Regulation of virtual assets on the horizon

Digital currencies (such as Bitcoin) are described by the UK Gambling Commission as “established forms of crypto logically secured currencies that are traded, and recognised by institutions like the Financial Conduct Authority and HM Revenue & Customs”. 

Any gambling business wishing to offer gambling facilities to consumers in Great Britain using digital currencies must hold an operating licence. To date, no licence authorising the provision of such gambling facilities has been granted by the UK Gambling Commission. One of the principal reasons for this is the challenge of achieving adequate anti-money laundering (“AML”) and counter-terrorist financing (“CTF”) compliance. In 2015, the Commission stated as follows:

  • “any licensee wishing to use digital currencies as a means of payment for gambling must be able to apply and take appropriate action regarding their Know Your Customer (KYC) policies, source of funds and any additional risks associated with this form of payment to their transactions” and
  • “any operators using a payment intermediary such as a Bitcoin exchange and/or payment services provider may need to take additional steps to ensure the funds came from a legitimate source, regardless of the currency used as a means of payment or means to gamble”.

It went on to list the following challenges around the use of digital currencies:

  • “There is increasing scope to use digital currencies, which, coupled with some of the misconceptions surrounding them, eg, whether their use does constitute gambling, may increase the challenges if gambling operators do not fully understand them”
  • “The degree of anonymity associated with digital currencies may be attractive to individuals who want to conceal their identity and the source of their funds”
  • “Coupled with other tools to conceal identity, the ownership and source of funds can be effectively concealed from law enforcement or operator enquiries”
  • “There is an absence of specific AML regulation surrounding digital currencies in the UK at present”
  • “The decentralised nature of digital currencies means there is no central authority that supports its value and can assist law enforcement” and
  • “Digital currencies such as Bitcoin have had a history of large price fluctuations. Operators would need to appropriately consider and mitigate against any risk to their financial security following possible currency fluctuations as well as being open with players as to those risks”.
 It has more recently expressly advised consumers to be cautious when using digital currencies to gamble, citing “a history of hacking, theft and other criminal activity associated with digital currencies”.

Addressing the above challenges may soon be assisted by new regulatory measures. Last week, in response to the need for an effective global, risk-based response to the AML/CFT risks associated with virtual asset financial activities, the Financial Action Task Force (“FATF”) adopted changes to the FATF Recommendations and Glossary that clarify how the Recommendations apply in the case of financial activities involving virtual assets.

These changes add to the Glossary new definitions of “virtual assets” and “virtual asset service providers” – such as exchanges, certain types of wallet providers, and providers of financial services for Initial Coin Offerings (ICOs). The changes make clear that jurisdictions should ensure that virtual asset service providers are subject to AML/CFT regulations, for example conducting customer due diligence including ongoing monitoring, record-keeping, and reporting of suspicious transactions. They should be licensed or registered and subject to monitoring to ensure compliance. The FATF will further elaborate on how these requirements should be applied in relation to virtual assets.

As a next step (projected to take place by June 2019), the FATF will update its Guidance to assist countries with the full and effective implementation of these requirements of the FATF Standards.

All countries are encouraged by the FATF to swiftly take the necessary steps to prevent the misuse of virtual assets. This includes assessing and understanding the risks associated with virtual assets in their jurisdictions, applying risk-based AML/CFT regulations to virtual asset service providers and identifying effective systems to conduct risk-based monitoring or supervision of virtual asset service providers.

The full FATF statement on regulating virtual assets can be downloaded below.