes behind the updated BSA reporting requirements was to
facilitate the traceability of US currency and currency equivalents [prepaid access]
illegally moving across the US border and out of the United States.
FinCEN Director James H. Freis, Jr. stated, FinCEN prepaid access regulations
also provide a balance to empower law enforcement with the information needed
to attack money laundering, terrorist financing, and other illicit transactions
through the financial system while preserving innovation and the many legitimate
uses and societal benefits offered by prepaid access.6
However, because of Guidance released by FinCEN on March 18, 2013 in document
FIN-2013-G001, a seemingly contradictory situation has emerged for Bitcoin convertible
virtual currency.
The subject of the Guidance was the Application of FinCEN's Regulations to Persons
Administering, Exchanging, or Using Virtual Currencies such as Bitcoin. This Guidance
exempts Bitcoin from being regulated as prepaid access. This would appear to contradict
both the 2009 and the 2011 earlier attempts at expanding CMIR regulations in order to
better regulate the cross border movement of funds valued at over $10,000.
Here is text from the FinCEN document FIN-2013-G001
The Financial Crimes Enforcement Network ("FinCEN") is issuing this
interpretive guidance to clarify the applicability of the regulations implementing
the Bank Secrecy Act ("BSA") to persons creating, obtaining, distributing,
exchanging, accepting, or transmitting virtual currencies
In contrast to real currency, "virtual" currency is a medium of exchange that
operates like a currency in some environments, but does not have all the attributes
of real currency. In particular, virtual currency does not have legal tender status in
any jurisdiction. This guidance addresses "convertible" virtual currency. This type
4

ibid

Morgan, R. (2011). Cash, Bearer Bonds, or Cell Phone? FinCEN Proposes to Expand Obligations under CrossBorder Reporting Rule. [Blog] Payment Law Advisor. Available at:
http://www.paymentlawadvisor.com/2011/11/03/cash-bearer-bonds-or-cell-phone-fincen-proposes-to-expandobligations-under-cross-border-reporting-rule/ [Accessed 4 Nov. 2014].
Santangelo, B., Mosher, D., Friedman, W. and Truax, M. (2012). FinCEN issues final rules relating to money
services business (MSB) definitions. Journal of Investment Compliance, 13(1), pp.17-22.

of virtual currency either has an equivalent value in real currency, or acts as a

substitute for real currency.
A person's acceptance and/or transmission of convertible virtual currency cannot
be characterized as providing or selling prepaid access because prepaid access is
limited to real currencies.
...FinCEN's regulations define "prepaid access" as "access to funds or the value of
funds that have been paid in advance and can be retrieved or transferred at some
point in the future through an electronic device or vehicle, such as a card, code,
electronic serial number, mobile identification number, or personal identification
number." 31 CFR 1010.100(ww). Thus, "prepaid access" under FinCEN's
regulations is limited to "access to funds or the value of funds." If FinCEN had
intended prepaid access to cover funds denominated in a virtual currency or
something else that substitutes for real currency, it would have used language in
the definition of prepaid access like that in the definition of money transmission,
which expressly includes the acceptance and transmission of "other value that
substitutes for currency." 31 CFR 1010.100(ff)(5)(i).7
This new FinCEN guidance appears to contradict existing attempts to expand the
reporting requirements and financial regulations which trace the movements of currency
and its equivalents across US borders.
Mr. James A. Dinkins, Executive Associate Director, Homeland Security Investigations
further muddied the water and confirmed this in a letter to Mr. James H. Freis, Jr.,
Director, Financial Crimes Enforcement Network on April 9, 2012. It read:
E. Should the border declaration apply to codes, passwords and other
intangibles as well as to any tangible object that is dedicated to accessing
prepaid funds?
HSI believes that border declaration should not apply to codes, passwords and
other intangibles.
Identification and verification of intangibles in the context of border enforcement
poses logistical and potential legal issues that are not contemplated by currency
and monetary instrument declaration regulations. The structure of the currency
and monetary instruments declaration regime, hinges on the existence of a
physical object. The language requires something that can be passed from one
individual to another in order to be presented to a third party for
execution/payment.
a) Should it only apply to cards or also to cellphones, keyfobs, or other
tangible objects that include a device that enables them to function in a
7

U.S Department of the Treasury Financial Crimes Enforcement Network, (2014). Guidance FIN-2013-G001
Application of FinCEN - Regulations to Persons Administering, Exchanging, or Using Virtual Currencies.
Washington, DC: U.S Department of the Treasury, p.1.

similar manner to "swiping" a magnetic stripe card?

Border declaration should apply to cell phones, key fobs, or other tangible objects
when these objects are associated with a prepaid account. These products
represent the evolution of value delivery systems from cash to other forms which
assure the authenticity of the value associated with the product, while providing
increased access and personal security to the users. As with cards; the application
of the border declaration requirement should be determined by the prepaid nature
and liquidity of the product, rather than the delivery system.8
One can conclude from the interpretation of this guidance, that Bitcoin convertible virtual
currency is a decentralized financial tool that makes it possible to easily circumvent the
federal currency and monetary instrument reporting requirements and the original intent
of BSA regulations.
Example one:
A person crossing the US border from El Paso to Juarez must report an amount of
cash or prepaid cards in excess of $10,000 in their possession. However, a person
in El Paso that uses $25,000 of cash and buys Bitcoin can transfer that value over
the border to a buyer in Mexico with no reporting or supervision. The buyer can
also keep the value concealed in a USB drive stored in his pocket and legally
walk across the border without declaring the value. The value representing
Bitcoin, can also be printed on a paper wallet then carried or mailed across the
border into Mexico without any reporting.
Example two:
An Islamic extremist can fly into the Los Angeles from Africa with $500,000 in
Bitcoin, to fund a terror attack, concealed in a file on the SDHC memory card
loaded into his camera. He is not required to declare he is carrying $500,000 US
dollars worth of Bitcoin because Bitcoin funds are not considered prepaid access.
The criminal traveling across the border with $11,000 of unreported prepaid cards
is committing a crime. The terrorist with $500,000 in unreported Bitcoin is
traveling legally and would have no issues passing through US Customs without
declaring that value.
Example three:
Each week in 4 major American cities, cash proceeds from criminal activity is
exchanged into Bitcoin. Unlicensed sellers of Bitcoin in each city have weekly
arrangements with regular cash buyers and profit during this above market resale
of Bitcoin for cash. At the end of each week, these 4 anonymous Bitcoin buyers in
each city, transfer or funnel this newly acquired Bitcoin to wallets controlled by
associates Los Angeles. The funds are then copied onto a laptop of a courier
flying from LAX into Mexico City each week.
8

Dinkins, J. (2014). FINCEN-2011-0003-0016. 1st ed. [pdf] Washington, DC: U.S. Office of Homeland Security,
pp.1-3. Available at: https://www.scribd.com/doc/249160458/FINCEN-2011-0003-0016 [Accessed 4 Nov. 2014].

There are no federal or state laws in American which supervise or regulate value moving
in and out of Bitcoin wallets. Further there are no requirements to maintain a history of
transactions. Even though Bitcoin has very similar features to cash and in America there
are very strict rules governing the movement of cash, Bitcoin flows freely without
reporting or record keeping requirements.
More importantly, there is no reporting or supervision of the Bitcoin-for-cash sales
conducted by unlicensed Bitcoin agents in the US. Any weekly movement of Bitcoin
funds across the US border into Mexico is invisible to law enforcement. This is a
dangerous financial service and likely to grow because of the profitability to the Bitcoin
sellers and the safety it offers to those moving illegally obtained and unreported funds
across the border.
The legal exclusion of Bitcoin from the CMIR is a mistake. In order for a healthy and
legal Bitcoin consumer market to develop in the United States, those individuals and
businesses engaged in US Bitcoin activity should remain focused on the spirit of the law
and not the loopholes which permit illegal activity. Becoming properly licensed under the
Money Service Business and Money Transmitter regulations should be the goal every US
Bitcoin user and enterprise. At present, easily avoiding these laws is very common and
creates a substantial risk for the US.
Because of the anonymous nature of numbered Bitcoin wallets, anyone can be the owner
of the account. Because of Bitcoin's decentralized nature, there are no legal connections
between the owner of a wallet address and a verified individual. Ownership of a wallet
can transfer in just a moment from one person to another.
There is currently no accessible land or computer based record of ownership or system of
identity documents that make it possible to link an individual to a specific wallet address,
which could later represent a legal chain identifying the actual owner for that wallet.
Example: Wallet address, 1N9SN3vAArSwYjQixuBBiTKDsNJtRgnAae, which is owned
and used Fred Smith, can be instantly given to Judy Jones one night in a bar. This offers
no provable history of that wallets ownership.
Bitcoin is electronic cash minus the US regulatory supervision, reporting requirements
and state level regulations of a cash product, a bank issued monetary instrument or a
prepaid card. Industry participants, such as online Bitcoin payment processors treat
Bitcoin as an online electronic method of payment, however, its features require
supervision and reporting as a cash type of product. The current federal and state laws
governing Bitcoin ownership, transactions and cross-border movements are woefully
inadequate.
The United States has restrictions on moving bulk cash (amounts of $10,000 and higher)
within the US and across US borders. However, there are no restrictions on the
movement or payment of Internet based digital currency products such as Bitcoin

throughout the US or across any US border.

