On 5 July 2016, the European Commission presented its legislative proposal to amend the Fourth Anti-Money Laundering Directive(4AMLD) to further reinforce EU rules to combat the laundering of money (AML) and to counter the financing of terrorist activities (CFT). On 26 April 2018, the European Parliament confirmed the latest text of the proposed directive known as the Fifth Anti-Money Laundering Directive(5AMLD), which amends 4AMLD with the aim of tackling risks associated with virtual currencies.
The proposal presented by the Commission acknowledges the fact that virtual currencies have “highlighted innovative ways for governments to reduce fraud, corruption, error and the cost of paper-intensive processes”, and meanwhile noted that “virtual currency market has the potential to set in place new, modern ways in which governments and citizens interact, in terms of data sharing, transparency and trust”.
To this day, no specific laws or binding rules have been implemented at EU level to cope with risks in relation to virtual currencies. The Commission addressed the issue that suspicious transactions made through virtual currencies are not sufficiently monitored by the authorities, which are unable to link the transactions to identified persons. In addition to that, it was stressed that virtual currencies entail a risk that they may be used by terrorist organizations to conceal financial transfers. 5AMLD introduces the following novelties to 4AMLD in relation to the crypto world.
Introduction of a definition of “virtual currencies” and “custodial wallet providers”
5AMLD provides a definition of “virtual currencies” as “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”.
Taking a deeper look into this new form of electronic “value”, it seems that the goal was to cover all existing virtual currencies (coins, tokens), not leaving any loopholes for avoiding AML requirements. By presenting such a definition, the 5AMLD partly acknowledges that virtual currencies might be viewed as a new form of money, however, such introduced 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 means of payment but rather may function as assets, commodities or securities.
The inclusion of virtual currency exchange platforms and custodial wallet providers as obliged entities to be registered and comply with AML and CFT requirements
Custodian wallet provider is introduced as “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 private key of the user is not held by the wallet provider, then such service provider shall not fall under the AML/CFT provisions. For instance, as of today, such service providers would be Trezor, Ledger Nano S, Jaxx and Mist. But almost all centralized crypto exchanges holding private keys of their customers would be the obliged entities to follow the rules.
The 5AMLD does not provide a definition of “virtual currency exchanges”. However, such a definition derives from the description of the relevant obliged entities provided under the 5AMLD: “providers engaged in exchange services between virtual currencies and fiat currencies“. Two points can be taken out of such definition. First of all, EU legislators have clearly decided to regard crypto-to-crypto exchanges as falling out of the scope of AML provisions. Second of all, newly introduced legislation causes legal uncertainty as to what scope of the crypto-to-fiat exchange activities are regulated. It is not clear what intensity and type of exchange activities fall under the scope of AML provisions. Such an uncertainty might be especially crucial for ICO organizers which might be deemed as providing exchange services between their newly issued tokens and fiat currencies under the light of 5AMLD.
Exchange service and wallet providers will have to be registered (authorized), and, as a result, will, like any other financial institutions, have to implement necessary customer due to diligence controls, monitor transactions and report any suspicious activity to the relevant national authorities. It is worth mentioning that such services are not licensed and none of the special minimum capital requirements or a specific number of qualified managing bodies are required.
5AMLD also notes that these obliged entities need to gather information not only about their customers but, also, about certain other third parties not in a direct relationship with the respective obliged entities (e.g. beneficial owners).
From the date of transposition of 5AMLD into the national laws, national authorities (including, of course, 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 virtual currencies. Consequently, the competent authorities will match all the bank and payment accounts with their corresponding accountholders, proxy holders, and beneficial owners. Therefore, pseudonymity or anonymity currently prevailing in the crypto field will be diminished for purposes of AML rules.
The updated directive will enter into force three days after its publication in the Official Journal of the European Union 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 enables currency exchanges and wallets to get authorized and provide transparent services.
Author: Darius Lengvinas, Legal Compliance Specialist at Orca Alliance.