Most currency is fiat, meaning its value is created and controlled by the government. But some currency isn’t. Instead, its value vis-à-vis traditional currency is assigned by companies or individuals.
This has raised concern by U.S. Treasury Department officials who believe some virtual money could be used to launder real money, most notably through bitcoins, a virtual currency based on a complex cryptographic computer algorithm that topped 70 real dollars per bitcoin unit this week, albeit on a small trading volume of this highly volatile, hacker-prone, unregulated virtual currency. (For a thorough explanation of how bitcoins work, check out this primer from MIT Technology Review.)
The spike in interest in bitcoins since they emerged in 2008 led this week to the Treasury’s Financial Crimes Enforcement Network (FinCen) to lay down the law: Now, the same kind of bookkeeping requirements that have been in place for money transfer handlers like Moneygram International Inc. (NYSE:MGI) and The Western Union Company (NYSE:WU) will apply to transactions of more than $10,000 between virtual money and fiat currency.
The aim is to prevent organized criminal organizations -- including drug cartels and terrorist financiers -- from using unregulated units of value to launder money. Though the FinCen doesn’t specifically name bitcoins, its definition of “convertible virtual currency” would apply to it as well as any other “medium of exchange that operates like a currency in some environments.”
"We are beyond the stage where this was just funny money and a fun online thing. This [bitcoins] is used as a currency," Nicolas Christin, associate director of Carnegie Mellon University's Information Networking Institute, told the Wall Street Journal in a report on the new rules it published on Thursday night. Bitcoin developers have said they support the move to curb abuses, the report added.
Continue Reading Below
The economic tumult in Europe is one reason for the recent increase in the value of bitcoins. BGR reported a spike in bitcoin app downloads in Spain in the past week, which corresponds with a $20 rise in the value of the virtual currency over the past few days. A spike in value also registered after the FinCen rules were released, suggesting that investors in the virtual currency see the U.S. government’s recognition as recognition of bitcoin’s legitimacy.
While bitcoin -- or any similar future virtual currency that might emerge -- is the target of the new regulation, it’s unclear how it might affect companies that use their own virtual currencies to promote their businesses.
Last month, Seattle-based online retail giant Amazon.com, Inc. (Nasdaq:AMZN) announced it began distributing this virtual currency to make it easier for users of its Kindle Fire e-book to buy third-party Kindle apps.
While it’s unlikely a drug lord or a terrorist is going to use Amazon Coins to launder illegitimate gains, companies that use virtual units of value are likely going to be checking with their legal advisors on how the new rule might affect their bookkeeping and disclosure practices.