The Issue with cross-border Bitcoin transfers.
If a person were to deposit $8,000 in twenty dollar bills each day for a week or more
through multiple bank branches of the same major US bank, this activity would very
likely trigger the filing of a Suspicious Activity Report (SAR) as required by law. The
bank's software would have flagged the higher than normal multiple cash deposits and the
bank would report that activity as suspicious.
Yet, any person or group can anonymously transfer $4,000,000, or more, in Bitcoin each
week from anonymous wallets in New Jersey and New York across the US border into
wallets located in Culiacan, Mexico. These anonymous cross-border money flows go
completely unnoticed by all banks, US Financial Regulators and law enforcement
agencies.

There are laws regulating the movement of cash funds across national borders. (+
$10,000 cash)
There are laws for reporting the large movement of cash in any business
transaction.(SAR $2,000+ CTR $10,000+)
There are laws requiring business persons to reports large transactions of cash in
the course of everyday business (Form 8300).
There are no laws governing the movement of Bitcoin in any of these
situations.

Moving Cash from US to Mexico.

Cash funds located in the US can be used to purchase Bitcoin from individuals found
through communities such as http://www.meetup.com and https://localbitcoins.com/ plus
a number of other online Bitcoin services, forums and groups.
One such connection service is LocalBitcoins.com https://localbitcoins.com/
[text from the website]
Buy and sell bitcoins near you
Instant. Secure. Private.
Trade bitcoins in 6820 cities and 231 countries including United States.9
Across the United States in both large and small cities, Bitcoin buyers and sellers are
connecting and completing private transactions. Without exception, in every American
city, anyone can make a connection through a local group and buy Bitcoins with cash.
Outside of the US, connections are also taking place in cities around the world.
As a part time or full time job, private individuals residing in the US have been engaging
in the online purchase of Bitcoins in the marketplace either from a recognized exchange
company, a foreign trading company, a large off market OTC seller or retail digital
currency business. The purchase is made at or below market prices generally using a bank
wire transfer and that individual will then attempt to resell the Bitcoins in a local face-to9

LocalBitcoins.com, (2014). Index Page. [online] Available at: https://localbitcoins.com/ [Accessed 4 Dec. 2014].

face cash transaction at a marked up price. This is a profitable method of trading and a
steady business in the US. Individuals with a good supply of cash or Bitcoins, along with
some negotiating skills can generally make a living buying and reselling Bitcoin in their
local market.
Cash buyers will often pay higher than market prices for Bitcoins and regular weekly
business arrangements are common. This private transaction between local cash buyers
and unlicensed, unregulated Bitcoin sellers leaves no transaction history, generates no
Form 8300, SAR or CTR activity and requires no formal identification of the buyer or
seller. The sellers are not licensed as money transmitters nor do they operate as money
service businesses. Even if these two parties have verbal agreements to buy and sell using
bulk cash each week, these transaction go unreported.
Scenario:
Instead of the bulk cash smuggling of $100,000 - $300,000 in small US notes into
Mexico, illegally obtained proceeds from drug sales can easily be exchanged into
Bitcoin and instantly transferred across the border or around the world.
Transactions on localbitcoins.com are organized and widespread. Each day, in major US
cities and areas, the website localbitcoins.com helps to match buyers with sellers. Anyone
can simply visit the web site, enter a zip code, an amount of money, the method of
payment, and be matched with Bitcoin buyers and sellers.
7 large metropolitan cities in the US were chosen at random and those cities were entered
into localbitcoins.com requesting in person cash buys of Bitcoin in the amount of
$3500. In each case, hundreds of connections were instantly arranged with Bitcoin sellers
in those major cities that would locally accept cash in person.
In this instance, the individuals exchanging cash for Bitcoin were unlicensed, unsupervised and do not report large or suspicious cash transactions as required by law.
These buyers and sellers do not file suspicious activity reports (SAR) or currency
transaction reports (CTR) as required of licensed money service businesses and money
transmitters. These sales circumvent FinCEN regulations which expose the transfer of
large amounts of illegal cash.
Bank Records and Foreign Transactions Act of 1970 (BSA) requires financial
institutions to record (Title I) requires financial institutions to create and retain
records relating to domestic and international fund transfers in amounts of $3000
or more. The requirements are detailed and vary depending on whether the wire is
conducted through a bank or through a nonbank financial institution.
In the case of financial institutions, the requirement applies to deposits,
withdrawals, and exchanges of currency, or other payments or transfers by,
through, or to a financial institution in a banking day involving a transaction (or
multiple transactions by or on behalf of the same person) in currency exceeding
$10,000. If the aggregate amount of cash exceeds $10,000, then the financial
institution must file a CTR. In the case of casinos, it applies to any "cash in" or

"cash out" transaction involving more than $10,000. By volume, the

approximately 16,000,000 CTRs that are filed each year.10
These individuals are required to be licensed and regulated but fail to do so and the
website business, localbitcoins.com has no supervision or regulations requiring the
buyers and seller to be regulated.
The website also does not use any software that could aggregate total daily transactions
on its members and no identification of cash buyers is required. LocalBitcoins.com offers
no anti-money laundering program (AML) and does not have a know your customer
(KYC) in program for cash transactions, nor is there a stated AML policy on the website.
Many offers were discovered to sell Bitcoin, for cash, at the $9,000 to $9,999 level.
These appear to be obvious attempts to structure cash purchases below required reporting
level. Cash sales at this ($9,000) level were found in every major city that was
researched. An additional problem is exposed by these sales when one buyer can circulate
through multiple sellers accumulating 4-10 times the amount of cash per day that would
require reporting. However, the website and business offers no possible way to aggregate
or present a total of accumulated transactions that have occurred during one business day.
Additionally, reporting levels for suspicious activity reports (SAR) of $3,000 in cash can
easily be circumvented. Many $2,900 transactions were possible without any report of
suspicious activity. Many cities had Bitcoin sellers advertising a maximum sale of $3000,
$2,999 or $2,900. This is at or below the required reporting level of $3,000.
Presented here were the available amounts of Bitcoin from sellers in the major cities
which could be purchased in person using cash only.
Los Angeles, California
Date of cash purchase was 11/18/2014 approximately 2-3pm PST. Total possible cash
purchases available for that day were:
30,000
20,000
9,000
9,000
2,000
40,000
4,000
5,000
10,000
10,000
4,500
10,000
9,000
10,000
20,000
10 Linn, C. (2010). REDEFINING THE BANK SECRECY ACT: CURRENCY REPORTING AND THE CRIME OF

STRUCTURING. Santa Clara Law Review, [online] 50(2), pp.412-413. Available at:
http://digitalcommons.law.scu.edu/cgi/viewcontent.cgi?article=1058&context=lawreview [Accessed 14 Nov. 2014].

9,999
9,000
9,000
9,000
9,999
10,000
20,000
10,000
9,999
1,000
3,300

========
$ 293,797
More than $293,000 in Bitcoin could have been purchased with cash on this one day in
the Los Angeles area. 11/18/2014
San Diego, California
Date of cash purchase was 11/18/2014 approximately 2-3pm PST. Total possible cash
purchases available for that day were:
9,999
2,999
9,000
9,999
8,000
27,500
9,900
9,000
9,000
9,000
4,599
6,000
6,000
9,000
2,000
4,000
9,000
5,000
9,000

========
$ 158,996
More than $158,000 in Bitcoin can be purchased with cash on this day in the San Diego
area. 11/18/2014
San Antonio, Texas area (including Houston).
Date of cash purchase was 11/18/2014 approximately 2-3pm PST.
Total possible cash purchases available were:
3,000
4,500
6,000
2,500
3,000
5,000

5,000
2,000
50,000
40,000
10,000
1,000
10,000
1,000
8,000
5,000
2,000
9,900
3,000
2,680

========
$ 173,580
More than $173,000 in Bitcoin can be purchased with cash on this day in the San Antonio
area. 11/18/2014
Brooklyn, NY
Date of cash purchase was 11/19/2014 approximately 7am EST.
Total possible cash purchases available were:
2,000
9,999
1,000
5,000
9,999
6,000
2,900
4,500
10,000
5,000
2,900
9,999
10,000
10,000
10,000
10,000
8,000
10,000
10,000
9,000
4,800

========
$ 151,097
More than $151,000 in Bitcoin can be purchased with cash on this day in the Brooklyn
and New York City area. 11/19/2014
Baltimore, MD and Philadelphia areas
Date of cash purchase was 11/19/2014 approximately 7am EST. Total possible cash
purchases available were
30,000

1,000
25,000
9,000
5,000
30,000
2,999
1,000
3,000
1,500
2,000
12,000
2,000
2,000
3,000
5,000
3,000
3,000
3,000
3,000
1,200
3,000
3,000
9,000
2,000
9,000

========
$ 173,699
More than $173,000 in Bitcoin can be purchased with cash on this day in the
Baltimore/Philadelphia areas. 11/19/2014
Miami, FL and South Florida areas.
Date of cash purchase was 11/19/2014 approximately 7am EST.
Total possible cash purchases available were
1,000
25,000
10,000
4,500
1,000
1,000
3,000
4,000
1,000
5,000
1,000
3,000
1,000
1,000
3,000
4,000
50,000
1,000
25,000

