Treasury's Bank Secrecy Act Advisory Group will include a member of the virtual-currency community to help make regulations "better informed and more effective," David S. Cohen, the undersecretary for terrorism and financial intelligence, said today.

Treasury has urged industry leaders to devise ways to prevent criminal use of virtual currencies rather than develop technology that "further obscures financial trails," he said in remarks prepared for a speech at the New York headquarters of Bloomberg News.

Virtual currencies will benefit from government oversight that lends credibility to the market, he said.

"Financial transparency can help bring stability to the virtual currency market and security to its users and investors," Cohen said. "That is what we are trying to do through sensible, flexible and — to use a word from the tech world — scalable regulation."

Governments around the world are grappling with how to classify or regulate virtual currencies such as Bitcoin. Authorities in Russia, China and Israel have sought to restrict the payment system, while Treasury Secretary Jacob J. Lew said in January the U.S. needed more time to assess the "phenomenon" to ensure it isn't used for unlawful purposes.

The Treasury Department is working with other countries and the European Commission to develop international standards for virtual currency, Cohen says. 

"There may be situations where we need to choose between innovation and transparency," Cohen said in the draft remarks. "Let me be clear: When forced to choose between the two, we will err on the side of transparency."

If virtual currencies become prevalent enough for consumers to use them exclusively, Cohen says, the department will look at putting cash-like regulations on the industry. For example, vendors that receive more than $10,000 on a purchase must report the purchase.

Bitcoin, the most popular digital currency, emerged from a 2008 paper written by a programmer or group of programmers under the name Satoshi Nakamoto. It uses a public ledger to record transactions made under pseudonyms, an aspect of the system that has fed mistrust among law enforcement.

The price for Bitcoins soared in November, topping $1,000 for the first time, as merchants including Overstock.com began accepting the virtual currency and speculators anticipated broader use of digital money.

Prices dropped this year amid mounting U.S. prosecutions of Bitcoin-linked money laundering, concerns that governments would restrict the currency and market disruptions including hacker attacks on online exchanges.

Cohen has served as undersecretary since 2011. He first joined the Treasury in 1999 and, while working for its general counsel, helped draft part of the Patriot Act that granted the regulator new tools to thwart money laundering and terrorist financing after the Sept. 11 attacks.

The Treasury's office for terrorism and financial intelligence seeks to prevent criminal networks from using the U.S. financial system and to cut off funding for terrorists. It includes the Office of Foreign Assets Control that helps enforce sanctions on nations, such as Iran, that have a history of providing support to terrorist groups.

New York financial regulators also have been working on a response to Bitcoin. Benjamin Lawsky, the state's superintendent of financial services, announced last week that his office is accepting applications to operate exchanges for Bitcoin and other digital currencies. He plans to propose a set of rules for virtual-currency firms by mid-year.

Last month's collapse of Tokyo-based Bitcoin exchange Mt. Gox, in which some customers lost their holdings, shows the need for "robust standards for consumer protection, cyber security and anti-money laundering compliance," Lawsky said.

Federal authorities have been targeting misuse. Last year, they shut down Silk Road, an online drug and weapons bazaar where Bitcoin was the preferred medium of exchange. In January, they arrested Charlie Shrem, a Bitcoin entrepreneur, on charges of money laundering. He has denied the allegations.

"We do not currently see widespread use of virtual currencies as a means of terrorist financing or sanctions evasion," Cohen said in his speech. "But these are adaptable actors who are drawn to ungoverned spaces, and so may increasingly look to this technology as an attractive way to transfer value."

This story has been updated with additional reporting by Bailey Reutzel.

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