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Business  12, Feb 2014

Why Bitcoin cannot afford to be unregulated

Founder & CEO of LoanGarage.com, writes a rebuttal to David Moskowitz’s thought – ‘Why Bitcoin in Singapore should remain unregulated’

The points made by David Moskowitz in his article have certainly provided some food for thought, and I do not disagree with him entirely. He made a couple of salient and good points. I do not disagree that a Bitcoin industry in Singapore would be beneficial for the local economy. In fact, the MAS statement on Bitcoin usage has put us on the world map and shown how we can lead the way in how Bitcoins are treated under the law.

However, I must disagree with two points that he has made; principally, his suggestion that money laundering is not a problem and secondly, that we should “allow the free market to work”.

Bitcoin is a good instrument to launder money

It is claimed that there is no precedent for prosecutions for laundering money using bitcoins. Well, on 10 February 2014, it was reported that 2 men in Florida were charged for laundering money using Bitcoins. However, one can forgive David for overlooking this because this was only public knowledge on the date of the publication of his op-piece. But again, on 1 February 2014, it was reported in Forbes that a Bitcoin entrepreneur was prosecuted in New York on suspicion of, among other things, money laundering.

However, that aside, I take the view that Bitcoins is the perfect instrument for money laundering. Having worked in INTERPOL’s Office of Legal Affairs, I have had the humbling opportunity to have a first-hand view of money laundering operations worldwide. Lets start with a simple definition of money laundering as offered by the UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances. Money laundering is defined as knowingly engaging in a financial transaction with the proceeds of a crime for the purpose of concealing or disguising the illicit origin of the property from governments.

Also Read: Banning Bitcoin will lead its usage to grey areas: Buysellbitco.in CEO

There are so many ways of laundering money and Bitcoin’s features. While Bitcoin transactions are not anonymous and they are public, the identity of the user remains unknown until information is revealed under some circumstances. While cash is still definitely the best way to launder money, the possibility of unauthorized mining and theft of Bitcoin opens the door – albeit a small one – to the possibility of money laundering.

It was suggested that money laundering happens on a big scale and the small transactions and trade volume of Bitcoin does not allow this. Respectfully, this is contrary to criminal practice. The best way to launder money is through small transactions and trade volume. Period. The whole point of engaging in money laundering is to avoid detection and suspicion. The best way of doing it is to do it in small inconspicuous amounts; especially through shell entities. Criminals generally engage in the “Place-Layer-Integrate” modus operandi. First, a criminal will ‘place’ the money in the existing financial system, next to ‘layer’ it by removing the illegal taint, and then to ‘integrate’ it by mixing it with the legal funds.

A couple of examples are as follows:

  1. You open a cash account with a knowing stockbroker. Make a few trades. Doesn’t matter whether you win or lose on that trade. Cut your losses / coup your gains and get out of the position. You do this in small amounts otherwise other big legitimate traders will get suspicious.
  2. You are rich enough to get a banking licence. You buy or create a bank. The bank ‘lends’ you some money. You ‘pay back’ the loan to the bank which will circulate the money into the legal financial system.

How would this work with Bitcoin? Using the above examples:

  1. You open a Bitcoin wallet and trade on an unregulated Bitcoin exchange (that you probably own through some entity). You then make transactions using Bitcoin and take out your illicit gains in cash. You bypass the entire financial system entirely!
  2. You are rich enough to buy or create a Bitcoin exchange and you cater it for criminals or use it exclusively for your money laundering operations – why not since you don’t have to report to any central regulator.

Clearly the examples above are pretty unsophisticated but you get my point. Bitcoin is attractive as a money laundering instrument because you remove the need for “placing”.

A ‘free market’ does not necessarily mean an unregulated market
Although I am not intending to delve into deeper issues of the pros and cons of free market and capitalism, one just has to look at the 2008 subprime mortgage crisis in the USA for anecdotal evidence as to why a free market is no guarantee that it will work themselves out. The market for credit default swaps and derivatives was unregulated in the US and participants drove it off the cliff in the name of profit. In other words, it is self-serving truism for participants to call themselves the best regulators for the industry they are in.

At the same time, I do not advocate an unrestrained approached towards regulation. I am a firm believer in a light-touch approach to regulation in order to protect self-evident public interests such as safeguards against abuse and crimes. However, what is not obvious to many is that in order for regulators to implement safeguards against the same, Bitcoin may have to be treated as a form of currency. If the government does that, it is tantamount to declaring Bitcoin as illegal but according to the Currency Act, the only legal tender is the Singapore dollar.