========
$ 144,500

More than $144,000 in Bitcoin can be purchased with cash on this day in South Florida.
11/19/2014
Seattle, WA area (including just over the US/CA border)
Date of cash purchase was 11/19/2014 approximately 6am PST. All prices in USD unless
otherwise noted. Total possible cash purchases available were:
9,000
9,000
5,000
5,000
9,500
5,000
5,000
1,000
7,500
3,000
1,000
10,000 CAD
9,800
73,424 CAD
1,000
1,000 CAD
1,000 CAD
5,000 CAD
9,000 CAD

========
$ 70,800 USD + $ 99,424 CAD = Total value of cash buys in USD
$ 70,800 + $ 87,742= $ 158,542
More than $158,000 in Bitcoin can be purchased with cash on this day in the Seattle area.
11/19/2014
Greater Atlanta, GA area
Date of cash purchase was 11/19/2014 approximately 10am EST. Total possible cash
purchases available were:
1,000
10,000
2,000
2,000
9,000
9,000
3,000
1,000
3,000
1,000
6,000
3,000
3,000
3,000
6,000
3,000
2,000
3,000
6,000

1,000
9,000
9,000

========
$ 95,000
More than $95,000 in Bitcoin could be purchased with cash on this day in the greater
Atlanta, Georgia area. 11/19/2014
Text from the LocalBitcoins.com website:
"Real name is not required in local cash trade or safe online payment methods."
"Real name is not required when selling bitcoins."11
The Form 8300 Requirement
(Report of Cash Payments Over $10,000 Received in a Trade or Business - FinCEN,
Form 8300, OMB No. 1506-0018, Department of the Treasury, Financial Crimes
Enforcement Network - IRS Form 8300, Department of the Treasury Internal Revenue
Service)
The US Treasury Department along with Federal Law Enforcement Agencies is
concerned with unreported large cash transactions in America. As referenced by Form
8300 even car dealers, real estate agents and attorneys are required to report more than
$10,000 changing hands.
The BSA requires certain nonfinancial trades and businesses to report the receipt
of more than $10,000 in currency in the sale of goods or services. This is the socalled "Form 8300" requirement-a reference to the name of the form commonly
used by filers such as automobile dealers, real estate closing agents, and attorneys
to report large currency transactions. The Form 8300 report has four parts. Part I
requires the filer to identify the person from whom the cash was received. Part II
requires information about the person or persons on whose behalf the transaction
was conducted. Part III requires a description of the transaction itself-i.e., the
date, time, nature of the currency, and amount of the transaction. Part IV requires
information about the business participating in the transaction." The Form 8300 is
unique among BSA reports in that it doubles as a kind of SAR form as well.12
Yet, every day in America, hundreds of thousands of dollars can be quickly and quietly be
exchanged for Bitcoin convertible virtual currency. The source of the cash is unknown,
the end users (The receivers) and final destination of the virtual currency is unknown, and
the transactions go unreported. Furthermore, large amounts of Bitcoin moving across the
US border go unreported.
The situation raises some important questions.
11
12

Localbitcoins.com, (2014). Real name policy on LocalBitcoins. [online] Available at:

https://localbitcoins.com/guides/real-name [Accessed 10 Nov. 2014].
Linn, C. (2010). REDEFINING THE BANK SECRECY ACT: CURRENCY REPORTING AND THE CRIME OF
STRUCTURING. Santa Clara Law Review, [online] 50(2), pp.412-413. Available at:
http://digitalcommons.law.scu.edu/cgi/viewcontent.cgi?article=1058&context=lawreview [Accessed 14 Nov. 2014].

1. Engaged in matching Bitcoin buyers with sellers, is LocalBitcoins.com

required to operate as a money service business?
2. Without FinCEN registration and the proper money transmitting licenses, is
LocalBitcoins.com operating legally?
3. Is this yet another example of new disruptive technology, when paired with
some simple html, circumvents old outdated financial regulations?
Compared with P2P Lending
Peer-to-Peer online lenders such as Prospers, which match lenders with borrowers, are
required to be licensed as money transmitters and operate as money service businesses.
However, such companies directly engage in sending and receiving payments on behalf
of customers.
Compared to Travel and Rental Companies
A company such as Airbnb that matches travelers with open rentals is also required to be
registered and properly licensed. However, this business directly handles all payments
between parties. In fact, all customer payment transactions "must" take place through the
Airbnb website. The company transacts online payments through various currencies and
payout methods. (California Money Transmitters License #2508)
LocalBitcoins.com as a Money Service Business?
LocalBitcoins.com directly accepts Bitcoin value and transfers that value on behalf of its
clients (transferred through online wallets maintained at www.localbitcoins.com).
The fact that LocalBitcoins.com arranges transactions between buyer and seller of a
financial product, then transfers Bitcoins on behalf of its customers, may cause FinCEN
to determine that LocalBitcoins.com is operating as an money service business and
require proper registrations and licensing across the US. Escrow services and online bill
pay (quick sell form) may also further qualify the operation as a money service business.
Certainly, those individuals buying and selling Bitcoin through the website as agents are
required to be properly registered and licensed, however fail to do so.
In recent administrative rulings, FinCEN has tried to clarify the regulations and help
identify exactly which Bitcoin businesses are required to be registered and which
companies are exempt. One of these letters explains that a business which matches
Bitcoin buyers & sellers is required to obtain proper licensing. FinCEN makes it clear
that such companies may be considered money services businesses under US law.
However, the ruling is focused on one specific case, not LocalBitcoins.com, and that
ruling may or may not extend to LocalBitcoins.com.
On October 27, 2014 the US Department of the Treasury Financial Crimes Enforcement
Network issued two administrative ruling letters. These are FIN-2014-R011 and FIN2014-R012

The subject of the letters was: Request for Administrative Ruling on the Application of
FinCENs Regulations to a Virtual Currency Trading Platform
FIN-2014-R011:
This responds to your letter of December 3, 2013, seeking an administrative
ruling from the Financial Crimes Enforcement Network (FinCEN) on behalf of
[ ] (the Company), about the Companys possible status as a money services
business (MSB) under the Bank Secrecy Act (BSA). Specifically, you ask
whether the convertible virtual currency trading and booking platform that the
Company intends to set up (the Platform) would make the Company a money
transmitter under the BSA. Based on the following analysis of the description of
the Platform as presented in your letter, FinCEN finds that the Company would be
a money transmitter pursuant to our regulations.
You state in your letter that the Company wishes to set up a Platform that consists
of a trading system (the System) to match offers to buy and sell convertible
virtual currency for currency of legal tender (real currency), and a set of book
accounts in which prospective buyers or sellers of one type of currency or the
other (Customers) can deposit funds to cover their exchanges.13
From this ruling, FinCEN policy division associate director Jamal El-Hindo clearly states
that such Bitcoin businesses fall under the definition of a money transmitter. This letter
further details the movement of customer funds through the company in connection with
transactions. It should be read and interpreted very carefully.
Selling Bitcoin for Cash Deposit
Here is text from an individual agent selling Bitcoins and receiving cash deposits
(payments) into an individual Bank of America account.
The LocalBitcoins.com website reads:
Third party deposit at Bank of America:
"Go inside any Bank of America or 1st Convenience and fill out a deposit slip
with my account information. ONLY DEPOSIT CASH."14
Consequently, an unlicensed Bitcoin seller using individual or multiple Bank of America
accounts plus other national banks, can accept cash deposits from strangers and transmit
Bitcoin in 30-40 different states without any registration or supervision.
Once the cash proceeds of crime are converted into Bitcoin, the virtual currency can
instantly be transferred out of the US and sold (converted back to national currency)
13

US Department of the Treasury Financial Crimes Enforcement Network, (2014). FIN-2014-R011 Subject: Request
for Administrative Ruling on the Application of FinCEN - Regulations to a Virtual Currency Trading Platform.
Washington, DC: US Department of the Treasury, pp.1-7.
14 Localbitcoins.com, (2014). Buy bitcoins online in from cylon5: Cash deposit: INSTANT Bank of America, 1st
Conven. (Open Sun.). [online] Available at: https://localbitcoins.com/ad/98552/purchase-bitcoin-cash-deposit-instantbank-of-america-1st-conven-open-sun-united-states [Accessed 4 Dec. 2014].

