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Where Does The CFPB Stand On Bitcoin?

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As various government entities are coming together to discuss the many issues related to virtual currencies, there is one empty seat at those tables: the CFPB. Now, the GAO is calling for the agency to get involved in order to assure consumer well-being. Why has it been so hard to get the bureau engaged?

It usually doesn’t take much coaxing for the Consumer Financial Protection Bureau (CFPB) to take up an issue. Except when it comes to virtual currencies – where there’s been harm to consumers already in the face of bitcoin exchange fraud. They’ve been largely absent from the pertinent interagency working groups that are addressing issues related to virtual currencies, and now the GAO says that it’s time for them to step in and get involved.

In a recent report, the GAO notes that various federal agencies already have begun to collaborate on virtual currency issues through informal discussions and interagency working groups primarily concerned with money laundering and other law enforcement matters. However, those groups have not focused on emerging consumer-protection issues, and the CFPB, which is responsible for providing consumers with information to make responsible decisions about financial transactions, generally has not participated in these groups.

Subsequently, the 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. Moreover, without the CFPB’s input, 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 GAO said in its report “Virtual Currencies: Emerging Regulatory, Law Enforcement, And Consumer Protection Challenges."

The GAO conducted its virtual currency review because such currencies, which essentially are digital representations of value not issued by governments, have grown in popularity, including for use in buying goods and services when exchanged for dollars or other currencies. Bitcoin, for example, which formed in 2009, and similar virtual currency systems operate over the Internet and use computer protocols and encryption to conduct and verify transactions.

"While these virtual-currency systems offer some benefits, they also pose risks,” the GAO noted in its report. “For example, they have been associated with illicit activity and security breaches, raising possible regulatory, law-enforcement, and consumer-protection issues."

As such, the agency was asked to examine federal policy and interagency collaboration issues concerning virtual currencies.

The report discusses federal financial regulatory and law enforcement agency responsibilities related to the use of virtual currencies and associated challenges. It also takes a look at the actions and collaborative efforts the agencies have undertaken regarding virtual currencies. To address the objectives, the GAO reviewed federal laws and regulations, academic and industry research, and agency documents. It also interviewed federal agency officials, researchers, and industry groups.

Concerns have arisen because virtual-currency systems may provide greater anonymity than traditional payment systems, and they sometimes lack a central intermediary to maintain transaction information. As a result, financial regulators and law enforcement agencies may find it difficult to detect money laundering and other crimes involving virtual currencies.

Moreover, many virtual-currency systems can be accessed globally to make payments and to transfer funds across borders. Consequently, agencies investigating and prosecuting crimes that involve virtual currencies may have to rely on cooperation from international partners who may operate under different regulatory and legal regimes, the GAO said.

Among the consumer and investor protection issues virtual currencies have raised include the reported loss of consumer funds maintained by bitcoin exchanges, volatility in bitcoin prices, and the development of virtual-currency-based investment products, according to the GAO. For example, in February, Tokyo-based bitcoin exchange c Mt. Gox filed for bankruptcy after reporting that it had lost more than $460 million.

Federal financial regulatory and law enforcement agencies have taken a number of actions regarding virtual currencies. In March last year, for example, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued guidance that clarified which participants in virtual currency systems are subject to anti-money-laundering requirements and required virtual-currency exchanges to register with FinCEN.

Additionally, financial regulators have taken some actions regarding anti-money-laundering compliance and investor protection. For example, in July 2013, the Securities and Exchange Commission (SEC) charged an individual and his company with defrauding investors through a bitcoin-based investment scheme. Moreover, law-enforcement agencies have taken actions against parties alleged to have used virtual currencies to facilitate money laundering or other crimes. In October last year, for example, multiple agencies worked together to shut down Silk Road, an online marketplace where users paid for illegal goods and services with bitcoins.

As the CFPB jumps into the discussions on virtual currencies at the federal level, various states also have been working to address their own issues. California Gov. Jerry Brown, for example, recently signed into law a bill that recognizes legal use of bitcoins and other digital currencies in the state. The bill removes a provision of state law that prevented the use of `’anything but the lawful money of the United States,” the L.A. Times reported June 28.

"In an era of evolving payment methods, from Amazon Coins to Starbucks Stars, it is impractical to ignore the growing use of cash alternatives,” the law’s sponsor Assemblyman Roger Dickinson (D-Sacramento) said in a statement.

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