On many occasions we have predicted that cryptocurrencies will soon become subject to Anti Money Laundering and Countering Financing of Terrorism (AML/CFT) regulations.
This became clear in July 2016 when the European Commission announced that it will impose new regulations and presented its proposed changes. (Coming soon: A legal definition of virtual currencies).
In our 2014 Virtual currency report we analysed the anticipated impact of the potential regulations on the cryptocurrency market and discussed the subject again in 2015’s Bitcoin and money-laundering regulations article. We have also brought attention to the subject during industry conferences and meetups.
Currently, legislative work on these regulations is nearing the end, both at the EU-level and in Poland. Below, we take a look at what the nearly-ready rules will contain and their practical impact.
A global trend
As we have made clear on previous occasions, the fact that AML regulations will cover cryptocurrencies is hardly a surprise. Such regulations have been adopted or are being developed in countries including: the US, Australia, Singapore, Japan and South Korea.
What is surprising is that the EU’s regulatory efforts began at a relatively late date. I had anticipated that these regulations would be part of 2015’s 4th Anti-Money Laundering Directive (4AMLD), but they were only proposed in the aftermath of terrorist attacks in Europe several months later.
One of the main goals of the 5th AML directive (5AMLD) is the strengthening of transparency rules in financial transactions. (5AMLD is a de facto revision of 4AMLD). These changes will address not only ‘virtual currencies’ but also pre-paid cards and mechanisms for determining each transaction’s beneficial owners and their information. These changes have been identified as one of the EU’s legislative priorities for both 2017 and 2018.
On 20 December 2017 the European Council and the European Parliament announced a political agreement and presented a compromise version of the draft directive. This version is expected to be approved following the conclusion of relevant legislative procedures. The proposal provides a period of 18 months (after the new directive enters into force) for Member States to implement its provisions into their legal systems.
The process of implementing 4AMLD into the Polish legal system is ongoing. The Polish regulations will also address ’virtual currencies’ – a subject matter addressed in the still incomplete 5AMLD. The proposed act is in the final stages of the governmental approval process and should be presented to the Polish parliament in the near future.
What can we expect from the upcoming 5AMLD and Polish act regulations?
Key practical conclusions
The key impacts of the proposed regulations (in their current versions) will include:
- A new definition of ‘virtual currencies’
Both the draft directive and the proposed Polish act include a definition of ‘virtual currency.’ This significant development will impact how the new regulations are applied to cryptocurrencies such as Bitcoin and ether and, potentially, to a wide variety of tokens (more about tokens) – it is the subject of a separate article.
- Applying AML regulations to cryptocurrency exchanges
One of the key goals behind the new rules is ensuring that entities facilitating access to ‘virtual currencies,’ especially ones which operate at the nexus of traditional financial institutions and blockchains, are subject to AML regulations.
As currently set out in the draft Polish act, this will involve the imposition of legal obligations on:
“entities engaged in providing:
- exchanging services between virtual currencies and fiat currencies,
- exchanging services between virtual currencies,
- facilitating exchanges listed in a) or b), or
- 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.
It is important to note that the scope of the proposed Polish act would extend beyond the draft EU regulations. The Polish proposal would apply AML rules not only to entities providing “exchanging services” (e.g. exchange bureaus) and “facilitating exchanges” (e.g. exchanges) of “virtual currencies” into traditional currencies but also ones which conduct “exchanging services between virtual currencies” (crypto-to-crypto).
This potentially key aspect of the proposed act may have a significant impact on the Polish ICO market and is further discussed in a separate article.
Furthermore, the 5AMLD proposal would require these entities to be registered by Member States.
A register of ‘virtual currency’ users
The startling news that the EU is developing a register of ‘virtual currency’ users linking users’ personal data with their public keys recently electrified blockchain media around the world.
Does the current draft 5AMLD make any reference to such a register?
It does provides for feasibility studies on establishing a self-declaration system under which virtual currency users would provide their wallet addresses to relevant institutions. The draft 5AMLD calls on the Commission to analyse the issue and potentially provide an appropriate proposal for a central database registering users’ identities. However, any such proposal will not be presented in the near future (at least until two years following the deadline for member states’ implementation of 5ALMD).
As discussed above, the Polish and EU legislative processes are ongoing and the final wording of the proposed regulations may still change. However, there is no doubt that versions of these rules will eventually be adopted. This will have significant direct impact on the cryptocurrency market and an equally-significant indirect impact on the development of blockchain projects in Poland.
It is certain that the regulations described in this article open the doors to future laws regulating cryptocurrencies and other applications of blockchain technology. This conclusion is supported by the high likelihood that the subject will be addressed in this year’s G20 discussions as well as the growing concerns expressed by central banks (doubtlessly fuelled by the rapid growth of cryptocurrency and token capitalisations in 2017). The next few months will certainly keep us all busy.