through a non-US exchange agent or trading company. The proceeds could then be wired
to any bank account in the world or withdrawn by debit card from ATMs located in
almost any country in the world.
Layering with Bitcoin
Layering is a technique used in the laundering of money. The cash proceeds of crime can
also be moved through Bitcoin and layered by using multiple digital currency products. If
the end user (receiver) so desires, the incoming Bitcoin can easily be exchanged into
another digital currency product, such as PerfectMoney, which may offer more liquidity
in certain countries and thus make the transferred funds more accessible. This additional
exchange into another digital currency product adds another foreign exchange agent
transaction and another jurisdiction to the task of tracing the movement of funds around
the globe. This type of exchange is discussed further in the paper.
Stopping this entire chain of funds should be accomplished in the US at the point where
Bitcoin is exchanged. However, the strict regulations for exchange agents selling Bitcoin
for cash go un-enforced in the US.
This problem of digital currency being sold to unknown parties through anonymous cash
deposits into local bank accounts is not new.
Before their now infamous Liberty Reserve money laundering case, two of the primary
operators, Vladimir Kats and Arthur Bubovsky owned www.goldage.com a very popular
digital currency exchange located in Brooklyn, New York.
Here is text from the press release provided by the New York County District Attorney
regarding their 2006 operation and arrests. Please note the sale of digital currencies for
cash deposited into local NY accounts.
Goldage.net Indicted NYC
DISTRICT ATTORNEY - NEW YORK COUNTY
News Release
July 27, 2006
Contact: Barbara Thompson 212.335.9400
Manhattan District Attorney Robert M. Morgenthau announced today the
indictment of two people on charges of operating an illegal money transmittal
business. Eight subsidiary businesses operated by the defendants have also been
indicted.
The defendants are ARTHUR BUDOVSKY and VLADIMIR KATS. The
defendants illegal money transmittal business is GOLDAGE INC. Also indicted
today are other companies operated by BUDOVSKY and KATS: GOLDAGE
HOLDING INC., ECSN INC., EXECUTIVE COMMERCIAL SERVICES INC.,
INTERNETWORK MANAGEMENT INC., GGN INC., B TO B
MARKETPLACE INC. and MGA INTERNATIONAL INC. The defendants

operated out of their Brooklyn apartments.

The indictment charges that the defendants operated an illegal money transmittal
business that received and transmitted $4 million between January 1, 2006 and
June 30, 2006. The investigation leading to todays indictment determined that
GOLDAGE (www.goldage.net) was set up by BUDOVSKY and KATS in 2002,
and at least $30 million was illegally transmitted to accounts worldwide since the
start of the defendants illegal activities. BUDOVSKY and KATS allowed
individuals to open accounts at GOLDAGE with limited documentation of
identity. The investigation is continuing into the identity of the defendants
customers and the source of customers funds.
The investigation revealed that individuals would open an online GOLDAGE
account. Then, customers instructed the defendants to purchase an amount of EGold for their accounts. Customers could also choose their method of payment to
GOLDAGE. Specifically, they could wire money, make cash deposits or mail
postal money orders and checks. BUDOVSKY AND KATS maintained various
bank accounts under the guise of different defendant subsidiary companies: For
example, GOLDAGE HOLDING INC., held accounts at Commerce Bank and
Bank of America; ECSN, INC had accounts at Citibank; EXECUTIVE
COMMERCIAL SERVICES INC., had accounts at Wells Fargo;
INTERNETWORK MANAGEMENT INC.. Had accounts at Bank of America;
GNN INC., had accounts at Wachovia; B TO B MARKETPLACE INC., had
accounts at JP Morgan Chase; MEGA INTERNATIONAL INC., had accounts at
Washington Mutual. Generally, cash was deposited into accounts at Bank of
America, Commerce and Wells Fargo, while wire transfers and postal money
orders were generally handled through accounts at Citibank and JP Morgan
Chase.
Once the defendants had purchased the E-Gold for their customers, the customers
could withdraw the money by requesting wire transfers to accounts anywhere in
the world or have checks sent to individuals anywhere in the world.
The defendants kept a fee on both ends of the transaction; E-Gold charges a socalled storage fee for holding its digital currency.
As part of the investigation, undercover investigators from the Manhattan District
Attorneys Office set up three accounts at GOLDAGE and moved money through
the defendant companies. Undercovers deposited $55,000 in cash and postal
money orders to GOLDAGE accounts and then transferred the funds to other
accounts.
Those parties acting as licensed money transmitters engaged in legal financial activity
with the public are a critical link in uncovering criminal activity. It is for this reason that
those agents are required to be licensed, maintain anti-money laundering programs, and
report suspicious activity along with large transactions. This regulated activity helps to

identify money laundering and also forces criminals to use more risky methods of
moving money. Yet, everyday, thousands of individuals across the US, operating in plain
view, are engaged in illegal money transmitting and dangerous cross border Bitcoin
exchange transactions without any licensing or supervision.
Each day, the total amount of US funds moving through non-bank digital currency
products is in the hundreds of millions and that number will only grow larger in the years
ahead.
Despite the fact that US banks have strict requirements for money transmitters and
registered money service business accounts, thousands of unregistered individuals are
acting as Bitcoin sales and exchange agents transmitting funds through personal and
company bank accounts without disclosing this activity to the bank. These exchanges
work to disguise the original source of funds, and end up completing anonymous
financial transactions on behalf of unknown international clientele.
Here is a short list of banks represented by unlicensed exchange agents transacting cash
deposits through the website LocalBitcoins.com. There is little if any due diligence on
these cash deposits and this represents third party transactions completed by unlicensed
money transmitters.
11.20.2014 from http://www.localbitcoins.com
Arvest Bank (https://www.arvest.com)
Bank of America (https://www.bankofamerica.com)
Bank West
BB&T (http://www.bbt.com)
BBVA Compass Bank (https://www.bbvacompass.com)
BAC (http://www.bankbac.com)
BMO Bank of Montreal (http://www.bmo.com)
Citigroup/Citibank (http://citibank.com)
Citizens (https://www.citizensbank.com)
Citizens Union Bank (http://www.cubbank.com)
Chase Bank (https://www.chase.com)
Capital One (https://www.capitalone.com)
Commerce Bank (https://www.commercebank.com)
Co-Op Credit Union CCU (https://www.coopcu.com)
Charter Bank (https://www.charterbk.com)
Fifth Third Bank (https://www.53.com)
Huntington (https://www.huntington.com)
JP Morgan Chase & Co (http://www.jpmorganchase.com)
HSBC (https://www.us.hsbc.com)
NB&T - National Bank and Trust (https://www.banknbt.com)
Peoples United Bank (https://www.peoples.com)

PNC (https://www.pnc.com)
Regions Bank (http://regions.com/)
SECU (State Employees Credit Union)
Suntrust (https://www.suntrust.com)
Santander (https://www.santanderbank.com)
TD Bank (http://www.tdbank.com/)
US Bank (https://www.usbank.com)
Wells Fargo (https://www.wellsfargo.com)
WoodForest National Bank (https://www.woodforest.com)
This basic list is not all of the possible combinations for cash deposits in US banks. This
list represents a one day slice of activity from a section of LocalBitcoins.com
Several individual Bitcoin buyers from this category disclosed their ability, to deposit
cash in multiple banks within an area or region. These statements were found in the
listings:
"Any bank in NYC area" as high as $10,000
"Any Major Bank" as high as $30,000
"Cash deposit: Any Major Bank" as high as $10,000
"Cash deposit: Any bank branch near me in the SF Bay Area" as high as
$8,00015
Transactions by unlicensed individuals purchasing Bitcoin convertible virtual currency by
depositing cash into a local account are occurring throughout the United States. It is
reasonable to predict that as the volume and liquidity of Bitcoin increases along with the
number of Bitcoin exchange outlets, the currency will be deluged with cross-border
transactions originating with the illegal drug trade. Because laundering money through
other popular digital currency products on a global scale has already been well
documented, it should already be a goal of law enforcement to identify this possible
future Bitcoin issue.
Without direct proof, it would be improper to assume that drug cartels are engaged in
money laundering operations using Bitcoin. Despite a lot of circumstantial evidence,
there are no published cases which reflect this situation. The liquid trading market of
Bitcoin is not yet large enough to handle the volume of cash moving south. In the recent
trade based money laundering case from Los Angeles Fashion District (Oct. 2014),
around $65 million in cash was recovered from the raids.16 At the present time, amounts
of cash this size are far too large for the Bitcoin market. However, market liquidity and
familiarity with Bitcoin will continue to grow in the months and years ahead. The
potential that any number of transnational criminal organizations will adopt Bitcoin
remains high.
15
16

Localbitcoins.com, (2014). Find bitcoin offers. [online] Available at: https://localbitcoins.com/instant-bitcoins/

[Accessed 11 Nov. 2014].
Taxin, A. (2014). Los Angeles Fashion District gets new cash reporting rules after money-laundering bust. Los
Angeles Daily News. [online] Available at: http://www.dailynews.com/general-news/20141002/los-angeles-fashiondistrict-gets-new-cash-reporting-rules-after-money-laundering-bust [Accessed 16 Nov. 2014].

