Bitcoin and The Long Arm of The Law

Executive Brief

Regulation is a touchy subject in the bitcoin industry. Many cryptocurrency idealists who truly believe they are invincible to government reach, also believe that the lack of bitcoin-specific regulation gives them a free pass. They may be in for a nasty surprise when they find out just how long 'the long arm of the law' really is. Governments around the world already have an arsenal of catch-all laws that can be used to fight tax evasion and other illegal activities that attempt to hide behind the anonymity of some cryptocurrencies and related services. 

Read the full story below. 

Within the industry, there are a couple of areas that are particularly vulnerable to the wrath of the law.


Anonymous Cryptocurrencies

These currencies will always be around, but they will have a very difficult time achieving their desired degree of mainstream acceptance if they are structured in such a way that everyday businesses can't accept them. A business relies on their financial institution to keep things running smoothly, and can't risk losing access to financing or everyday banking because a form of payment they chose to accept isn't transparent or compliant with existing regulations. Accepting any form of money that publicly brags about being anonymous and impervious to government scrutiny may end up putting a big target on their back. No business wants to be watched that closely.


Mixers and Tumblers

A digital currency mixer is a service that mixes bitcoin/cryptocurrency from various sources and sends it in a manner that makes it nearly impossible to trace to the original source. These services are operating in violation of already established laws, and are now in the crosshairs of law enforcement agencies around the globe.

"All countries are advised to take action against Digital Currencies Mixers/Tumblers. Such services are designed exclusively to anonymize transactions and to make it impossible for Law Enforcement Agencies to detect and trace suspicious transactions. The existence of such companies should not continue to be tolerated."

-Recommendation from the Global Conference on Money Laundering and Digital Currencies


The Long Arm of the Law

Worldwide, there are enough similar variations of the following laws to fill a library or two, so it is important to research what may apply in your jurisdiction. Many of these laws are so broad and far reaching they easily encompass the activity of mixers, tumblers, and anonymous digital currencies. The following are examples of some of the laws that already have the power to oversee these currencies and services.


Obstruction of Justice

In the United States, obstruction of justice has an extensive reach:

"Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both," Sarbanes-Oxley Act of 2002, Section 1519

There is no longer a requirement for someone accused of obstructing justice to have known there were criminal proceedings ongoing or even contemplated. Knowing that a cryptocurrency will be used for untraceable transactions that operate outside the law if it is anonymized, anyone that purposely alters (mixers/tumblers) the transaction history, may find themselves facing obstruction of justice charges. It will be a laughable defence if you try to claim that you weren't aware a fully anonymous currency could be used for illegal purposes.


Unexplained Wealth Laws

"All countries are advised to consider the creation of the crime of unexplained wealth. The existence of such crime and its usage as a predictive offence for the crime of money laundering is key factor successful investigations/convictions/confiscations in this field." [sic]

-Recommendation from the Global Conference on Money Laundering and Digital Currencies


Unexplained Wealth Orders (UWO), used to help combat organized crime and corruption, are in place in various countries including Australia, Columbia, and Ireland. This type of law places the onus on any individual who is obviously living beyond their means, to prove their wealth was acquired legitimately and all corresponding income taxes were paid on it. Funds and property can be seized if the person cannot supply proof.

Canada Revenue Agency utilizes an audit method called "Indirect Verification of Income" if your lifestyle doesn't match the income you have declared for tax purposes. If you can't prove you acquired your wealth legitimately, you will have to pay income tax on the difference between what you claimed your income to be and the result of the Indirect Verification of Income. On top of the added taxes, there may be interest charges, penalties, and legal proceedings.

You may want to think twice about posting a picture of a Ferrari (and calling it yours) on social media. Public domains are fair game for collecting lifestyle information.


Money Laundering

Money laundering is a criminal act in which illegally obtained funds have their origin and details disguised, concealed, or misrepresented. The money is filtered through numerous avenues to obscure it, and then sent back in a manner and/or form that makes it difficult, if not impossible, to trace to the original source.


Proceeds of Crime

There are various Proceeds of Crime Acts around the world that attempt to deter organized crime, money laundering, and terrorist financing by depriving criminals of the profit from their offences. Canada's Proceeds of Crime (Money Laundering) and Terrorist Financing Act has a few items that may be of particular concern to anyone operating a mixer, tumbler, anonymous cryptocurrency, or an exchange that trades any such currencies. You can be deemed to be in possession of proceeds of crime from any Canadian indictable offence, even if the crime did not occur in Canada.

"Proceeds of Crime means any property, benefit or advantage, within or outside Canada, obtained or derived indirectly as a result of:

(a) the commission in Canada of a designated offence, or
(b) an act or omission anywhere that, if it had occurred in Canada, would have constituted a designated offence."

-Criminal Code of Canada - Section 462.3(1)


There is a legal requirement for record keeping and client identification for both financial service providers and anyone else that engages in an activity that is prone to usage in money laundering or terrorist financing. Any suspicious financial transactions or large amounts of currency (or other value/property) crossing borders must also be reported. The anonymizing process of altering and concealing transaction history certainly fits the criteria for a usual money laundering practice, as does the operation of an online cryptocurrency casino.

To be guilty of Possession of Proceeds of Crime, the Crown Prosecutor must prove the proceeds were from illegal means, the accused was, or had been, in possession of them and either knew the funds were from criminal activity or was suspicious but never verified the source. Pleading ignorance to knowing the source of the proceeds, when they have been hiding behind the cloak of anonymity for a reason, is a weak defense in Canada. If you feel that your anonymous cryptocurrency activity is untouchable by Canadian law, you may want to brush up on the long list of provisions in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.

The views expressed by the authors on this site do not necessarily represent the views of DCEBrief or the management team.

Author: Cindy Williamson

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