Last December, Australian authorities searched the Sydney home ^[1] of the alleged founder of Bitcoin, and in doing so brought virtual currencies back into the spotlight—this time with an Australian flavour. The search served as a timely reminder to the rest of us about the need to expand government oversight of virtual currencies.

But just what are virtual currencies? And why should we care?

A virtual currency ^[2] is a digital representation of value that can be traded online and isn’t regarded as the ‘legal tender’ of any country. As the IMF explains ^[3], virtual currencies cover a wide array of ‘currencies’ including simple ‘IOUs’ (for example, internet/mobile coupons or airlines miles), those backed by assets such as gold, and cryptocurrencies including Bitcoin, Ripple and Litecoin.

According to the Financial Action Task Force ^[2], some virtual currencies can be exchanged for real (fiat) currency (for example, Bitcoin, Ripple and Litecoin) while others are ‘non‑convertible’ and can only be used on certain websites (for example, World of Warcraft Gold ^[4]).

Given the pace of technology, there’s a chance digital currency will achieve wider acceptance and disrupt our traditional finance model faster ^[5] than our regulatory processes can manage. Before being disbanded for money laundering activities, Liberty Reserve ^[2] (a Costa-Rican money transmitter) had over ‘one million users worldwide’ and ‘handled 55 million transactions daily’, most of which were illegal. So there’s a chance that we could miss an opportunity to implement mechanisms that serve to limit the criminal and terrorist use of these technologies, and provides consumers, businesses and investors with confidence in their use.

Although virtual currencies offer potential benefits ^[6], including speed and efficiency in making payments and transfers, they also have the ability to harm society and individuals ^[7]. By not requiring transactions to be monitored and verified by ‘a trusted third party’, they’re also anonymous and therefore not easily traced by law enforcement agencies.

As Tobias Feakin writes ^[8], the pseudo-anonymity offered by virtual currencies and the anonymity of dark net sites (such as Evolution and the now defunct Silk Road) provides a cover for trade in illicit goods (including drugs and child pornography) and services (like contract-assassinations).

The potential for such misuse is not lost on governments. The UK government’s 2015 National Strategic Assessment of Serious and Organised Crime ^[9] commented that virtual currencies have become ‘the payment system of choice’ for individuals and organisations involved in some areas of cyber-crime. In Australia, the Australian Crime Commission’s Organised Crime in Australia 2015 report ^[10] examined how victims of cyber and technology-enabled crimes paid ransoms in Bitcoin.

While ‘traditional’ (non-cyber) criminals might appreciate their value for laundering funds and paying for illicit goods and services ^[11], some cases are emerging ^[12] on how virtual currencies are also being used to support terrorist organisations.

For instance, Ali Shukri Amin—a 17 year old from Virginia (US)–was sentenced to 11 years imprisonment ^[13] in June 2015 after pleading guilty to providing material support and resources to ISIS ^[14], including instructions on how to use Bitcoin ^[15] to conceal donations to the terrorist organisation.

Governments around the world have taken a variety of approaches ^[16] when it comes to regulating virtual currencies, ranging from a complete ban ^[3] on their use (China, Russia), proposals to introduce new anti-money laundering and terrorist financing laws (Canada), and developing regulations covering digital currency firms ^[17] (New York State).

In Australia, the Attorney-General’s Department described virtual currencies as a ‘powerful new tool’ at last year’s Senate inquiry into digital currencies ^[6]. At the inquiry, ASIC said it was aware that some banks had ceased doing business with ‘Bitcoin related companies’ due to concerns about the risks Bitcoin posed to their business and reputation. In response, the Senate committee strongly supported applying anti-money laundering and counter-terrorism financing laws to digital exchanges but noted the statutory review of the Anti-Money Laundering and Counter-Terrorism Act 2006 was already considering this issue.

With an election expected later this year, it’s doubtful whether the statutory review’s recommendations could be implemented into law before 2017-18. And implementation into practice would take longer still.

That’s too long to wait. We’re already seeing these currency technologies entering the mainstream, albeit in small numbers. At present it’s difficult to exchange virtual currencies ^[16] for hard currency. But a greater acceptance ^[9] by the general public of virtual currencies could increase their use.

With a number of financial institutions ^[18] and securities exchanges ^[19] already investigating ^[20] how to make better use of the technology underpinning virtual currencies, it’s probable that virtual currencies will grow in use. With growing use comes the possibility of misuse, and without satisfactory regulation or monitoring there won’t be an ‘administrative body to report illicit activity’ ^[16].

Over the next year, ASPI will follow developments in this area and seek to provide options for government to strike a balance between stimulating the development of new technologies and avoiding their misuse. Issues to be explored include blockchain ^[18] and the need to increase funding and research on combatting crime through the use of innovative technologies.

Virtual currencies are an important issue for the future of our society and economy. The Australian government is in a position to promote these innovative technologies and shape how virtual currencies are monitored and used while taking action to limit the potential for their misuse by organised crime and terrorist financiers.