Exchanging Bitcoin for other digital currency products

One of the key advantages in laundering money through multiple digital currency
products is the disappearing history of ownership and the vanishing connection to any
source of funds as digital value moves between currency products.
The GoldAge crew operated many exchange businesses including Cambist.net, which
was an automatic exchange for multiple digital currencies. While Cambist.net was in
operation, for a fee, anyone could anonymously deposit one digital currency and
withdraw another digital currency. The entire transaction took just a matter of moments.
Many instant and anonymous digital currency exchange services are in operation today
around the world. These websites include the fast exchange of Bitcoin for other digital
currency products.
Below are some examples of online services where anyone can quickly exchange one
digital currency product, including Bitcoin, for another. Some services are automatic and
the exchange occurs instantly. Others operate manually and the business completes the
transactions by hand. All of these web businesses are located outside of the US and some
are operated from Pakistan.
Below is a short list of about 40 active exchanges. Each month new exchanges appear
online. Sometimes, existing exchanges will disappear overnight. This is a very unlicensed
and unregulated area of the digital currency business.
https://p2pchange.is/ Instantaneous automatic exchange 24/7/365
https://e-scrooge.is/default.aspx
https://qcashpay.com/
https://goldux.com/
https://obmen.pm/
http://walletsexchange.com/
https://xzzx.biz/ automated
http://easypay.pk/
http://xchangerzone.com/
http://ukr-obmen.com/
https://coinomat.com/#BTC/PERFECT automatic
https://wmcash.biz/
https://e-money.su/ automated
https://www.zharifsofiaexchanger.com/ sell BTC them buy another
http://www.superchange.ru/index.php BTC BTCe
http://www.digitalchanger.com/
https://www.paymentbase.com/ BTCe
https://www.exhere.es/ sell no verification
https://xchange.cc/en/
BTC
http://e-dollar.ng/ selling BTC then buying another 2 transactions
https://magnetic-exchange.org/
https://www.alfacashier.com/ BTC, non-US proxy

http://www.xmlgold.eu/ non-US proxy

https://www.e-xchange4u.com/
https://wmglobus.com/
http://express-pm.com/
https://x-obmen.com/ No BTC but others and automated
https://naira4dollar.com/ (registration means verify a cell phone)
http://www.sahibexchange.com/
http://www.exchange-credit.ru/
http://www.africashinter.com/
https://www.cbtekghana.com/
https://buyemoney.com/
http://www.mrcashier.com/ cash out to WU
https://www.exchangegold.org/
http://www.bestexchangeonline.com/ auto
https://netex.io/en BTCe
https://24change.com/
https://solidchanger.com/
http://pakexchange.pk/
https://preexchange.com/ automated mode within 5 minutes
http://www.sonuexchange.com/
The anonymous movement of funds from Middle East countries into the US
Example Scenario: Anonymously funding a US terror attack from the Middle East
with Bitcoin.
These are simple arms length transactions through a US third party with no verifiable
source of funds and no possible identification of the original sender.
The LocalBitcoins.com site advertises on behalf of unlicensed individuals acting as
Bitcoin buyers. These buyers will complete a Bitcoin purchase by depositing cash into
local US bank branches and accounts. Bitcoin is sold and transferred to one of these
buyers and cash is anonymously deposited into third party US bank accounts.
An example transaction using this method of exchange to fund a terror attack is detailed
in this section of the paper. It's important to understand, that because there are presently
hundreds of possible Bitcoin exchange transactions and digital currency product
combinations, this scenario is just one example in thousands of possible funding
situations.
This transaction was created with an amount of cash from a foreign country being
converted into Bitcoin, transferred into the US, converted back to cash by an unlicensed
third party financial agent, then anonymously deposited to an unknown US bank account.
The Facts:
A regulated US bank account is on the receiving end of this transaction
The cash originates with a foreign national

The funds are sent from Pakistan

It's impossible to determine a source of the funds
It leaves no cross border transaction record, report or receipt identifying that
funds have crossed the US border

Much like the outcome from a Hawala transaction, the cash in these Bitcoin transfers
disappears through one foreign country then reappears in the US without any receipt of it
crossing the US border.
This funding transaction could be accomplished today through individuals advertised on
the website Localbitcoins.com or similar online referencing services matching Bitcoin
buyers with sellers in the US.
The anonymous funds in this example can originate as either national currency cash notes
or digital currency products exchanged into Bitcoin.
Scenario:
A party in Pakistan buys Bitcoin using cash (Pakistani rupee) at a local exchange service.
Example:
http://bitcoinpk.com/
Crystal Filling Station (PSO Petrol Pump)
Plot 3, Block 3, Rajput Colony, Main Rashid Minhas
Gulshan-e-Iqbal
Karachi Sindh 75300
Pakistan
+92 334 2921358
http://bitcoinpk.com
This sale of BTC for cash at this particular location is completed through software
provided by https://www.coinsafe.com/Crystal-Filling-Station/ and mobile phones.
[Text from the website]
(CoinSafe makes it easy for merchants around the world to buy and sell bitcoin at
their store locations. With our intuitive mobile software and exchange
partnerships, we help local businesses attract new customers by offering their own
Bitcoin ATM service.) 17
The original funding party in Pakistan gives the gas station operator cash and receives
Bitcoin using a mobile device. No ID is required and the transaction is completely
anonymous.
That original Pakistani party could then create an online alias with an American sounding
name (Greg Smith) and Gmail address ([email protected]). It is impossible to
verify legal Bitcoin ownership through a wallet address and this causes a huge problem
17

Coinsafe.com, (2014). Crystal Filling Station (PSO Petrol Pump) | CoinSafe. [online] Available at:
https://www.coinsafe.com/Crystal-Filling-Station/ [Accessed 4 Dec. 2014].

for the US.

Using this alias, the party then enters a sell order of Bitcoin for "cash deposit" in the US,
using one of many unregistered individuals acting as Bitcoin exchange agents, advertised
on http://LocalBitcoins.com. The Bitcoins are sold to the US agent and cash is
immediately deposited into a third party US bank account selected by the Pakistani seller
and until that point unknown by the person depositing the cash.
This is a third party transaction originating with an unknown individual's funding. The
buyer in the US has no knowledge of who is ultimately receiving the funds. Once the
cash is cleared into the account, the funds could then be bundled with other incoming
Bitcoin cash-deposit sale transaction deposits or sources and funneled into other US
bank accounts.
The end result of this Bitcoin transaction leaves cleared funds on deposit in a US bank
account readily available for withdrawal or transfer. These funds could also be instantly
withdrawn using a bank ATM card.
A series of these anonymous US currency funding transactions could be accomplished
through the same US Bitcoin buyer or multiple buyers found on LocalBitcoins.com (there
were dozens listed on this website that could perform this almost instant anonymous cash
exchange.)
Other than cash, several types of funding methods could also be used to pay for the
original Bitcoin purchase. This anonymous funding could have originated from multiple
locations, individuals and countries.
Funding of this type of Bitcoin sale can be accomplished using any of these sources.
(If you have value in any of these digital currency products, you can easily and often immediately,
exchange it or convert it to Bitcoin. Some funding sources require identifying the sender because of fraud.
As one example, stolen or hacked accounts and credit cards might be used to purchase Bitcoin. Cash
requires no name or ID.)
Apple Store Gift Card Code,
Amazon Gift Card Code,
Alipay,
AstroPay,
BPAY Bill Payment,
BTCe,
C-Gold (Commerce Gold),
Cash by mail,
CashU,
Cashier's check,
Chase Quickpay,
Dwolla,
eCoin,
Entro Money,
EPESE,
EgoPay,

fasapay,
Interac e-transfer,
Liquidpay USD/RUB,
M-PESA Kenya (Safaricom),
M-PESA Tanzania (Vodacom),
MoneyPak,
Skrill,
Money Order (Postal or otherwise),
Moneygram,
NetSpend Reload Pack,
Neteller,
OKPay,
Paxum,
Paym,
Paypal,
Payza,
Payweb,
PerfectMoney e-voucher,
PerfectMoney USD,
Paymer,
PaySafeCard,
Pingit,
PostePay,
ePayments,
Qiwi,
RedPass,
SEPA (EU) bank transfer,
SolidTrustPay,
Starbucks Gift Card Code,
Steam Gift Card Code,
Superflash,
Swish,
Tigo-Pesa Tanzania,
Transferwise,
Ukash,
Vanilla,
Venmo,
W1 USD,
Walmart Gift Card Code,
WESTERN UNION,
Yandex money

The original scenario of funds in Pakistan moving through Bitcoin leaves no direct link
between the receiver in the US and the sender in the Middle East and no source of funds.
Just as in a Hawala transaction, the sender and final receiver are mutually exclusive and
cannot be connected.
Engaging in a continuous series of Bitcoin sale transactions, as just explained, even in
small amounts of $4,000 - $5,000 dollars at a time in Bitcoin currency, could allow any
unknown party to easily accumulate $100,000 - $200,000 in US funds over a short period
of time (Two days).
Again, this transaction produced no record of funds moving across the US border, no

