http://online.wsj.com/article/SB10001424127887324373204578374611351125202.html By JEFFREY SPARSHOTT The U.S. is applying money-laundering rules to "virtual currencies," amid growing concern that new forms of cash bought on the Internet are being used to fund illicit activities. Enlarge Image Agence France-Presse/Getty Images The Treasury says money-laundering rules apply to 'virtual currencies.' The move means that firms that issue or exchange the increasingly popular online cash will now be regulated in a similar manner as traditional money-order providers such as Western Union Co. WU 0.00% They would have new bookkeeping requirements and mandatory reporting for transactions of more than $10,000. Moreover, firms that receive legal tender in exchange for online currencies or anyone conducting a transaction on someone else's behalf would be subject to new scrutiny, said proponents of Internet currencies. The rising popularity of virtual currencies, while no more than a drop in the bucket of global liquidity, is being fueled by Internet merchants, as well as users' concerns about privacy, jitters about traditional currencies in Europe and the age-old need to move money for illicit purposes. The arm of the Treasury Department that fights money laundering said Monday that the standard federal banking rules aimed at suspicious dollar transfers also apply to firms that issue or exchange money that isn't linked to any government and exists only online. One of the fastest-growing alternative cash products is Bitcoin, an online currency launched in 2009 that isn't backed by a central bank or controlled by a central administrator. Currency units, known as "bitcoins" and consisting of a series of numbers, are created automatically on a set schedule and traded anonymously between digital addresses or "wallets." Certain exchange firms buy or sell bitcoins for legal tender at a rate that fluctuates with the market. It isn't clear if the latest guidance would apply to a merchant's online scrip. Amazon.com Inc., AMZN -1.51% for example, in February announced Amazon Coins, which starting in May can be used to buy apps and games on Kindle Fire. An Amazon Coin is worth one cent. Amazon didn't respond to a request for comment. "We are beyond the stage where this was just funny money and a fun online thing. This is used as a currency," said Nicolas Christin, associate director of Carnegie Mellon University's Information Networking Institute. Bitcoins can be used in a host of legitimate transactionsfor example, website Reddit allows users to upgrade services using bitcoins and blog service Wordpress.com's store accepts them as a form of payment. Pizzaforcoins.com also lets bitcoin savers pay for deliveries through Domino's and other pizzerias. On the other hand, at least one online service takes bitcoins as payment for illegal drugs, according to a Federal Bureau of Investigation report last year. Bitcoin's backers point out that criminals will use any currency for money laundering or illegal purchases. "I think it's inevitable that just like you have U.S. dollars used by thieves and criminals, it's sadly inevitable you will have criminals use a virtual currency. We want to work with authorities," said Jeff Garzik, a Bitcoin developer. Still, law enforcement, regulators and financial institution have expressed worries about the hard-to-trace attributes of virtual currencies, helping trigger this week's move from the Treasury's Financial Crimes Enforcement Network, or FinCen. Creating clear-cut rules for virtual currencies is difficult. A FinCen official said that anti-money-laundering rules would apply depending on the "factors and circumstances" of each business. The rules don't apply to individuals who simply use virtual currencies to purchase real or virtual goods. The new guidance "clarifies definitions and expectations to ensure that businessesare aware of their regulatory responsibilities," said Jennifer Shasky Calvery, FinCen director. The FBI report last year said Bitcoin attracts cybercriminals who want to move or steal funds. "Bitcoin might also logically attract money launderers and other criminals who avoid traditional financial systems by using the Internet to conduct global monetary transfers," the report said. An FBI spokeswoman declined to comment when asked about the agency's concerns regarding virtual currencies. For now, the size of the bitcoin market is so small that it could be difficult or costly to move and exchange large amounts of illicit funds. Another danger: extreme price fluctuations. The value of a bitcoin rose to more than $60 a unit from less than $49 on one exchange following the release of FinCen's new guidancea move that Mr. Garzik attributed partly to a new level of certainty and legitimacy that federal recognition attaches to bitcoin transactions. The American Bankers Association in 2011 asked the Consumer Financial Protection Bureau to apply consumer financial protection laws uniformly across the financial sector regardless of whether an entity is a traditional bank or one of the evolving nonbank payment providers. A CFPB spokeswoman declined to comment on the matter. "This framework would wildly expand the reach of FinCen and the [Bank Secrecy Act],' said Patrick Murck, legal counsel for the Bitcoin Foundation, a trade group that promotes Bitcoin software and security standards. He said the government's rules "would be infeasible for many, if not most, members of the Bitcoin community to comply with." Some firms say they anticipated the rules. Charlie Sherm, chief executive of bitcoin payment processor BitInstant, said his company is already compliant. Mr. Christin of Carnegie Mellon said that he believes Bitcoin's dominant use right now is speculation. "When you have a commodity or currency whose value has grown as rapidly as Bitcoin it makes sense to hold on to it as a speculative instrument," he said. It also is commonly used for online black markets or gambling sites. "Whether used for money launderingthere is no smoking gun." Trading also is limited. On the biggest exchange, Japan-based Mt. Gox, volume has ranged from the equivalent of about $427,000 a day to just over $8 million a day during the past month, according to BitcoinCharts, a website that provides financial and technical data on bitcoins. The jump in the bitcoin exchange rate this week also coincides with concerns euros could be taken from retail bank accounts in Cyprus to fund a bailout. Internet blogs say speculators are looking toward currency alternatives.