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How EU Fight Against Money Laundering Affects Crypto

By Darius Lengvinas
How EU Fight Against Money Laundering Affects Crypto 101
Source: iStock/simonidadjordjevic

On 26 April 2018, the European Parliament confirmed the latest text of the European Commission proposed directive known as the Fifth Anti-Money Laundering Directive (5AMLD). To this day, no specific laws or binding rules have been implemented at EU level to cope with risks in relation to virtual currencies.

How EU Fight Against Money Laundering Affects Crypto 102
Darius Lengvinas is a legal compliance specialist at Orca Alliance, a banking platform for cryptocurrency users. Author: Reda Ruzel

The Commission addressed the issue that suspicious transactions made with virtual currencies are not sufficiently monitored by the authorities and they are unable to identify the person behind the transactions. In addition, it was stressed that virtual currencies entail the risk that they may be used by terrorist organizations to conceal financial transfers.

5AMLD introduced the following crypto-related novelties.

  • Introduction of a definition of “virtual currencies”

“A digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically.”

It seems that the goal was to cover all existing virtual currencies, and not leave any loopholes for avoiding requirements. By presenting such a definition, the 5AMLD partly acknowledges that virtual currencies might be viewed as a new form of money. However, the definition does not provide any classification for virtual currencies, and as a result, does not address the fact that virtual currencies might not always operate as a means of payment but rather may function as an asset, commodity or security.

  • Virtual currency exchange platforms and wallet providers obliged to comply with AML (anti-money laundering) and CFT (combating the financing of terrorism) requirements

“An entity that provides services to safeguard private cryptographic keys on behalf of their customers, to hold, store and transfer virtual currencies.”

Hence, when a user’s private key is not held by the wallet provider, but by the user, then such a service provider is not satisfying the anti-money laundering (AML) or combating the financing of terrorism (CFT) provisions. For instance, as of today, such service providers would be Trezor, Ledger, Jaxxand Mist.

  • The 5AMLD does not provide a definition of “virtual currency exchanges”

However, such a definition derives from the description of the relevant obliged entities:“providers engaged in exchange services between virtual currencies and fiat currencies.” EU legislators have clearly decided to regard crypto-to-crypto exchanges as falling outside the scope of the AML provisions. What is more, newly introduced legislation creates legal uncertainty as to what intensity and type of exchange activities fall under the scope of the AML provisions. Such uncertainty is especially crucial for ICO organizers, which might be deemed to be providing exchange services when receiving fiat currencies and issuing new tokens.

  • Exchange service and wallet providers to be registered (authorized)

Providers will have to implement the necessary customer due diligence controls, monitor transactions and report any suspicious activity to the relevant national authorities. Such services are not licensed and none of the special minimum capital requirements or specific number of qualified managing bodies are required.

  • National authorities authorized to obtain all information from virtual currency exchanges and wallets

From the date of the transposition of 5AMLD, national authorities (including tax authorities) will be authorized to obtain all information from virtual currency exchanges and wallets allowing them to associate virtual currency addresses to the identity of the owner of the virtual currencies. Consequently, the authorities will match all the bank and payment accounts with their corresponding account holders, proxy holders, and beneficial owners.

  • The Take-Away: More transparency and less anonymity

The implemented 5AMLD will definitely present more transparency and credibility in the crypto world, and therefore the anonymity or pseudonymity currently prevailing in the crypto field will decrease. It is a positive outcome that the possibility of money laundering and financing terrorist activities through virtual currencies will be diminished. However, such novelties will bring all crypto users under the duty of paying taxes for crypto sales and exchanges (for instance, by exchanging Bitcoin for Ethereum you are considered to be selling Bitcoin, and hence you must pay taxes) as all tax authorities will get the complete list of all such crypto transactions.

The updated directive will enter into force three days after its publication in the Official Journal of the EU, and the Member States will then have 18 months to transpose the new rules into their national legislation. Estonia, however, once again demonstrated its crypto-oriented approach and ability to rapidly adopt new regulations – it has already transposed the directive’s provisions to the extent of virtual currencies and has made it possible for currency exchanges and wallets to become authorized and provide transparent services.

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