record or identification of sender and final receiver (first person to receive it after
crossing the border or the last person sending it before funds crossed the US border) and
no possible method to verify the source of funding (Taliban heroin sales, ISIS plundering,
extremist, charity funds, etc.) The funds originated as cash notes (Pakistani rupees) in
Pakistan sent from an un-identifiable foreign party.
In order for the funds to anonymously move across the US border, the monetary
instrument during that transaction is Bitcoin. The movement of funds goes 100%
undetected by regulatory agencies.
Even though the money is deposited into a registered US bank account, this simple, cheap
and almost instant cross-border transfer of funds completely circumvents US regulations
which are designed to monitor funds moving in and out of the United States.
Similar transactions can also take place beginning with another digital currency product
(not cash). Exchanging another brand of digital currency, or another digital currency
product, for Bitcoin through a local Pakistani service would create the same type of final
transfer.
Here is an example:
http://www.e-cash.pk/
Text from the company's website:
Welcome to E-Cash.Pk
(Our service is meant especially for those who want to safely Ecurrency with Western
Union or Money Gram. Exchange, Buy & Sell, Webmoney, Perfect Money, Bitcoin and
Egopay e-currencies Western Union or MoneyGram, Instant Loading, Exchanges
between e-currencies. Thanks to us, you will be able to exchange Perfect Money, EgoPay,
Webmoney, Bitcoin and many more coming. We are WorldWide Best, Efficient and
Cheap e-Currency Exchanger.)18
Any of other type or brand of digital currency such as Perfect Money, OKPay, Egopay
can quickly and anonymously be exchanged into Bitcoin by parties domiciled in Pakistan
or anywhere in the Middle East. Generally all that is required is a smartphone. No source
of funds is ever needed and this type of third party exchange is widely permitted and
accepted. Those newly acquired Bitcoins can then be sold through an agent found on
LocalBitcoins.com, as previously described, and cash received into a US bank account.
1. The two Bitcoin sales transactions from Pakistan are:Cash, exchanged into
Bitcoin and sent to the US
2. Digital Currency products, exchanged into Bitcoin and sent to the US
Without restriction, any person residing or traveling outside of the US, may have an
account at Localbitcoins.com. Those engaged in buying and selling on LocalBitcoins.com
do not compare or check any Bitcoin client names against the Special Designated
Nationals List (SDNL) nor do they screen for customers located in financial sanctioned
18

E-cash.pk, (2014). Sell/Buy/Exchange Perfect Money, Bitcoin, Webmoney Egopay In Pakistan, Western Union,
Money Gram,. [online] Available at: http://www.e-cash.pk/ [Accessed 4 Dec. 2014].

countries.
Bitcoin wallets do not identify the legal owner of the funds. Consequently, this
responsibility falls on the agent engaged in Bitcoin financial transactions. The individuals
acting as agents on LocalBitcoins.com and other websites, forums etc. are not registered
or supervised.
Having thousands of unlicensed, unregistered and un-supervised individuals engaged in
international Bitcoin financial transactions through the US banking system is certainly a
bad idea.
There are several hundred live digital currency products accessible online. These have
been loosely organized into three types of product categories. Products can be defined as
digital currency systems, exchange agents and payment processors.
Digital currency systems operate within a closed ledger moving value back and forth for
customers. Generally, adding funds to this kind of system is accomplished through a third
party agent exchanging value on behalf of the user. However, there are some active
companies today that accept direct funding.
Exchange agents are responsible for exchanging national currency into digital currency
and also exchanging various brands of digital currency into other brands of digital
currency products.
A final category of digital currency products is the payment processor. Payment
processors are the most advanced and generally the most regulated of all these products.
The payment processor can accept national currency for deposit into a digital account,
buy and sell digital currency (in exchange for national currency deposits), exchange
various digital currencies for other brands of digital currency and finally arrange a
national currency withdrawal into regulated bank products such as a bank account or a
debit card.
The reason for identifying and loosely defining these categories is to show the wide
variety of money laundering options available today within the digital currency universe.
A majority benefit using digital currency as a money laundering tool is the ease at which
criminals can engage in layering.
The primary purpose of layering is to separate the illicit money from its criminal source
or origin. Layering of digital currency transactions means obscuring any audit trail and
severing any link with the original crime that produced the currency.
If a regulated bank product, such as an overseas wire transfer to a US checking account,
was identified as being linked to the proceeds of a crime, those funds could easily be
electronically traced back to the original source (or at least the owner of record).
Many digital currency products operating from jurisdictions outside of the US do not

require full identification of account holders. Additionally, as the case with Bitcoin,
digital currency accounts rarely require full government identification and verification of
the individual owner.
Consequently, one digital currency that is exchanged for another digital currency product
leaves an untraceable path for anyone investigating the original source of funds.
Complicating matters even further, if each digital currency company is domiciled in a
different jurisdiction this creates an enormous strain on law enforcement agencies when
attempting to investigate the illegal transfer of funds.
Example one:
The proceeds and profit from the sale of narcotics on a Silk Road type online drug bazaar,
funds which originate in Bitcoin, are exchanged into Commerce Gold https://c-gold.com/
operating from Malaysia. The exchange of digital currency products occurs through a
popular automatic and semi-automatic currencies exchange agent, 24change
(https://24change.com/) which is operating from Russia.
The balance in Commerce Gold is then exchanged into Perfect Money, which operates
from Russia. This c-gold to PM exchange was performed by yet another independent
exchange agent in Pakistan, Ebuy Exchange, (http://ebuyexchange.com/) [C-gold USD
to Perfect Money / EgoPay USD ]
The end result of this chain is an easy to create but complex web of layering. The original
source of the funds is obscured and the ending balance is liquid and available in another
digital currency product. Funds can now be anonymous exchanged into cash, wired to a
bank or loaded onto a debit card. These funds can be cashed out without any worry of
being traced back to their original source.
Here is the chain of ownership from start to finish.
1. Proceeds of crime received in a Bitcoin wallet.
2. Funds are exchanged in Commerce Gold, a company that operates from Malaysia.
3. The exchange was handled by 24change which is an organization operating from
Russia.
4. The Commerce Gold balance is then exchanged into Perfect Money, another
organization operating from Russia.
5. This final exchange is handled by Ebuy Exchange, operating from Pakistan.
These proceeds of drug sales have moved through multiple digital currency products
located in multiple jurisdictions. The various agents for each exchange were also located
in additional jurisdictions and those parties are known to operate through multiple
corporate organizations and businesses.
Please note that even as the original Bitcoin owner was residing in the US, none of the
digital currency issuers or the exchange agents are registered money transmitters or
operating as money service businesses. Nor are any of them registered with FinCEN.
Tracing these funds back to an original source would be a monumental and likely
impossible, task for any local law enforcement agency.

The scary component in these transactions is the sheer number and variety of un-witting
US banks and branches which are made available to any anonymous Bitcoin seller. Quite
literally, one can send funds almost door-to-door from anywhere in the Middle East to
any small town or large city in the US leaving no trace of the original sender and no
source of funds.
One example from the LocalBitcoins.com website 11/19/2014, one of the many, was an
individual using the nickname CASH_TO_CRYPTO.19 This un-monitored individual will
accept Bitcoin digital currency delivered into his wallet from any person operating from
anywhere in the world. No identification on the sender is required, nor is any source of
funds documentation. Once an amount of Bitcoin is deposited into the US buyer's online
Bitcoin wallet, he will anonymously make a cash deposit to any unknown third party
bank account designated by the sender, at any of the following US banks including one
PNC bank branch in Canada.
1. Wells Fargo - Wells Fargo provides services at more than 9,000 locations across
America, more than 12,500 ATMs
2. Bank of America - Bank of America operatesbut doesn't necessarily maintain
retail branches in all 50 states of the U.S., the District of Columbia and more than
40 other countries. It has 16,259 automated teller machines (ATMs).
3. Suntrust - SunTrust operates 1,497 bank branches and 2,243 ATMs across
Southern states, including Alabama, Arkansas, Florida, Georgia, Maryland,
Mississippi, North Carolina, South Carolina, Tennessee, Virginia, West Virginia,
and Washington, D.C.
4. PNC Bank - PNC is the one of the largest banks in the United States based on
deposits and branches, operating in 19 states and Washington, D.C. PNC has
2,840 branches in the following states and a branch in CANADA. PNC Bank
Canada Branch, The Exchange Tower, 130 King Street West, Suite 2140, Toronto,
Ontario M5X 1E4, Canada
5. Co-Op Credit Union - Wisconsin: Co-op Credit Union has five full-service
locations in Wisconsin, including, Black River Falls, Fall Creek, Galesville,
Melrose, and Strum.
6. Regions Bank - Regions Bank, operates some 1,700 branches and 2,400 ATMs
across a 16-state network in the South, Midwest, and Texas.
7. BB&T Bank - Based in Winston-Salem, N.C., the company operates 1,824
financial centers in 12 states (including North Carolina, South Carolina, Virginia,
Maryland, West Virginia, Kentucky, Tennessee, Georgia, Florida, Alabama,
Indiana, and Texas) and Washington, D.C.
In February 2014, Florida State authorities announced criminal charges against two men,
advertised on LocalBitcoins.com, for selling Bitcoins in exchange for cash. Undercover
agents meet with unlicensed individuals in Florida advertised on LocalBitcoins.com and
after several purchases totaling more than $30,000 each the two were separately arrested.
19

Localbitcoins.com, (2014). Buy bitcoins online in from CASH_TO_CRYPTO: Cash deposit: CO-OP
CU,BB&T,TD,SUNTRUST,CITI,WOODFOREST(9pm est. [online] Available at:
https://localbitcoins.com/ad/108255/purchase-bitcoin-cash-deposit-co-op-cubbttdsuntrustcitiwoodforest9 pm-estunited-states [Accessed 4 Dec. 2014].

