In a move that could threaten bitcoin users’ privacy, a recent Communication from the European Commission to the European Parliament and Council has made recommendations intended to counter hidden terrorist funding by requiring entities and business owners to reveal their true identities on record, and to examine financial transactions completed through Virtual Currency Exchange Platforms.
While the overall purpose of the communication is to address a variety of sources of terrorist funding, the sections that apply specifically to digital currencies could have some far-reaching and unintended consequences for the bitcoin community.
The communication outlines two main strands of action:
- How to further detect and prevent terrorist organisations and their backers to move funds and other assets; and to ensure that financial movements can wherever possible help law enforcement to trace terrorists and stop them from committing crimes;
- How to further disrupt the sources of revenue of terrorist organisations, by targeting their capacity to raise funds in the first place.
Highly versatile criminals are quick to switch to new channels if existing ones become too risky. For innovative financial tools, it is critical to be able to manage the risks relating to their anonymity, such as for virtual currencies.
The first target for the Commistion includes “anonymous currency exchanges,” which they suggest that E.U. member states bring under the control of “competent authorities,” and then ensure that the exchanges comply with relevant national Anti-Money Laundering legislation.
A second target for control is the prepaid card market. The communication recognizes the important economic role that prepaid cards play, especially for the underbanked and for distribution of social benefits. And while it also acknowledges the advantage that anonymous prepaid cards offer in terms of privacy protection, especially with respect to internet-based transactions, the report expresses concern that “anonymity has also been sought or abused to conduct illegal actions.”
The key question is how to address the concerns raised by the anonymity of such general purpose cards without wiping out the benefits that these instruments offer in their normal use.
One proposed solution would include requiring customer identification and verification at the time of online activation of prepaid cards, and the establishment of centralized bank and payment account registers or electronic data retrieval systems to hold this identification data, while giving “competent authorities” access to information on bank and payment accounts.
Intelligence and data arising from the digital and virtual flow of funds to and from a growing list of “high risk third countries” outside of the E.U., involving people, groups, or activities that are identified as suspicious by authorities, are being gathered and will be scrutinized to prevent terrorist financing, money laundering, and tax evasion. Where Law Enforcement finds suspicious activity, funds could be cut off with swift force under the 4th Anti Money-Laundering Directive or the 4th AMLD.
“Once a country is listed…[the E.U.] will have to increase the degree and nature of monitoring of financial transactions from that country. But at present, the exact nature of these measures is not explicitly defined in the legal text.”
The task of implementing the new directive is not yet precise in its procedural guidelines, which exposes a fundamental flaw in the concept: If there isn’t a defined limit to the extent of the increased supervision of virtual currency, the extent to which the oversight can be legal – and effective – could be in question.