Report of the Commonwealth Working Group on virtual currencies

Executive summary
At the Commonwealth Law Ministers Meeting held in Gaborone, Botswana from 5–8 May 2014, Law Ministers, in adopting the Report of the Commonwealth Group of Experts on Cybercrime,11 Commonwealth Secretariat, Report of the Commonwealth Working Group of Experts on Cybercrime, LMM(14)14, London, 2014.
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‘stressed that cybercrime was a global matter and any weak link provided opportunities for criminals. Prevention was of crucial importance, and the effort to combat cybercrime required collaboration with a wide range of national, regional and international organisations and with the private sector and civil society’.

In endorsing the Commonwealth Secretariat’s programme of work, the Ministers also accepted the recommendations of the report, which included the proposal that ‘every Commonwealth jurisdiction should have an up-to-date and comprehensive legal framework to combat cybercrime’.

To further its mandate to provide technical assistance to Commonwealth member countries, particularly in the areas of cybercrime, anti-money laundering and countering the financing of terrorism (AML/CFT), the Secretariat convened a Round Table on Virtual Currencies from 17–18 February 2015, comprising representatives from 10 member countries22 Barbados, Ghana, Jamaica, Kenya, New Zealand, Nigeria, Singapore, Tonga, Uganda and the UK.
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and from regional and international organisations,33 The African Union, the Council of Europe, the United Nations Office on Drugs and Crime (UNODC),INTERPOL, the International Monetary Fund (IMF) and the Eastern and Southern African Anti-Money Laundering Group.
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which aimed to:

(1)
raise awareness of emerging trends in the use of virtual currencies among Commonwealth member countries and sensitise states on the need to follow such developments;
(2)
determine any risks that these trends pose, with a focus on the potential of virtual currencies to be associated with criminal offences, including money laundering and the financing of terrorism;
(3)
enable member countries to acquire an overview of existing responses and possible new responses to address any harmful impact and to set milestones for future action.
Following the Round Table, representatives from the participating member countries agreed a number of conclusions, outcomes and recommendations, which included:

(1)
a report on the prevalence and impact of virtual currencies in the Commonwealth (the ‘Report’); and
(2)
the need for technical guidance for member countries on the potential regulatory and legislative measures that could be implemented to effectively respond to virtual currencies (the ‘Technical Guidance’).
In order to achieve these outcomes, the Secretariat established a Commonwealth Working Group on Virtual Currencies (the ‘Working Group’),44 Australia, Barbados, Kenya, Nigeria, Singapore, Tonga and the UK, with the IMF, World Bank, Interpol and UNODC, chaired by Colin Nicholls QC.
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with membership drawn from all regions of the Commonwealth, including small jurisdictions and international organisations with expertise on virtual currencies, to consider the recommendations of the Round Table. To assist the Working Group in these tasks, the Secretariat undertook a survey of the prevalent virtual currencies in eight member countries,55 Ghana, India, Jamaica, Kenya, Nigeria, South Africa, Trinidad and Tobago and Uganda.
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as well as research into the regulatory responses in some economies within the Commonwealth, to provide a cross section of Commonwealth experience of virtual currencies.

The results of the surveys and the research, which are included in this report, have disclosed that member countries have adopted a diverse range of approaches to virtual currencies, from that of Bangladesh, which has declared them illegal, to that of Canada which, although recognising their legality, has sought to regulate the high risks involved in their use.66 Virtual currencies are in use in 46 of 53 member countries, based upon client download statistics. The list of the jurisdictions is in the report.
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Although some jurisdictions have yet to formally appreciate the nature and impact of virtual currencies, those that have done so demonstrate a variety of disparate responses, including some which are limited, uncoordinated and fragmentary.77 See, Conclusion 4.
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To deepen their understanding of virtual currencies, the Working Group received presentations from experts88 The UK Digital Currency Association; British Banking Association; BitPesa, a Kenyan remittance service using virtual currencies; Bitt, a Barbadian virtual currency exchange; Bankymoon, a South African virtual currency-using business; Minku, a Nigerian virtual currency-using business; Prof Alan Woodward, University of Surrey; Dr Sarah Meiklejohn, University College London; and Ripple Labs, a US-based provider of decentralised payment services.
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from the banking sector, academia, virtual currency operators and users and law enforcement during the first half of its meetings held on 24–26 August 2015.

Although this report is primarily concerned with the development of legislative and regulatory responses to mitigate risk, it also seeks to confirm the express recognition of members of the Round Table that virtual currencies have the potential to accrue significant benefits for Commonwealth member countries.