Both individuals have been charged with multiple felonies including Florida's version of
money laundering and engaging in an unlicensed money-servicing business.
Despite these high profile arrests, cash exchanges for Bitcoin are still commonplace
across the US.
Bitcoin Money Laundering
Money laundering through Bitcoin Payment Processors
Online payment processors were not designed to accept anonymous cash payments.
Online payment processors receive consumer payments in the form of checks, bank
issued electronic fund transfers, ACH, credit and debit cards. All of these payments
originate through a highly regulated banks and financial institutions.
Consumer access to these financial products requires a high degree of personal
identification and requires extensive record keeping of every penny moving through
every transaction. This important record keeping presents a history of the funds and more
importantly an accumulated history of the total money flowing through each account.
There is also forensic software within these banks and institutions which actively
examines deposits and withdrawals with the intent of preventing the financial accounts
from being using in money laundering transactions. The records of these accounts
provide a legal money trail which can later prove and prosecute money laundering
crimes.
Consumer payments flowing into an online payment processor have a verifiable history
and an easily identifiable owner. Bitcoin transactions provide none of this information.
The account (wallet) initiating the consumer payment is not legally connected to anyone
and offers no history and information on the source of funds. The Bitcoin payment
processor has no way to trace the history of the payment and verify the identity of the
person spending the Bitcoin. In this case, Bitcoin acts as cash, however, the Bitcoin
payment processor does not treat Bitcoin with the regulations required for cash
transactions.
Bitcoin is not a bank issued, easily traceable, highly regulated financial product. Retail
consumer businesses accepting in person cash payments operate very differently than
online payment processors. Cash businesses are regulated by a very different set of
financial rules.
The BSA's recordkeeping provisions require financial institutions to verify and record
certain identifying information about the person conducting a financial transaction at or
above a $3000 monetary threshold. Bitcoin payment processors may or may not be able
to extend any verification to the legal owner of an incoming Bitcoin transaction.
Example: Merchandise purchased with Bitcoin is Then Resold
Essentially, this method to launder money can be accomplished using Bitcoin from any

major city in the world. This particular example uses online retailers accepting Bitcoin
and eBay for the resale, however there are many other options of this working example
using various other agents around the globe.
Scenario:
Bitcoins have been obtained by a resident of the US through the worldwide distribution
of ransom ware. The ransom ware generated an anonymous Bitcoin income of
approximately $30,000 in Bitcoin per week for a total period of two months.
Approximately $240,000 in Bitcoin is now available and ready to be laundered.
The Bitcoin owner established accounts at the following online retailers using alias
names and addresses. The addresses could be mail drops in the area, vacant houses,
friend's homes, mail boxes, trailer parks etc. The goal is to use a different name and
address for each purchase of merchandise online when possible.
14 aliases have been created and now there are 14 names, address and emails available to
go shopping online with Bitcoin. $140,000 worth of Bitcoins is then divided up into 14
separate wallets.
Using various local proxies or different IP addresses, each of the aliases, visits
www.overstock.com and purchases high quality merchandise which can be resold.
Purchase examples may include:
Pre-owned Rolex 18k Gold President Men's Black Dial Watch, $12,550.00
Pre-Owned Rolex Men's Datejust Steel and 18k Gold Jubilee Band White Roman
Dial Watch, $8,855.99
Pre-Owned Rolex Women's 'President' Gold Watch, $8,650.00
Fremada 14k White Gold Men's Solid 9.7mm Curb Link Chain (24-inch) $3,944.84
Auriya 14k Gold 2ct TDW Certified Cushion Cut Diamond Ring (H-I, SI1-SI2)
$9,793.69
Canon EOS 5D Mark III 22.3MP Digital SLR Camera with 24-70mm Lens,
$4,299.00
Canon EOS 7D Mark II 20.2MP Digital SLR Camera with 18-55mm Lens,
$2,149.00
Panasonic AG-HMC40 AVCCAM HD Black Camcorder, $3,695.99
These items are all high dollar, high quality, name brands that can easily be resold.
After the items arrive, another round of buying commences through the same alias on
http://www.tigerdirect.com/
Purchase examples:
Panasonic Toughbook 31 - Core i5 3340M / 2.7 GHz - Item#: PN0-102737038 |
Model#: CF-31WBP50LM $6,20999
Panasonic Toughbook 19 - Convertible - Core i5 3340M / 2.7 GHz Item#: PN0102727625 | Model#: CF-1956YWXLM $4,80699

HP ZBook 17 Intel Core i7-4800MQ 2.7/32GB Memory Item#: HPR-102031015 |

Model#: F2Q82UT#ABA $3,85749 Lenovo ThinkPad X1 Carbon 20A8 Ultrabook - Core i7 4600U / 2.1 GHz Item#: LQW-102697576 | Model#:
20A8004AUS $3,30599
Samsung UD55D - 55" - commercial use - UD-D Series LED-backlit LCD flat panel
display - 1080p (FullHD) - direct-lit LED Item#: SS6-102341028 | Model#:
UD55D $6,84699
HP ProLiant DL580 G7 643066-001 4U Rack Server - 2 x Intel Xeon E7-4807
1.86GHz Item#: H258-643066001 23197 | Model#: 643066-001 $8,11149
Other possible merchandise that can be purchased online and then resold is Bitcoin
mining equipment. A very liquid market has developed for the high quality items.
All of this merchandise can be resold online through eBay under an actual person's name.
At the end of the year, eBay will send that person a form 1099 declaring the proceeds and
the original dirty Bitcoin has now appeared as legal income to be reported on that year's
tax return.
Other options in this resale category include buying gift cards from Bitcoin retailers such
as:
http://www.gyft.com/
https://www.egifter.com/
http://cryfter.com/
Merchandise can be purchased from online retailers such as Amazon, Staples, Home
Depot, Sears etc. using the gift cards, and then resold through eBay for the same result.
Here is the question created from this research:
Why does a Bitcoin transaction better conceal the illegal movement of funds rather than a
bank account, credit card, and PayPal or ACH payment?
The funded Bitcoin wallet containing the proceeds of crime is not connected or registered
to anyone. In fact many people use a new wallet address for each transaction. To make an
online purchase at any of these retailers, through the payment processor, one simply
needs Bitcoin in a wallet and an alias for delivery of the goods.
Regarding online purchases using more conventional bank regulated bank products such
as credit cards, ACH or PayPal funds, it should be obvious that these funds have
originated and circulate through highly regulated electronic bank issued products. All
along the route of these funds (from check to wire, to credit card transactions, etc.), banks
and other reporting companies are creating and maintaining electronic records of the
transactions.
The owners of a bank account are verified, as required by law, and traceable. If a person
has $100,000 in a bank account and decides to spend those funds through a debit card

online with Overstock, the source of funds and the person spending the money can easily
be identified. This is not the case with retail Bitcoin transactions. As Bitcoin moves
through the blockchain from owner to owner and wallet to wallet, there is no
identification of those individuals. Bitcoin also leaves no real verifiable records which
could allow law enforcement to trace illegal funds back to a wallet owner at some future
time. This is very similar to a cash product.
It's quite simple to set up 20-50 alias online and pay with Bitcoin, it's very difficult, if not
impossible for most people, to set up 20-50 different credit cards and bank accounts, then
complete the same series of online merchandise purchases. The same is true for 50 new
verified PayPal accounts.
Bitcoin wallets pose a serious risk of money laundering for online retailers accepting
payments through a Bitcoin payment processor. The identity of the Bitcoin owner cannot
be verified and wallet spending the funds contains no account history or verifiable source
of funds. Decentralized convertible currency acts more like a cash product.
If an online retailer is processing consumer payments through a Bitcoin merchant service
such as BitPay or Coinbase, from the online retailer's point of view, a large monthly
increase in Bitcoin orders from individual buyers may simply be viewed as an increase in
Bitcoin sales (Hooray, more consumers are now flocking to Bitcoin!). Whereas, the same
amount of increase in cash purchase transactions moving through a retail store location
might raise a flag with the merchant or trigger a reporting requirement through the bank.
Bitcoin Payment Processing
BitPay
BitPay accounts are available in every country around the world and the merchant
account can be set up in any of more than 150 national currencies. BitPay supports
settlement in 9 currencies and direct bank deposit in 33 countries.
AUD - Australian Dollars
BTC - Bitcoin
CAD - Canadian Dollars
EUR - Euros
GBP - Pounds Sterling
MXN - Mexican Pesos
NZD - New Zealand Dollar
USD - US Dollars
ZAR - South African Rand20
The BitPay Company should be receiving a substantial amount of praise from the
industry and the public alike for advancing the use of Bitcoin in consumer markets.
Company executives have done a very good job in pioneering this market. However,
there may be some difficult regulatory items ahead in BitPay's future.
BitPay has registered with FinCEN, however, does not operate as a licensed money
20

BitPay Support, (2014). What are my options for settlement?. [online] Available at:
https://support.bitpay.com/hc/en-us/articles/201890513-Getting-Paid [Accessed 4 Dec. 2014].

