Will EU’s New AML Laws Refute Crypto’s Dirty-Money Image?
The debate over whether or not the cryptocurrency industry needs international regulations seems to be never-ending. On one side of the argument are those who believe that crypto is fine as it is, with a patchwork of regulatory jurisdictions that pepper crypto’s legal landscape.
However, the party of individuals and larger entities seems who call for international regulations on crypto seems to be growing larger, particularly whenever a disaster strikes or when major security flaws in exchanges or other platforms are revealed.
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As it stands now, what’s good for the goose is good for the gander–for example, cryptocurrency exchanges in places that have established security standards may be more attractive to a wider number of users. After all, users in Northern Ireland or Cambodia may benefit indirectly from regulatory standards that have been placed on a Japanese exchange (Japan has one of the most advanced regulatory environments for crypto in the world.)
But Japan is still quite an anomaly. The governments of most countries are still in the infancy of understanding what crypto is, let alone creating a comprehensive regulatory environment for it.
Therefore, the introduction of Europe’s AMLD5, a new anti-money laundering regulation, will have a significant impact on the way that any cryptocurrency exchange (or similar service) that wishes to operate in Europe conducts its KYC (know your customer) and AML (anti-money laundering) checks.
Agreement on #AMLD5 just reached by EU institutions. New rules will increase transparency on the beneficial owners of companies and trusts and make the EU stronger in fight against #MoneyLaundering and terrorism financing @judithineuropa @krisjaniskarins @EU2017EE @EU_Commission pic.twitter.com/NXPZOnMRXi
— Roberto Gualtieri (@gualtierieurope) December 15, 2017
In the summer of 2018, it was agreed that EU member states would transition into AMLD5 enforcement by January of 2020. The latest draft of the directive was published by the European Parliament and Council and FATF (Financial Action Task Force), a multinational organization dedicated to fighting financial crime, earlier this month.
The impact of the AMLD% has the potential to impact the cryptocurrency industry similarly to the way that the European GDPR (General Data Protection Rule) impacted the ways that websites collect data. While the regulation is specific to Europe, the effect it had stretched across the globe, reaching each and every firm that a website accessed by users based in Europe. Unless a company was willing to geo-sense and block all EU-based visitors to its website–and some were–it was forced to comply.
Because most cryptocurrency exchanges have some operations in Europe, they will be forced to either comply with AMLD5 or to end their operations in EU member states. Therefore, AMLD5 is expected to impact most cryptocurrency exchanges around the world.
In a certain light, it seems that the rest of the world may have been waiting for something like AMLD5 for a long time. “From an international point of view, the key relevance of AMLD5 is that it confirms the EU’s leadership role in AML (anti-money laundering) legislation,” wrote Claus Christensen, CEO at Know Your Customer Limited, in a report for RegulationAsia.
“Over the last few years, we have seen a similar effort from regulators across the Asian region to improve overall transparency in company structures and more extensive KYC (know your customer) and AML screening requirements, but the lack of a political and economic central body comparable to the European Commission makes it harder to coordinate strategy in the same way.
AMLD5 Could Make Crypto More “Legit”
It may come as a surprise that even a number of fairly reputable cryptocurrency exchanges have employed very limited KYC checks. One study conducted by digital identity firm Mitek in 2018 revealed that two-thirds of cryptocurrency exchanges “failed” to check the identities of their customers almost entirely.
Two Thirds of US, EU Crypto Exchanges Fail to Verify Customer Identities #Industry #aml #AMLD5 #coinbase #cryptocurrencyexchange #cryptocur https://t.co/rgfabM8reM
— CryptosVibe (@cryptosvibe) June 6, 2018
Indeed, of the 25 exchanges examined by Mitek, 68 percent of them allowed users to trade crypto and fiat currency requiring just an email address and telephone number.
Of course, whether or not this lack of KYC checks is detrimental to the industry significantly depends on who you’re talking to. The more (shall we say) libertarian-minded side of the crypto community may believe that having any KYC checks on crypto exchanges goes against the very nature of the beast–after all, these checks do make it much easier for coins to be tracked through purchases and for the IRS to enforce taxation on crypto assets.
Wow, spending more taxpayer money while #EU regulation cripples Bitcoin exchanges and wallet providers with their #AMLD5 directive. Politicians should stay out of #blockchain because where we are going, we don’t need politicians! #lessismore #Europe #politics #bitcoinrevolution https://t.co/kAhLsOJBgY
— MrBitcoin (@MrBitc0in) April 11, 2018
On the other side of the coin, however, are those who believe that having a more standardized set of KYC requirements will further ‘legitimize’ the cryptocurrency industry.”
