Over the past year or so, cryptocurrencies have worked their way into the spotlight. The digital currencies allow consumers to complete anonymous transactions thanks to blockchain technology – a blessing to consumers and those involved with illegal activities, but a nightmare for regulators.
The European Union took its first steps toward issuing cryptocurrency regulations when they passed the Fifth Anti-Money Laundering Directive. However, recent reports have shown that perhaps more action is needed. It will be interesting to see how companies handle cryptocurrency regulations moving forward.
How Does The EU Define Virtual Currencies?
Even though Bitcoin first emerged a decade ago, not many people paid attention until the last two years. Now that people realize the wide-sweeping implications that virtual currencies can have, there has been significant debate about how to define these currencies. The first definition of virtual currencies came from the European Central Bank in October 2012.
The bank published a report entitled, “Virtual Currency Schemes.” In it, they defined a cryptocurrency as a “convertible, bidirectional, and decentralized virtual currency.” Another definition in the report defined it as, “a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community.”
A few years later, in 2015, the bank produced an updated report. In this report, they argued that digital currencies do not meet the three standard criteria of money:
• Store of value
• Medium of exchange
• Unit of account
The European Central Bank, therefore, updated its definition of digital currencies in this report. They instead stated that “virtual currency is a digital representation of value, not issued by a central bank, credit institution, or e-money institution, which, in some circumstances, can be used as an alternative to money.”
The EU Seeks Regulation In The Fifth AMLD
After the European terrorist attacks of 2016, reports came out that terrorists used prepaid cards to fund most of their illegal activities. This prompted the EU to release the 5AMLD, which, among other things, put regulations in place regarding cryptocurrencies. The provisions covered both providers who engaged in exchange services, allowing consumers to exchange fiat currencies for digital currencies, and custodian wallet providers.
The 5AMLD again redefined the definition of digital currency. The description outlined in the 5AMLD is significantly broader than the two previous definitions. The most recent description states that a cryptocurrency is, “a digital representation of value that can be digitally transferred, stored, or traded and is accepted as a medium of exchange.”
The EU also defined cryptocurrency exchanges as obligated entities, meaning they now faced Counter Financing of Terrorism and Anti-Money Laundering regulations as all other financial institutions. This requires cryptocurrency exchanges to perform customer due diligence on anyone making a transaction. It also requires them to submit suspicious activity reports.
Furthermore, the 5AMLD sought to remove the “anonymous” part of cryptocurrencies. The regulations mandate that Financial Intelligence Unites must verify the identities of digital currency owners. They must also verify addresses as well. Lastly, those who provide customers with cryptocurrency exchanges and wallets must also register with the respective authorities, such as the Financial Conduct Authority in the United Kingdom.
Although there was initial pushback against these regulations because they reduced the anonymity associated with digital currencies, the hope is that they will ultimately help legitimize the currencies. Regulations go a long way toward legitimizing centralized products. The rules could also allow for international adoption in Asian and North American cryptocurrency markets as well.
Cryptocurrency Regulation Is A Work In Progress
Because regulators have never dealt with something as unique as digital currencies, the rollout of regulations will be a work in progress. For instance, reports from the Securities and Markets Stakeholder Group detail how many digital assets fall under the Unfair Commercial Practices Directive, even though they’re only covered when the asset is listed as a business and the person making the purchase is considered a consumer.
The report also details that digital currencies like bitcoin do not currently fall under the Markets in Financial Instruments Directive, Market Abuse Regulation, or Prospectus Regulation. The authors in the report make a case that digital currencies bear the same risk as other assets that fall into these regulations, such as bonds and stocks.
It will be interesting to see how the European Commission handles reports like these moving forward. The Securities and Markets Stakeholder Group does not have the authority to make such decisions, so any changes must come at the hands of the European Commission. As the group further seeks a better understanding of digital currencies and their use, we’ll likely see updated definitions and increased regulations moving forward.
A more recent report from the European Banking Authority called for similar regulations. This report called upon the European Union to implement standardized controls for digital currencies. This report is critical of the directives outlined in the 5AMLD, calling them inadequate. The report also claimed that failure to implement universal regulation gives rise to numerous risks, including:
• Consumer protection
• Market integrity
• Operational resilience
• Level playing field
The EBA called for a “technologically neutral and future-proof approach” that would help mitigate against future cryptocurrency developments. If you’re a financial player in the cryptocurrency markets, we recommend that you don’t become comfortable with the current regulations that were put in place thanks to the most recent AMLD. Over the next few years, there’s a strong chance that future cryptocurrency regulations are in store.
In the meantime, it’s critical that you remain compliant with all regulations as they currently exist. This includes taking strong Know Your Customer approaches. Thankfully, today’s technology makes it easier than ever to do so.
For instance, customers can verify their identity online through the camera on their computer or smartphone. The cameras can instantly verify hologram IDs and confirm a match to the individual providing the ID. Fortunately, at AU10Tix, we specialize in KYC implementation and can help put a system in place that ensures you meet all EU cryptocurrency regulations.