Regulation of Bitcoin at EU level is "absolutely coming and absolutely necessary", senior sources state, and is likely to arrive in the form of new legislation rather than adopted into existing laws.
PaymentsCompliance spoke to European Commission and European Council figures during two closed doors sessions this week to understand how regulators are approaching the subject of controls.
The European Banking Authority (EBA) recently repeated its stance that it would not support regulation of Bitcoin, following an opinion piece in which it outlined 70 threats associated with crypto-currencies.
However, it has since softened its hard-line approach by stating it would give the opinion to the EU and let it make its own mind up.
The EBA would likely have to work with other regulators to then act as enforcers.
A senior European Commission figure said: “We know it’s coming, it cannot be avoided. We know there are huge risks involved and it is up to us to protect consumers.
“It is a case of when, not if, and it is being discussed at an advanced stage.
“It's the next big thing on our agenda, and regulation is the only way forward.”
The source said money laundering was “undoubtedly” the biggest concern surrounding the legitimacy of Bitcoin.
Authorities remain concerned the anonymous aspect of the peer-to-peer transfer of funds is "an open invitation for criminals" to wash illicit cash.
Anti-money laundering (AML) expert Brian McDonnell, a partner at Addleshaw Goddard law firm, agreed that crypto-currency “could lend itself to money laundering”.
“There is a risk that if you can convert your ill-gotten gains from criminal proceeds into crypto-currency, then obviously you could engage in transactions with that currency which would then layer and disguise its home origin,” he said.
But McDonnell suggested that regulators could tackle this by attempting to locate a crypto-currency’s “identifiable participants”.
He said: “States or international bodies could theoretically step in and seek to exercise some control over how those crypto-currencies operate.
“And assuming they have the appetite, because they believe it is a source of money laundering, terrorist financing or other criminal activity in the dark web, they have to have the means as well.
“It’s no good saying we want to regulate this space because of the fear of money laundering or terrorist financing if we have no practical way of doing that because of the way crypto-currencies operate.”
Tom Robinson, chief operating officer at London-based Bitcoin business Elliptic, told PaymentsCompliance that through analysis of transaction records and external data, he believes the Blockchain can already be used to trace the flow of illicit funds.
Robinson said that assigning digital IDs to known Bitcoin network participants can help businesses assess the likelihood of being exposed to the proceeds of crime.
Eventually, it could also be used by regulatory authorities to investigate money laundering, he added.
“Once you make a transaction it’s recorded forever on the Blockchain, and you don’t know what’s going to happen in the future in terms of tools for the anonymising of payments,” he said.
“So you might make a transaction now and in a few years’ time it might be easy to assign your identity with it.
“Money laundering with Bitcoin is a very risky endeavour; if I were going to try and launder money I don’t think I’d use a digital currency with a completely transparent, public ledger at its heart.”
But Robinson warned that authorities must develop a full understanding of the technical details of crypto-currencies, to avoid falling behind technologically-advanced criminal actors.
He said: “It’s fairly straightforward to do at the moment, but I think an arms race will develop between money launderers and people like us trying to trace payments.”
Other experts are more hostile towards regulatory interference in crypto-currency technology.
Crypto-currency regulation expert Juan Suarez, counsel at Bitcoin wallet provider Coinbase, said last month that Bitcoin “faces the immediate risk of regulation that could stamp out innovation and ultimately defeat the utility of the technology”.
He added: “In truth, restricting peer-to-peer Bitcoin transfers across the Bitcoin network would require an onerous, oppressive, and laborious enforcement campaign, akin to restricting the transmittal of emails via privately-hosted servers.”