WASHINGTON (7/1/14)--Virtual currencies, while heralded by some as part of an innovative new financial system, bring with them a host of challenges and risks to financial institutions, consumers and law enforcement. The U.S. Government Accountability Office (GAO) has released a report on virtual currencies, outlining several of these issues, and urging the Consumer Financial Protection Bureau to take an active role in facing consumer issues that might arise with its use.
Virtual currencies are digital representations of value that are not government-issued, and systems operate over the Internet and use computer protocols and encryption to conduct and verify transactions. Some can be used to buy real goods and services and exchanged for dollars or other currencies.
But these currencies have also been associated with illicit activity and security breaches, which raises possible regulatory, law enforcement, and consumer protection issues.
Several of the main issues outlined in the June 26 GAO report are:
- Virtual currency systems may provide anonymity over traditional payment systems and can lack a central intermediary to maintain transaction information. This can lead to difficulties in detecting money laundering and other crimes;
- Many virtual currency systems can be accessed globally to make payments and transfer funds across borders. Consequently, law enforcement agencies investigating crimes that involving these currencies have to rely upon cooperation from international partners who may operate under different regulatory and legal principles; and
- The emergence of virtual currencies has raised a number of consumer and investor protection issues, including: reported loss of consumer funds maintained by bitcoin (one type of virtual currency) exchanges, volatility in bitcoin prices, and the development of virtual-currency-based investment products. For example, in February a Tokyo-based bitcoin exchange filed for bankruptcy after reporting it had lost more than $460 million.
The U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) released guidance in March 2013 requiring virtual currency exchanges to register with FinCEN. Federal agencies also have begun to collaborate on virtual currency issues through informal discussions and interagency working groups.
These working groups have focused on law enforcement aspects of virtual currencies, but not on emerging consumer protection issues. The GAO report states that the CFPB 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," the report reads.
The GAO recommended that the CFPB "take steps to identify and participate in pertinent interagency working groups addressing virtual currencies, in coordination with other participating agencies."
According to the report, the CFPB has agreed with this recommendation.
Use the resource link below for the full report.