Are Bitcoins Better Than U.S. Dollars?

Digital Currency vs. Fiat Currency: Illicit Money & Money Laundering

Written by Adam English
Posted December 3, 2013

Senatorial and Congressional hearings have long been used as a tool to show righteous indignation.

These hearings are a surefire way to get your name and face in the news.

For this reason, the recent hearing on cryptocurrencies threw me off...

Leading up to the hearing, the chairman of the Senate Homeland Security and Governmental Affairs Committee sent letters to nine agencies asking for guidance on what is already being done to deal with cryptocurrencies, also known as digital or virtual currencies.

The responses, taken together, are confusing and show a complete lack of coordination.

The SEC is reviewing whether or not digital currencies should be treated as a security, while the Commodity Futures Trading Commission is looking into regulating them as commodities; and the Treasury refuses to define digital currencies as legitimate.

However, a federal judge hearing a case about a Ponzi scheme recently ruled they are indeed currencies.

Clearly, the government is struggling on how to handle the new breed of currencies in the digital age after it has maintained sole control of money in the nation and hegemony worldwide.

On top of this is a growing fear of how they are being used...

The Department of Homeland Security has adopted an "aggressive posture" to address the "emerging threat and criminal exploitation of virtual currency systems."

And the Treasury's Financial Crimes Enforcement Network (Fincen) has produced two rules that define how exchanges should handle them and other virtual currencies.

"Fincen's recent guidance concerning virtual currencies made clear that virtual currency administrators and exchangers that provide services within the U.S. must register with Fincen as money-services businesses and that they share similar regulatory responsibilities with other financial institutions," said Jennifer Shasky-Calvery, director of Fincen.

This places a hefty burden on anyone using a nascent, nontraditional currency. They'll need to ascertain whom they are doing business with and how the currency has been used — otherwise, they may face investigations and charges.

A Pleasant Surprise

The negative tone for the hearing was set, and the venue itself hinted at what was to come.

The Senate Homeland Security and Governmental Affairs Committee — not a financial committee — held this hearing.

Then came the twist...


What had all the makings of another afternoon of admonishing politicians demanding action turned into a surprisingly supportive hearing filled with questions and little posturing.

The first comment came from Chairman Tom Carper, who drew a parallel to the early days of the Internet, when many people raised concerns about illicit use. Carper pointed out how, in the long run, the Internet has had a hugely beneficial effect on peoples lives.

Jennifer Shasky-Calvery agreed with Carper, saying: "Innovation is a very important part of our economy. It's something for us to be proud of."

Mythili Raman of the Justice Department stated: "There are many legitimate uses. These virtual currencies are not in and of themselves illegal. There is good reason for us to remain watchful, but we also intend to balance that against the need for legitimate users."

In the end, all three Obama administration officials at the hearing stressed that digital currencies have important, legitimate uses, and that regulators need to be careful not to stifle innovation.

Neither they nor any of the Senators denounced them or called for new regulatory powers to crack down on illicit uses of the currencies.

However, all three officials (along with other politicians) voiced concerns about their potential for laundering and illegal activities...

Disappointing Ignorance

Edward Lowery of the Secret Service, said this during the hearing: "Digital currencies are particularly well-suited for supporting crime that is transnational in nature, thus requiring close international partnership to conduct investigations, make arrests, and seize criminal assets."

This is hardly the case.

Estimates from the UN Office on Drugs and Crime in 2001 estimated that $2.1 trillion was earned through criminal activities in 2011 worldwide. This would equal 3.6% of global GDP.

The best estimate for the amount laundered through the financial system is $1.6 trillion in 2011, or 2.7% of global GDP. Less than 1% of this amount was seized.

The market capitalization of the top 40 digital currencies is roughly $13 billion. To put this in perspective, the market cap of the top 40 digital currencies is worth about .8% of the dirty money floating around in the financial system two years ago.

Digital currencies are hardly suited supporting transnational crime. Their combined worth doesn't break 1% of the total of dirty money that is floating around in the banks and financial institutions, many of which the U.S. government regulates.

They couldn't even support domestic crime. Most estimates for the size of the illegal drug economy in the U.S.A. are around $500 billion. Digital currencies, if purely used to buy drugs, could only support 2.6% of U.S. demand. 

If the Secret Service, Fincen, and Justice Department officials are going to worry about a currency that is "particularly well-suited for supporting crime that is transnational in nature," they should be talking to the Senate Homeland Security and Governmental Affairs Committee about the U.S. dollar.

The Real Problem

HSBC laundered more than $670 billion of funds for terrorist organizations, drug cartels, and money launderers from Mexico, Columbia, Burma, Cuba, Iran, Libya, and Sudan.

Western Union, Bank of America, JP Morgan Chase&Co, Citigroup, and Wachovia also allegedly failed to comply with American anti-money laundering laws.

And yet all the U.S. government could secure was a little over $2 billion in "deferred prosecution agreements" from the nearly $1 trillion of dirty transactions between HSBC and Wachovia.

If every single bit of value in digital currencies were wrapped up in the terrorist and drug money laundering HSBC allegedly committed, it would have been less than 2% of the $670 billion the bank handled for criminals.

Then there are the paper notes we create, send abroad, and cannot track...

About 25% to 30% of the $1.18 trillion of U.S. currency is estimated to be overseas. That comes out to roughly $300 billion, or 22.7 times the amount of digital currency out there.

From 2007 to 2008, HSBC's Mexican affiliate, HBMX, shipped $7 billion in physical U.S. dollars to HSBC's U.S.-based affiliate, HBUS. That was more than any other Mexican bank, even one twice HBMX's size. HSBC's total fine was 28% of that alone.

The Feds are either disappointingly ignorant or willfully ignoring the real problem when it comes to crime and laundering... they themselves.

Federal regulators have virtually no control over the domestic financial system. When they do catch someone, they barely put a dent in the profits banks are pulling in from handling dirty money.

These "regulators" talk about forming relationships and international cooperation to handle digital currencies, yet they cannot manage to seize more than 1% of the dirty money entering the financial system.

And today they are spending days speaking in front of Senators, expressing concern over an imaginary problem with digital currencies, while they have utterly failed to reign in the massive problems they are tasked to address.

Then again, I guess they do have their Fifth Amendment right against self-incrimination.

Take care,

adam english sig

Adam English

follow basic @AdamEnglishOC on Twitter

Adam's editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor's page

*Follow Outsider Club on Facebook and Twitter.

Heal Your Ailing Portfolio Body