Australia took an important step in countering the criminal use of digital and cryptocurrencies when legislation regulating digital currency exchanges under Australia’s Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) Act 2006 came into effect on 3 April. This regulation has many positives aspects. But digital currencies will continue to facilitate crime and will remain a challenge to law enforcement.

Regulating the industry is necessary because it removes an intelligence black spot that’s exploited by criminals. Digital currencies—including cryptocurrencies such as Bitcoin, Ethereum, and Ripple—pose numerous security challenges for governments. They’re known to be used in a range of crimes, including ransomware, terrorism, and the purchase of drugs, weapons and child exploitation material, often through the dark net.

They’re attractive to criminals due to the pseudo-anonymity created by cryptography and a peer-to-peer architecture provided by blockchain technology that negates the need for a central authority such as regulated bank settlement or government control. While all transactions and past ownership details are recorded in a publicly accessible ledger on the internet, computer code rather than individual names and addresses act as the owner’s digital signature in the blockchain.

The new legislation requires digital currency exchanges to register on a Digital Currency Exchange Register maintained by AUSTRAC, Australia’s AML/CTF regulator and financial intelligence unit. Two exchanges—CoinSpot and Independent Reserve—were the first to be registered when the legislation came into effect last month. More than 80 are now registered, with more applications pending.

Registered exchanges will have to collect and verify the identity of their customers and report to AUSTRAC details of suspicious matters and transactions involving physical currency of $10,000 or more. The laws apply when customers exchange digital currency for money or vice versa. These legislative changes are a positive step. They’ll provide new intelligence to government, particularly around suspicious activity. And regulation at the point of conversion between digital currency and real money is sensible because it’s a good place to ‘de‑anonymise’ criminals.

It’s certainly about time that regulation was introduced in Australia. The first decentralised cryptocurrencies emerged in 2009. According to Bradley Brown, AUSTRAC’s National Manager for Strategic Intelligence and Policy, criminals ‘have had a pretty audacious start in relation to digital currencies and cryptocurrencies for the last nine years’.

But the Australian government should be applauded for regulating the currencies, rather than introducing outright bans on them, as other countries have. Digital currencies and blockchain—the technology underlying cryptocurrencies such as Bitcoin—have legitimate and promising uses, and innovation should be encouraged. Benefits and opportunities include lower costs and faster payments, improving the efficiency of humanitarian aid delivery and increasing access to financial services.

Also positive is the response to regulation by the digital currency exchanges themselves. While some have bemoaned the cost to business, many have welcomed and even lobbied for regulation. As a director of Independent Reserve pointed out, there’s a ‘legacy stigma’ with digital currencies in which many people associate the currencies with crime.

Regulation under the AML/CTF Act will provide greater legitimacy, and give confidence and assurance to consumers, investors and business. This includes the banking sector, which has made it difficult for customers to trade in digital currencies, and for digital currency exchanges to hold bank accounts, owing to banks’ concerns about the risk of facilitating crime.

A further positive is the cooperation between the regulator, AUSTRAC, and the regulated sector in devising the new rules. A number of workshops were held between the regulator and digital currency exchanges before the legislation was drafted. This co‑design aligns with AUSTRAC’s smarter regulation program.

Despite these positive developments, digital currencies will continue to be exploited by criminals, and present an ongoing challenge to law enforcement and intelligence agencies.

First, there’s inconsistent regulatory treatment of digital currencies worldwide. While some countries have banned digital currencies, others—such as the European Union—are only considering regulation under AML/CTF legislation. For as long as this remains the case, individuals seeking anonymity can join digital currency exchanges in unregulated jurisdictions.

Second, Australia’s new regulations apply at the point where money is converted from real currency to a digital currency and vice versa. But many transactions don’t require a conversion because money is spent on goods and services or exchanged for other digital currencies. There remains a lack of transparency around many of these transactions, especially when compared to traditional banking.

Law enforcement has previously been able to exploit privacy weaknesses in digital currencies to identify criminals. However, the currencies’ degree of anonymity is one of their most popular features—for legitimate and illicit reasons alike.

Therefore, we can expect the continued development of privacy-hardened cryptocurrencies and other techniques—such as the use of TOR browsers, ‘dark wallets’ and ‘mixing’ services—to obscure true identities. These developments will continue to cause difficulties for law enforcement and intelligence agencies, which will need to keep up with technological innovations exploited by tech-savvy criminals.

Nonetheless, Australia’s regulation of digital currency exchanges, and the regulators’ cooperation with the sector, are welcome steps in the ongoing fight against crime.