The evidence of criminality in the use of virtual currencies discloses a critical need for an effective and co-ordinated legislative and regulatory response by member countries. Just as in other types of cybercrime, if countries ‘are not supported in developing and maintaining security and other capacities at levels consistent with other countries, they risk becoming attractive to offenders as a safe haven from which other locations can be attacked’.99 Commonwealth Secretariat, Report of the Commonwealth Working Group of Experts on Cybercrime, LMM (14)14, London, 2014, para 64.
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The Working Group concluded that:

(1)
virtual currencies are prevalent in almost every member country and within every region of the Commonwealth;
(2)
virtual currencies have the potential to benefit member countries and to drive development, but they also involve risks, particularly as regards their use by criminals for money laundering, terrorist financing and cyber and cyber-enabled crime;
(3)
with the exception of one member country,1010 Bangladesh; See, ibid., para 60.
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in which virtual currencies have been declared unlawful, the majority of member countries have recognised their advantages and treat their use as lawful;
(4)
prohibition of virtual currencies is unlikely to be effective. In some member countries in which regulation has been adopted, it has been limited, uncoordinated and fragmentary. There remain significant areas in which regulation is required;
(5)
although the Financial Action Task Force (FATF) Recommendations and Guidance on virtual currencies have provided a global response, they are limited to AML/CFT.
The Working Group recommended:

(1)
Legality: Member countries should be encouraged to make a positive determination on the legality of virtual currencies in their respective jurisdictions.
(2)
Awareness: Member countries should be encouraged to foster an awareness of virtual currencies within their jurisdictions and the potential risks involved in their use (including but not limited to the money laundering and terrorist financing (ML/TF) risks of virtual currencies and the risk to consumers). Financial regulators and central banks should consider making public statements on the legality of virtual currencies and the applicability of any existing legislative frameworks. Education and funding should be provided for training for law enforcement.
(3)
Legal frameworks: Member countries should be encouraged to consider the application of their existing legal frameworks to virtual currencies and, where appropriate, should adapt them or enact new legislation to regulate virtual currencies. Where member countries consider it necessary to legislate in response to cyber or cyber-enabled crime, they should be encouraged to have regard to the provisions of the Commonwealth Model Law on Computer and Computer Related Crime, and related Commonwealth documents, in particular:
Taxation: Tax authorities are encouraged to make public statements clarifying the appropriate taxation regimes applicable to virtual currencies and transactions relating to their use as a medium of exchange. Where appropriate, tax authorities are encouraged to adapt and extend existing taxation regimes to virtual currencies.
Proceeds of crime: Member countries should be encouraged to consider revising their proceeds of crime legislation to ensure that it is adequate to encompass the potential transmission of benefit by criminals using virtual currencies.
Consumer protection: Member countries should consider the possibility of extending their consumer protection legislation to include purchases of virtual currencies as well as consumer transactions using virtual currencies as a medium of exchange.
Any regulatory and legislative frameworks should focus on interactions with fiat currencies and avoid attempting to regulate the underlying decentralised ledger technology. Such frameworks should be technologically neutral and avoid stifling innovation.

(4)
The FATF guidance and recommendations: Member countries are encouraged to implement the FATF guidance for a risk-based approach to virtual currencies (June 2015) by bringing entities transacting at the intersection of fiat and virtual currencies within existing AML/CFT regimes.1111 FATF/OECD, Guidance for a Risk-Based Approach: Virtual Currencies, FATF, Paris, France.
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This should include applying existing registration or licensing requirements to such entities, including, where appropriate, mutual recognition of licences granted in one jurisdiction in other Commonwealth jurisdictions.
(5)
Law enforcement: Member countries should consider developing and improving the capacity of law enforcement, especially in the areas of digital forensics and analytics. This should include the training of prosecutors, judges and regulatory authorities.
(6)
Co-operation: The Commonwealth Secretariat and other international partners should create a digital repository of best practice and model regulations as part of an online community to assist member countries in developing their policies and capacity to respond to virtual currencies. Capacity-building activities for relevant public sector stakeholders should also be considered:
Member countries should encourage the establishment of industry associations within their jurisdictions to support the development of a responsible and sustainable virtual currency industry. Where such associations already exist, member countries should be encouraged to proactively engage with them and encourage responsible behaviour among their members, for example, by establishing or promulgating industry standards and accreditation models.
Clear information-management systems should be established between industry sectors to share information regarding suspicious transactions, to enhance co-operation in support of the development of a risk-based approach to the industry, and to allow a fair appraisal of strengths and weaknesses within compliance models.