“Considerable Shift” Towards Crypto Regulation in the EU

The AML Directive has enhanced the rules in terms of customer due diligence and risk assessment. Additional regulations are under way.

Recent decisions by the European Commission show a considerable shift from the laissez-faire approach towards fintech regulation, including blockchain and cryptocurrency, in the EU, Brice Boland, Senior Manager at Initio, a business consultancy firm, told Cryptonews.com.

EU commissioners are now pushing for an amended version of the EU’s Fourth Anti-Money Laundering Directive (4 AMLD), as its current version is not well adapted to the ongoing growth of cryptocurrencies, Boland added.

"After the amendment comes into force, professionals and especially exchange services between virtual and fiat currencies and custodian wallet providers will have to comply, which includes, of course, compliance with the regulations in their country of incorporation," explains Boland. "Furthermore, all the services linked to cryptocurrencies will need to be registered to the AML authority of their jurisdiction."

At the moment it is unknown when the directive might come into force.

In addition to this, the European Commission announced its Action Plan on Financial Technology in March.

“This plan will release several recommendations on issues such as blockchain, and it is expected to adjust all the supervisory practices (especially the standardization practices) for Member States," explained the senior manager at Initio, which specializes in the financial industry and has offices in Brussels, Luxembourg and Geneva.

Why do certain cryptocurrency exchanges criticize plans to extend the directive's coverage to include their activities?

"The question has always been the same: how could compliance needs and regulations meet the needs of a more business-oriented perspective? How can these two worlds combine? The market has its rules, as much as compliance has its," said Martina Giuffrida, consultant at Initio, who is part of its Tech Task Force and specializes in financial institution compliance and regulation.

According to her, some progress has been made, for example, with the creation of the first 100% AML / CTF (Counter-Terrorist Financing) compliant cryptocurrency: AMLBitcoin by the NAC Foundation.

“Owing to a biometric identification system, it is possible to identify the owner of a cryptocurrency wallet so that every transaction can be monitored by analyzing the individual track records of AMLBitcoin users,” Giuffrida says. "Additionally, in Luxembourg, the bitFlyer exchange was the first cryptocurrency platform to receive approval from the CSSF, the Luxemburg regulation authority. This approval allows it to trade across Europe in full regulatory compliance."

Enhanced rules

The current 4 AMLD has definitely enhanced the rules in terms of customer due diligence and risk assessment, according to consultants.

"On the one hand, the force of the cryptocurrencies is also related to their anonymity and this has presented several opportunities for criminal activities, such as money laundering or tax evasion. On the other hand, their success has represented one of the most complex challenges for professionals in terms of timing the adoption of the directive itself and the implementation of procedures and guidelines for users," Boland said.

Furthermore, the evolution of cryptocurrencies and the implementation of the directive give no choice but for professionals to adapt their procedures to keep up to date and, most importantly, compliant with the regulation.

Boland added that, at the time the directive was drafted, cryptocurrencies were not as common as they are today, and for this reason, the 4 AMLD does not explore this topic as it should. For this reason, the Council of the EU has reached a consensus to amend the directive by introducing a definition of 'virtual currencies'.

"To comply with these new demands, one solution that was suggested was to ban and subsequently denounce certain cryptocurrencies violating the compliance rules, such as violations of embargoes or international laws (as, for example, a new Venezuelan cryptocurrency was interpreted as doing)," he said. "The question is not to accept or not accept cryptocurrencies, because they represent a … new way of investing, but to establish controls on the kind of cryptocurrency an institution can actually accept. Another solution adapted by professionals, which is not really a new one, is to monitor transactions."

Own Policies

In late February, the European Commission hosted a roundtable, "Cryptocurrencies - Opportunities and Risks", where representatives of the exchanges BitBay and Coinbase were present.

Patryk Kadlec, BitBay's Chief of Business Development, said at that meeting that all market players must ensure safety and transparency for their users to cope with these challenges.

"It is worth mentioning that cryptocurrencies were unanimously referred to as a technical phenomenon with huge potential, which was confirmed by both the representatives of the European Union and industry," Kadlec told Cryptonews.com.

At the meeting, Coinbase and BitBay stated they already have AML and know your customer (KYC) policies, and they are ready to implement other necessary regulations to protect consumers and the market from illicit activities.

Coinbase did not respond to requests for comment.