WASHINGTON — The U.S. government sees no evidence of “widespread” use of virtual currencies such as Bitcoin to evade sanctions or finance terrorism, the Treasury Department's top official targeting money laundering said.
“Terrorists generally need 'real' currency, not virtual currency, to pay their expenses — such as salaries, bribes, weapons, travel, and safe houses,' David Cohen, the undersecretary for terrorism and financial intelligence.
”The same is true for those seeking to evade sanctions,” Cohen said in a speech at the New York headquarters of Bloomberg News.
Governments around the world are grappling with how to classify or regulate virtual currencies such as Bitcoin. Authorities in Russia, China and Israel have sought to restrict the payment system, while Treasury Secretary Jacob Lew said in January the U.S. needed more time to assess the ”phenomenon” to ensure it isn't used for unlawful purposes.
Cohen rejected arguments that regulation would drive virtual currency innovation out of the U.S., saying ”the opposite is true” in this new industry.
”Financial transparency can help bring stability to the virtual currency market and security to its users and investors,” Cohen said. ”And that is what we are trying to do through sensible, flexible and _to use a word from the tech world _scalable regulation.”
At the same time, Cohen emphasized that the government would err on the side of squeezing innovation if necessary for law enforcement purposes.
”There may be situations where we need to choose between innovation and transparency,” Cohen said. ”Let me be clear: When forced to choose between the two, we will err on the side of transparency.”
Cohen said that some virtual currency companies haven't registered with Treasury's Financial Crimes Enforcement Network, a requirement established in March 2013, and aren't following record keeping and reporting requirements.
”Those that do not comply with these rules should understand that their actions will have consequences,” Cohen said.
The Treasury Department's Bank Secrecy Act Advisory Group will include a member of the virtual-currency community to help make regulations “better informed and more effective,” Cohen said, without saying who it will be.
The department has urged industry leaders to devise ways to prevent criminal use of virtual currencies rather than develop technology that “further obscures financial trails,” he said.
Bitcoin, the most popular digital currency, emerged from a 2008 paper written by a programmer or group of programmers under the name Satoshi Nakamoto. It uses a public ledger to record transactions made under pseudonyms, an aspect of the system that has fed mistrust among law enforcement.
The price for Bitcoins soared in November, topping $1,000 for the first time, as merchants including Overstock.com began accepting the virtual currency and speculators anticipated broader use of digital money.
Prices dropped this year amid mounting U.S. prosecutions of Bitcoin-linked money laundering, concerns that governments would restrict the currency and market disruptions including hacker attacks on online exchanges.
The decline was “likely” connected to the outage at the website Blockchain.info, a popular Bitcoin wallet provider, said Jonathan Levin, a co-founder of Coinometrics, a research firm in Oxford, England. He also said that digital currency markets are “grossly inefficient.”
Cohen said that the Treasury Department places “real value” on financial innovation such as digital currencies.
“Advancements in technology that allow entrepreneurs and businesses to innovate, grow and hire are crucial to our country's long-term success,” Cohen said.
Cohen has served as undersecretary since 2011. He first joined the Treasury in 1999 and, while working for its general counsel, helped draft part of the Patriot Act that granted the regulator new tools to thwart money laundering and terrorist financing after the Sept. 11 attacks.
The Treasury's office for terrorism and financial intelligence seeks to prevent criminal networks from using the U.S. financial system and to cut off funding for terrorists. It includes the Office of Foreign Assets Control that helps enforce sanctions on nations, such as Iran, that have a history of providing support to terrorist groups.
New York financial regulators also have been working on a response to Bitcoin. Benjamin Lawsky, the state's superintendent of financial services, announced last week that his office is accepting applications to operate exchanges for Bitcoin and other digital currencies. He plans to propose a set of rules for virtual-currency firms by mid-year.
Last month's collapse of Tokyo-based Bitcoin exchange Mt. Gox, in which some customers lost their holdings, shows the need for “robust standards for consumer protection, cyber security and anti-money laundering compliance,” Lawsky said.
Federal authorities have been targeting misuse. Last year, they shut down Silk Road, an online drug and weapons bazaar where Bitcoin was the preferred medium of exchange. In January, they arrested Charlie Shrem, a Bitcoin entrepreneur, on charges of money laundering. He has denied the allegations.