As discussed in the first article, the anticipated draft AML regulation will cover:

“entities engaged in providing:

1. exchanging services between virtual currencies and fiat currencies,exchanging services between virtual currencies,
2. facilitating exchange listed in a) or b), or
3. custodial wallet services subject to (2)(17)(e)”.

Item d) refers to ‘virtual currency’ wallets which are defined as “digitally-stored credentials necessary for authorised persons to access virtual currency units and execute transactions including their exchange.

The proposed definition will result in an expansion of the list of ‘obligated entities’ subject to the requirements defined in the AML/CFT regulations. Among the obligations is the requirement to identify and verify their clients’ identities and to maintain registers of certain types of transactions.

A Polish proposal

It is important to note that the proposed Polish law’s scope extends beyond the EU regulations. The Commission’s regulations only cover entities engaged in exchanges between ‘virtual currencies’ and traditional ones (crypto-to-fiat and fiat-to-crypto). The Polish proposal would also apply AML regulations to entities which conduct “exchanges between virtual currencies” (crypto-to-crypto).

This extended approach may be justified by the desire to improve the effectiveness of anti-money laundering efforts by covering transactions which involve e.g. exchanging illicitly obtained funds from bitcoins into cryptocurrencies (such as Monero or Zcash) which provide an even higher degree of user anonymity.

However, this proposal may have undesirable effects on the market and while its practical effectiveness is questionable.

Potential consequences

As discussed in the article, the newly introduced definition of ‘virtual currency’ is quite imprecise and broad-ranging. As a result, we can expect that the term ‘virtual currency’ will apply not only to well-known cryptocurrencies (e.g. Bitcoin) but will also cover a wide variety of tokens (read more about tokens).

This would mean that many token-to-token exchanges would also be covered under the new regulations. Within this context, ICOs (coin offerings as means of raising capital for new ventures) represent a unique scenario. Most ICOs involve the exchange of ETH for newly introduced tokens. If these tokens fall under the new definition of ‘virtual currency,’ all ICOs would potentially be classified as “exchanges between virtual currencies” under the proposed rules.

Additionally, the entity conducting the ICO would have to be considered an “entity engaged in providing [or facilitating] exchange between virtual currencies.” This provision would certainly also raise a number of interpretative questions.

Uncertainties over the tax and regulatory environments have halted the growth of ICOs in Poland,  the introduction of this new regulation may be the final nail in the coffin of Polish ICOs.

Also, it is important to note that this regulation would most likely be unique to Poland (as it is not part of the Commission’s draft directive). Meanwhile, crypto-to-crypto exchanges are provided by entities across the world and can be accessed through any internet connection. As a result, there are serious doubts whether the proposed provisions would have any practical impact on money laundering operations.

Jacek Czarnecki