“Cryptocurrency wallets and exchanges want to enjoy the same trust as the wider traditional financial services, but for this to happen they need to rise above the sometimes-dubious reputation of cryptocurrencies’ past and be seen as ‘model citizens’ of the economy,” said John Devlin, principal analyst at P.A.ID Strategies, when the research was revealed. P.A.ID was responsible for publishing Mitek’s findings.
“Meeting the regulatory demands ahead of AMLD5 coming into force could go a long way to changing this sector’s reputation as being something of a ‘wild west’.”
“Meeting regulatory demands ahead of #AMLD5 coming into force could go a long way to changing this sector’s reputation…”#cryptocurrency #regulation #bitcoin #altcoins https://t.co/UptWaJWCwR
— Alexandra Beekers 🏳️🌈 🌍 (@AlexandraB66) June 5, 2018
Kalle Marsal, COO at Mitek, added that therefore, AMLD5 could be a simple way to improve the legal health of the industry: “wallets and exchanges want to change perceptions of lawlessness and it’s a relatively straightforward fix. Identity verification processes can be—if implemented correctly—simple for the customer and no barrier to signing up.”
“By incorporating systems that are just as future-looking as cryptocurrency itself, exchanges and wallets can be both competitive and compliant with regulatory demands,” he said.
Supervisor DNB admits creditcards offering fiat-crypto-fiat exchange should already be regulated under existing legislation – so why no supervision? These cards are actively marketed to NL/EU consumers from outside EU #PSD2 #AMLD5 #ICOHearingNL https://t.co/IbuuzcxrIR
— Joost Mulder (@joostmulder) January 24, 2018
However, there are some logistical shortcomings in the latest draft of the AMLD5 in terms of understanding how cryptocurrency wallets and exchanges operate.
One of the most questionable statements said that “countries should ensure that originating VASPs (virtual asset service providers) obtain and hold required and accurate originator information and required beneficiary information on virtual asset transfers, submit the information to beneficiary VASPs … and make it available on request to appropriate authorities.”
In other words, cryptocurrency exchanges need to obtain and hold the identities of their users, and then send them to other cryptocurrency exchanges where users might be sending transactions to.
On its face, such a requirement may seem innocent enough, but a letter from Chainalysis COO Jonathan Levin and head of policy Jess Spiro to the FATF not only explained that the requirement was “not feasible”–it could also have serious consequences.
First of all, “Virtual Assets are designed to provide a way to move value without the need to identify the participants in a transaction,” the letter explains. “In fact, in most circumstances, VASPs are unable to tell if a beneficiary is using a VASP or their own personal wallet in any given transaction. Therefore, requiring a transmission of information identifying the parties is not feasible.”
“There is no infrastructure to transmit information between VASPs today, and no one has the ability to change how virtual asset blockchains work.”
In other words, including this requirement in the directive could create a scenario in which cryptocurrency exchanges are faced with an impossible task. “There is no infrastructure to transmit information between
VASPs today, and no one has the ability to change how virtual asset blockchains work,” the letter said.
Therefore, the requirement could drive users away from centralized crypto exchanges, which could greatly reduce the transparency that FATF is seeking to establish through AMLD5: “forcing onerous investment and friction onto regulated VASPs, who are critical allies to law enforcement, could reduce their prevalence, drive activity to decentralized and peer-to-peer exchanges, and lead to further de-risking by financial institutions. Such measures would decrease the transparency that is currently available to law enforcement.”
While the FATF has not responded directly to this letter, the EU Commission that was involved in the creation of AMLD5 has been mandated to present a set of amendment proposals that may impose self-reporting requirements by early 2022. This may not exactly be a realistic solution, but the fact that the amendments are already a topic of conversation could be seen as a step in the right direction.
AMLD5 Could Help to Establish a Common Language for Crypto
If nothing else, AMLD5 provides what may be the first-ever legal definition of virtual currency: “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 was just last week that the Cambridge Center for Alternative Finance (CCAF) published a report that pointed out that a lack of commonly established definitions for cryptocurrency industry terms is one of the largest obstacles when it comes to the adoption of clear and consistent regulatory policies.
The 4th #AlternativeFinance Benchmarking Report by @CambridgeAltFin launched this week. Read the highlights and access the report that was supported by Invesco and the @CMEFoundation. #AltFin #P2P #Fintech https://t.co/0Lu0xZK4Q3
— Cambridge Judge (@CambridgeJBS) April 16, 2019
“A variety of terms are used, often interchangeably and without a clear definition,” the report said. “Even the term cryptoasset lacks a specific definition,” the report explained. “‘Cryptoasset’ and ‘token’ can have different meanings depending on the context in which they are used.”
Therefore, even if the directive itself may be somewhat ham-handed when it comes to regulating the cryptocurrency industries, it could pave the way forward for what may eventually become a global set of regulations for crypto.
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