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Earlier this week, the Parliament of the European Union overwhelmingly supported changes to anti-money laundering laws that will impose new regulations on cryptocurrency exchanges and custodians operating in Europe.
The law, known as the 5th Anti-Money Laundering Directive, marks a key development in cryptocurrency regulation, with the world’s second-largest economy now providing clarity to cryptocurrency companies about their anti-money laundering (AML) and counter-terrorism financing (CTF). obligations.
The fifth AML directive will effectively align the EU with cryptocurrency measures introduced in the United States more than five years ago. European regulators took a more wait-and-see approach than their American counterparts, at a time when the extent or nature of the risks posed by cryptocurrencies were not well understood. However, that approach changed at the end of 2015, after the terrorist attacks in Paris, when EU ministers invited for “strengthening controls” around cryptocurrencies, citing their potential use in terrorist financing and money laundering.
Filling the regulatory gap
These new regulations are much needed, both to bring legitimacy and clarity to the European cryptocurrency industry, and to counter the very real risks posed by misuse of the technology. Recent research from Elliptic bitcoin laundering found that a significant portion of the proceeds of crime in bitcoins was cashed through services located in Europe.
We believe this was caused by a regulatory loophole, which allowed certain “bad actor” services to exchange cryptocurrency for fiat, without properly identifying their clients or taking other anti-money laundering measures. These services have become havens for cryptocurrencies earned from ransomware, dark markets, scams, and other criminal activities.
Elliptic played a key role in the development of the new legislation, working with other cryptocurrencies through the Blockchain and Virtual Currencies Working Group. Over the past two years, we have been meeting with politicians, regulators and EU civil servants to inform them about the risks and opportunities presented by cryptocurrencies, and to ensure that any new legislation is proportionate and effective.
The new law covers two types of cryptocurrency business:
- “providers dealing with exchange services between virtual currencies and fiat currencies” i.e. cryptocurrency exchanges
- “custodian wallet providers” ie. cryptocurrency wallet services (where the service holds the private keys of its users)
These categories of businesses will become “obligatory entities” under the new AML/CFT law, similar to traditional financial institutions such as banks. They will be required to implement measures to combat money laundering and terrorist financing, such as due diligence (including KYC) and transaction monitoring. They will also be required to keep comprehensive records and report suspicious transactions.
Each of the 28 EU member states now has 18 months to “transpose” the 5th Anti-Money Laundering Directive and make it law in their countries. Therefore, EU-wide adoption should be achieved by the end of 2019.
Most cryptocurrency companies in the EU have already implemented comprehensive controls against money laundering and terrorist financing. This new EU legislation formalizes these requirements and will help ensure that bad actors are prevented from operating. It also marks a key step in harmonizing global cryptocurrency regulation, helping to reduce the potential for regulatory arbitrage.
Contact us if you have any questions about the 5th Anti-Money Laundering Directive or would like to know more about how our software can help you meet your regulatory obligations.
Compliance with EMEA regulations