The MAS Statement is only a temporary stop-gap measure
In my view, the statement issued by MAS relating to Bitcoin is simply a stop-gap measure as authorities take a wait-and-see-approach. The fact that MAS is not interfering in the use of Bitcoin is nothing novel from a legal perspective – MAS simply views this as a form of good exchanged in a barter trade. That is what a virtual currency is in the eyes of the law – just a form of good. There are other legal repercussions in having this virtual currency treated as a form of good but that is a story for another time.

Also Read: Tomcar Australia, the first car manufacturer to accept Bitcoin?

As the industry and adoption grows, the threats will be clearer and the government will act accordingly. They have to and they have been doing so i.e. wait-and-see-before-acting approach.

I think it would be a big mistake for investors and Bitcoin enthusiast to treat the statement from MAS as an endorsement (silent or positive) and bet their future (or investment) on this (temporary) position.

The views are of the author and e27 may not necessarily subscribe to them

e27 invites members from Asia’s tech industry and startup community to share their honest opinions and expert knowledge with our readers. If you are interested to share your point of view, please send us an email to writers[at]e27[dot]co

Aidil Zulkifli

Aidil Zulkifli

Aidil Zulkifli is the founder and CEO of KreditAja and LoanGarage.com, which are end-to-end consumer finance platforms in Indonesia and Singapore respectively. He was previously a commercial lawyer and has had experience working in the INTERPOL Office of Legal Affairs. He has also had the opportunity to assist Professor Simon Chesterman (Dean of NUS Law Faculty) in research for a book on intelligence and privacy laws - ‘One Nation Under Surveillance. A New Social Contract to Defend Freedom Without Sacrificing Liberty’ (Oxford Publishing) was published in January 2011.

  • David Moskowitz

    I’d like to thank Mr. Zulkifli for his rebuttal piece and congratulate him on his successful ventures. His work with INTERPOL has given him firsthand experience with money laundering I can only speculate about.

    To clarify some of my points from the original article, I used the term ‘prosecuted’ where I should have used ‘convicted’. Anyone can be prosecuted, and after a trial by jury or judge, convicted or acquitted. Currently, Charlie Shrem has been arrested and is being prosecuted, but has yet to be tried or convicted. Same goes for the Florida cases. We must presume them innocent until convicted. We’ll see if they are able to settle without admitting guilt or doing jail time like the staff at banking giant JP Morgan did after laundering $70 Billion in Madoff’s cash, or HSBC, fined $2 Billion for laundering Cartel cash in Mexico. If it were proportional to the allegations, Mr. Shrem would pay a fine of $28,000 and the persons in the Florida cases about $840. They would also be allowed to continue with their other businesses with the promise of not doing it again.

    “Money laundering is defined as knowingly engaging in a financial transaction with the proceeds of a crime for the purpose of concealing or disguising the illicit origin of the property from governments.”

    Thank you for this very clear explanation. I am not a lawyer, but it would appear that any person who knowingly provides assistance to someone as they attempt to commit or hide a crime is guilty of being a part of the criminal enterprise or conspiracy. This holds true of laundering the money the same as if you knowingly sold a car to a bank-robber to use as a getaway vehicle.

    As someone who brokers Bitcoin for clients in Singapore, I hold it as a legal as well as social responsibility to report any such criminal use of my services to the proper authorities.

    Under your examples of potential laundering with Bitcoin, you say “1) You open a Bitcoin wallet and trade on an unregulated Bitcoin exchange (that you probably own through some entity). You then make transactions using Bitcoin and take out your illicit gains in cash. You bypass the entire financial system entirely!”

    However, you didn’t explain how you get the cash out of the system. On an exchange, this would be put into a bank account- which should have properly KYC’d (know your customer) the account holder and have other safeguards in place.

    “2) You are rich enough to buy or create a Bitcoin exchange and you cater it for criminals or use it exclusively for your money laundering operations – why not since you don’t have to report to any central regulator.” Again, you didn’t explain how the cash is moving in or out of the system.

    If the criminal instead took their payment in Bitcoin, and used the Bitcoin to purchase items instead of converting it to cash, then they could circumvent the financial system. However, they would then have no use of an exchange. Law enforcement would have to focus more efforts on the crime itself rather than the transmission of funds.

    As to your point that the 2008 mortgage crisis was caused by an unregulated free market- you fail to take into account the socialized housing market in the US. Fannie Mae and Freddie Mac are both quasi-governmental agencies which provided massive liquidity to the housing markets. This allowed mortgage originators to sell off their subprime to the government, leaving taxpayers on the hook. Both agencies had teams of regulators sitting in their offices the whole time this was happening.

    However, this alone didn’t cause the financial crisis. It was massive leverage by the banks and quasi banks making bets with one another, under an implicit ‘too big to fail’ wink of the Federal Reserve. Hardly a free market.

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