transmitter. The company has stated that its operations are considered exempt from
registration as a money transmitter. Here is an excerpt from a post on the BitPay blog
website.
The heart of FinCENs guidance recommends that activities which are classified
as Money Services Businesses (MSB) or Money Transmission Businesses (MTB)
should be applied equally to both real currency and virtual currency. Therefore
activities such as remittance, payroll, and check cashing would be regulated
whether the type of money is real or virtual.
BitPay has a contractual agreement with our sellers for transaction processing,
clearance, and settlement of funds that arrive for a given merchant account.
BitPay does not have any contractual agreement with any sender of funds, and
does not engage in any activities that would be considered Money Transmission
activities.
We should pay close attention to footnote #10 of the guidance, which states:
10 FinCENs regulations provide that whether a person is a money
transmitter is a matter of facts and circumstances. The regulations
identify six circumstances under which a person is not a money
transmitter, despite accepting and transmitting currency, funds, or
value that substitutes for currency. 31 CFR 1010.100(ff)(5)(ii)(A)(F).
(B) Acts as a payment processor to facilitate the purchase of, or
payment of a bill for, a good or service through a clearance and
settlement system by agreement with the creditor or seller;
(F) Accepts and transmits funds only integral to the sale of goods or
the provision of services, other than money transmission services, by
the person who is accepting and transmitting the funds.
We have highlighted exemptions (B) and (F) which describe the activities
performed by BitPay. The IRS has defined rules for classifying Payment
Processors, or Payment Settlement Entities (PSE) in 2008 with the Internal
Revenue Code 6050W. This ruling and others clearly state that Payment
Processors and Payment Settlement Entities are not Money Transmitters.
BitPay has a contractual agreement with our sellers for transaction processing,
clearance, and settlement of funds that arrive for a given merchant account.
BitPay does not have any contractual agreement with any sender of funds, and
does not engage in any activities that would be considered Money Transmission
activities.21
21

Blog.bitpay.com, (2013). How FinCEN Guidelines Affect BitPay | The BitPay Blog. [online] Available at:
http://blog.bitpay.com/2013/03/23/how-fincen-guidelines-affect-bitpay.html [Accessed 4 Dec. 2014].

As recent as October 2014, FinCEN released new guidance for virtual currency payment
processors stating that such companies may be considered money services businesses
under US law.
There is clarification regarding virtual currency payment processors and the BSA
regulations on money transmission. From this statement and conclusions made by several
experienced digital currency professionals, FinCEN may require all Bitcoin payment
processors to operate as licensed money transmitters. Here is a portion of text from the
recent guidance that directly applies to Bitcoin payment processors. The important text
has been highlighted. Please note that this response from FinCEN is not written or
directed toward BitPay, however, it may apply to their business model.
FIN-2014-R012
Issued: October 27, 2014
Subject: Request for Administrative Ruling on the Application of FinCENs Regulations
to a Virtual Currency Payment System
FinCEN stipulates four conditions for the payment processor exemption to
apply to a particular business pattern:
(a) the entity providing the service must facilitate the purchase of goods or
services, or the payment of bills for goods or services (other than money
transmission itself);
(b) the entity must operate through clearance and settlement systems
that admit only BSA-regulated financial institutions;
(c) the entity must provide the service pursuant to a formal agreement; and
(d) the entitys agreement must be at a minimum with the seller or creditor
that provided the goods or services and receives the funds.
The Company fails to satisfy one of these conditions. The Company is
not operating through clearing and settlement systems that only admit BSAregulated financial institutions as members. According to your letter the real
currency payments from the consumer take place within a clearing and settlement
system that only admits BSA-regulated financial institutions as members
(specifically, a credit card network), however, the payment of the Bitcoin
equivalent to the merchant, by definition, takes place outside such a clearing
and settlement system, either to a merchant-owned virtual currency wallet or to a
larger virtual currency exchange that admits both financial institution and nonfinancial institution members, for the account of the merchant. 22
Example One
A foreign company sets up a Bitcoin payment processing account through a US based
Bitcoin payment processor. The foreign entity could be a corporation in any friendly
jurisdiction such as Singapore, Mexico, Bahamas, Panama, Hong Kong, Cyprus etc. For
22

US Department of the Treasury Financial Crimes Enforcement Network, (2014). FIN-2014-R012 Subject: Request
for Administrative Ruling on the Application of FinCEN - Regulations to a Virtual Currency Trading Platform.
Washington, DC: US Department of the Treasury, pp.1-3.

this example the company will be domiciled in Singapore and the daily proceeds from the
payment processor are received by the company, denominated in Euros, through a Cyprus
based bank.
The company is in the business of operating websites, forums and selling memberships in
organizations along with the organizations software and products. The laundering
operation occurs as new members are added paying with Bitcoin. The incoming illegal
proceeds, denominated in Bitcoin, are used to purchase products or memberships from
the organization through a payment button embedded from the payment processor
website (link). The forum charges its members, $20 a month for access to the private
information and forum's member area.
After several months of growth, accepting PayPal and online credit cards, the popular
website now has more than 100,000 online members. The apparently legitimate foreign
operated online business chooses to add Bitcoin as a method of payment and cycles the
incoming Bitcoins though a US based Bitcoin payment processor. Over the next 6-8
months the website picks up 200,000 new members. Just over 100k of these each month
pay with Bitcoin.
At 300,000 total members, the website is generating about $6,000,000 in monthly fees.
$4,000,000 is moving through regulated bank products (PayPal and credit cards) and
$2,000,000 is coming into the business each month in Bitcoin (100,000 x $20). These
new paying members send Bitcoins through the US based payment processor. Each day
the Bitcoin proceeds are converted into Euros and electronically deposited into the
company's bank account.
After a few more months the business owner receives a nice letter from the Bitcoin
payment processor congratulating them on the growth in Bitcoin members. However, this
forum website business has actually developed into a Bitcoin money laundering
operation. Almost all of the new 100,000 Bitcoin customers paying each month are fake
aliases and almost the entire $2,000,000 is Bitcoin coming in each month is the illegal
proceeds obtained from the sale of drugs in the US. That could quickly add up to more
than $24,000,000 a year being converted into Euro and transferred to a foreign owned
bank account. The money moves out of the US, through the Bitcoin payment processor
and into a legal company bank account.
Each Bitcoin member has a fake name, address and email, and a real Bitcoin wallet
which makes a $20 payment per month to Bitcoin payment processor.
This otherwise legal company which has been accepting legitimate income through
regulated bank products has piggy-backed a Bitcoin money laundering operation on top
of it usual monthly business. Illegal drug proceeds are being moved out of the US,
converted into Euro and deposited into a foreign bank account. Tax is paid on the income
and the dirty money is now legitimate income.
Example #2

An established Brazilian company, selling products to the US, decides to add Bitcoin
invoicing to their US sales. A good portion of sales are now received in Bitcoin using a
US based payment processor.
That company does $120,000,000 a year in US sales, and by adding Bitcoin now passes
$150,000,000. the following year. The additional $30 million in income is paid through
Bitcoin and cycled back to the company's bank account in Latin America.
While it appears that adding Bitcoin has increased sales, in fact the company is falseinvoicing and over-invoicing from Brazil to move illegal funds out of the US.
There is no method of accounting that would cause the Brazilian company to produce a
verified source of funds for the incoming Bitcoin accounts other than a simple forged
receipt. The payment processor could even request identify information on the accounts
and simply receive forged information. Since the Bitcoin funds do not originate with a
verifiable bank product, the owner is unknown. There is no way for the Bitcoin payment
processor to ever legally verify that the ownership information connected to any Bitcoin
wallet is accurate because wallets do not offer the ability to be legally linked to any party.
In both of these examples, if the additional sales had been generated by cash payments
instead of Bitcoin, the additional income in cash would have been flagged by the bank,
reported and likely investigated at some future point. Bitcoin should be considered as
cash income and regulated as such, however, it is improperly treated as an online
payment received from a regulated financial institution.
The origins of cash payments, as with incoming Bitcoin funds, cannot be traced from an
identified owner. A Bitcoin payment processor could only request the receipt supplied by
the company receiving the payment or engaged in the sale. In this case the Brazilian
company could just forge the receipt or over invoice which is very common in trade
based money laundering.
This begs the question, "How are incoming Bitcoin payments through a US are based
payment processor different from incoming funds like bank wires or credit card
payments?" There are no federal or state regulations that require companies to record or
report Bitcoin transactions as a company would treat cash transactions. No company or
person in the United States is ever required to file a SAR on a Bitcoin payment of more
than $3,000 or a CTR on a $10,000 deposit to a Bitcoin wallet. Furthermore, US persons
and businesses receiving more than $10,000 in cross-border Bitcoin funds are not
required to file a form 8300.
There are at least a hundred more examples of how illegally obtained Bitcoin can be
cycled through a US or foreign based Bitcoin payment processor. Bitcoin acts like cash
and should not be treated as a bank payment.
Here is additional text from the BitPay blog.

BitPay has voluntarily registered with FinCEN in 2011, so that we have an online
account to electronically report any suspicious activity that may arise. However,
to date we have not seen any suspicious activity and have not filed any reports.
All of our merchants are identified and we know their bank account information,
so there is little likelihood for someone engaging in criminal activity to use our
service.23
XXX

23

Blog.bitpay.com, (2013). How FinCEN Guidelines Affect BitPay | The BitPay Blog. [online] Available at:
http://blog.bitpay.com/2013/03/23/how-fincen-guidelines-affect-bitpay.html [Accessed 4 Dec. 2014].