	Background

Virtual currencies are financial innovations that have grown in number  and popularity in recent years. Other  virtual currencies may be used to purchase goods and services in the real  economy and can be converted into government-issued currencies  through virtual currency exchanges. A prominent example of a decentralized virtual currency system is bitcoin. The bitcoin computer protocol permits the storage of unique  digital representations of value (bitcoins) and facilitates the assignment of  bitcoins from one user to another through a peer-to-peer, Internet-based  network. Federal Agencies Face Emerging Challenges in Carrying Out Responsibilities Related to the Use of Virtual Currencies

While federal agencies’ responsibilities with respect to virtual currency are  still being clarified, some virtual currency activities and products have  implications for the responsibilities of federal financial regulatory and law  enforcement agencies. These challenges stem partly from certain characteristics of virtual  currency systems, such as the higher degree of anonymity they provide  compared with traditional payment systems and the ease with which they  can be accessed globally to make payments and transfer funds across  borders. Some Virtual Currency Activities and Products May Have Implications for Federal Agencies’ Responsibilities

Although virtual currencies are not government-issued and do not  currently pass through U.S. banks, some activities and products that  involve virtual currencies have implications for the responsibilities of  federal financial regulatory and law enforcement agencies. Examples of illegitimate uses include money laundering and  purchasing illegal goods and services using virtual currencies. SEC also regulates and has examination authority over investment  advisers subject to its jurisdiction. Virtual Currencies Present Regulatory, Law Enforcement, and Consumer Protection Challenges

The emergence of virtual currencies presents challenges to federal  agencies responsible for financial regulation, law enforcement, and  consumer and investor protection. If these exchangers have customers located  in the United States, they must comply with BSA and anti-money- laundering requirements. For example, law enforcement may have to rely upon  cooperation from international partners to conduct investigations, make  arrests, and seize criminal assets. Volatile prices. Agencies Have Taken Some Actions on Virtual Currencies, but Interagency Working Groups Have Not Focused on Consumer Risks

Federal financial regulators and law enforcement agencies have taken a  number of actions related to the emergence of virtual currencies,  including providing regulatory guidance, assessing anti-money-laundering  compliance, and investigating crimes and violations that have been  facilitated by the use of virtual currencies. Additionally, in March 2013, FinCEN issued guidance that  clarified the applicability of BSA regulations to participants in certain  virtual currency systems. Law Enforcement Agencies Have Taken Actions against Parties Alleged to Have Used Virtual Currencies to Facilitate Crimes

Law enforcement agencies have taken actions against parties involved in  the illicit use of virtual currencies to facilitate crimes. Also in May 2013, law enforcement agencies shut down Liberty  Reserve, a centralized virtual currency system that was allegedly  designed and frequently used to facilitate money laundering and had  its own virtual currency. Federal agencies have also begun to discuss virtual currency issues in  existing interagency working groups that address broader topics such as  money laundering, electronic crimes, and the digital economy, as follows:
The BSA Advisory Group—which is chaired by FinCEN and includes  the prudential banking regulators, Treasury, federal and state law  enforcement and regulatory agencies, and industry representatives— has addressed virtual currency issues in a number of ways. More  recently, in February 2014, Mt. These bitcoins were worth more than  $460 million when Mt. Gox filed for bankruptcy. Therefore, these  efforts may not be consistent with key practices that can benefit  interagency collaboration, such as including all relevant participants to  ensure that their knowledge, skills, and abilities contribute to the  outcomes of the effort. As a result, future interagency efforts may not be  in a position to address consumer risks associated with virtual currencies  in the most timely and effective manner. Recommendation for Executive Action

To help ensure that federal interagency collaboration on virtual currencies  addresses emerging consumer protection issues, we recommend that the  Director of CFPB (1) identify which interagency working groups could help  CFPB maintain awareness of these issues or would benefit from CFPB’s  participation; and (2) decide, in coordination with the agencies already  participating in these efforts, which ones CFPB should participate in. In its letter, CFPB concurred with our recommendation to identify and  participate in pertinent interagency working groups addressing virtual  currencies.
Why GAO Did This Study

Virtual currencies—digital representations of value that are not government-issued—have grown in popularity in recent years. Some virtual currencies can be used to buy real goods and services and exchanged for dollars or other currencies. One example of these is bitcoin, which was developed in 2009. Bitcoin and similar virtual currency systems operate over the Internet and use computer protocols and encryption to conduct and verify transactions. While these virtual currency systems offer some benefits, they also pose risks. For example, they have been associated with illicit activity and security breaches, raising possible regulatory, law enforcement, and consumer protection issues. GAO was asked to examine federal policy and interagency collaboration issues concerning virtual currencies.
This report discusses (1) federal financial regulatory and law enforcement agency responsibilities related to the use of virtual currencies and associated challenges and (2) actions and collaborative efforts the agencies have undertaken regarding virtual currencies. To address these objectives, GAO reviewed federal laws and regulations, academic and industry research, and agency documents; and interviewed federal agency officials, researchers, and industry groups.

What GAO Found

Virtual currencies are financial innovations that pose emerging challenges to federal financial regulatory and law enforcement agencies in carrying out their responsibilities, as the following examples illustrate:
Virtual currency systems may provide greater anonymity than traditional payment systems and sometimes lack a central intermediary to maintain transaction information. As a result, financial regulators and law enforcement agencies may find it difficult to detect money laundering and other crimes involving virtual currencies.
Many virtual currency systems can be accessed globally to make payments and transfer funds across borders. Consequently, law enforcement agencies investigating and prosecuting crimes that involve virtual currencies may have to rely upon cooperation from international partners who may operate under different regulatory and legal regimes.
The emergence of virtual currencies has raised a number of consumer and investor protection issues. These include the reported loss of consumer funds maintained by bitcoin exchanges, volatility in bitcoin prices, and the development of virtual-currency-based investment products. For example, in February 2014, a Tokyo-based bitcoin exchange called Mt. Gox filed for bankruptcy after reporting that it had lost more than $460 million.
Federal financial regulatory and law enforcement agencies have taken a number of actions regarding virtual currencies. In March 2013, the Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) issued guidance that clarified which participants in virtual currency systems are subject to anti-money-laundering requirements and required virtual currency exchanges to register with FinCEN. Additionally, financial regulators have taken some actions regarding anti-money-laundering compliance and investor protection. For example, in July 2013, the Securities and Exchange Commission (SEC) charged an individual and his company with defrauding investors through a bitcoin-based investment scheme. Further, law enforcement agencies have taken actions against parties alleged to have used virtual currencies to facilitate money laundering or other crimes. For example, in October 2013, multiple agencies worked together to shut down Silk Road, an online marketplace where users paid for illegal goods and services with bitcoins.
Federal agencies also have begun to collaborate on virtual currency issues through informal discussions and interagency working groups primarily concerned with money laundering and other law enforcement matters. However, these working groups have not focused on emerging consumer protection issues, and the Consumer Financial Protection Bureau (CFPB)—whose responsibilities include providing consumers with information to make responsible decisions about financial transactions—has generally not participated in these groups. Therefore, interagency efforts related to virtual currencies may not be consistent with key practices that can benefit interagency collaboration, such as including all relevant participants to ensure they contribute to the outcomes of the effort. As a result, future interagency efforts may not be in a position to address consumer risks associated with virtual currencies in the most timely and effective manner.

What GAO Recommends

GAO recommends that CFPB take steps to identify and participate in pertinent interagency working groups addressing virtual currencies, in coordination with other participating agencies. CFPB concurred with this recommendation.