EU Cryptocurrency Regulation

James HeadshotAuthor: James Page
Last Updated: August 2020

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Ten years ago, not many people believed that Bitcoin and the cryptocurrencies that followed would be so widely accepted that they would enter everyday use or that the total market capitalization of all cryptos will exceed $224 billion.

Governments were reluctant to take them seriously at first, and no specific legislation regarding cryptos had been passed. The same applies to the EU, which has remained silent for years on the topic of virtual currencies and crypto exchanges. At the lack of a univocal view, member states have taken upon themselves to apply different (if any) regulations.

In 2018, the EU announced that the text for the Fifth Anti-Money Laundering Directive which was finally going to address the topic of virtual currencies was in its final stages.

Published later that year, the Directive makes it compulsory for all member states to implement AML regulations and adds both cryptocurrency exchanges and custodian wallet providers to the list of obliged entities.

The Need for Crypto Regulation

So, what has prompted the EU into action and why do we need crypto regulation in the first place?

The major issue surrounding cryptocurrencies is anonymity. This anonymity or pseudonymity doesn’t allow for transactions to be monitored and tracked down to their senders/receivers, which is why virtual currencies have been frequently misused for illegal trading.

Cryptocurrencies have unfortunately been a reoccurring pathway for criminal organizations to get their hands onto “clean cash”.

Another problem connected to this anonymity is tax evasion. If someone completes a taxable transaction but decides not to pay taxes, the anonymous transaction prevents the tax authority from detecting and sanctioning the violation.

The Fifth Anti-Money Laundering Directive

The “AML 5” entered into force on July 9, 2018, under the full name of “Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU (Text with EEA relevance).

Apart from strengthening the EU financial regulations by asking beneficial company owners and politically exposed persons (PEPs) for greater transparency, improved cooperation between financial supervisory authorities, and enhanced control over high-risk third countries transactions among other things, the AML 5 also deals with virtual currencies and the problematic nature of their anonymity.

One of the first things that the new Directive has added is a definition of virtual currencies:

(18) “virtual currencies” means 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; 

Next, the Directive declares the need to extend the regulatory framework over fiat-to-crypto exchanges and custodian wallet providers, even though it recognizes that this “will not entirely address the issue of anonymity attached to virtual currency transactions, as a large part of the virtual currency environment will remain anonymous because users can also transact without such providers.”

This means that there will be additional measures in the future.

For now, the AML 5 includes three main regulations that directly address the crypto industry:

  1. It obliges exchanges and wallet providers to perform customer due diligence, i.e. to add a KYC (Know Your Customer) check to their registration application to obtain personal information from customers before allowing them to use the platform and notify the national Financial Intelligence Units (FIUs) about any suspicious activity.
  1. Next, financial investigators will gain the authority to obtain personal information (addresses and full identity) of those engaged in suspicious activities using cryptocurrencies.
  1. Lastly, fiat-to-crypto exchanges and wallet providers must register with their national financial regulators and fully comply with any additional financial laws.

The EU is positive that by putting the exchanges and wallet providers under such regulation it will discourage and decrease fraudulent activities and potential hacking attacks as these individuals wouldn’t risk revealing their identity by using these platforms. The same thing will be true of market movement schemes such as the popular “pump and dump” one.

The EU member states were required to implement the regulations into national law by January 10, 2020. As of January 2020, all countries except for Spain, Portugal, Cyprus, the Netherlands, Romania, and Slovenia have provided information on the EU portal in regards to the implementation of AML 5 measures.

How Will This Affect the Crypto Industry?

It’s not a secret that the new regulations will prove a heavy blow for the crypto industry as the majority of crypto users have turned to virtual currencies to enjoy a little more privacy and anonymity when transacting.

It seems like digital coins are falling short of fulfilling their promise in creating a decentralized payment system like the one envisioned by Bitcoin’s founder, Satoshi Nakamoto.

On the other hand, customers want to use a cryptocurrency exchange that’s reliable and secure, one where they can feel comfortable disclosing personal information and depositing their funds without worrying that they’ll end up in the wrong hands. The same is true for wallet providers.

This means that although the AML 5 regulations might seem too harsh at first, costing crypto platforms a lot of money, and work to adjust to the new compliance terms, in the long run, it will be beneficial for both providers and customers.

In an interview for CoinTelegraph, David Carlisle, a former US Treasury AML specialist and the current Head of Community at the blockchain analytics provider Elliptic, explains that there used to be a lot of regulatory discrepancies between exchanges operating in the US versus those in the EU.

Most of the US-based platforms are already AML and KYC compliant because of the laws under different state jurisdictions. The amended EU Directive will solve this problem and bring a wider adoption of virtual currencies by both respecting the users’ privacy and enforcing regulatory safety at the same time.

What’s left for fiat-to-crypto exchanges and wallet providers is to find the most efficient way to respond to this challenge. “The most successful businesses, the exchanges that are really thriving, are the ones that tend to take a proactive stance towards compliance and towards protecting themselves from financial crime,” suggests Carlisle.

About The Author

James Page

James Headshot

James is the main editor. With a passion for finance and anything blockchain, cryptocurrency is right up his alley. He's responsible for most of the content on the site, trying his best to keep everything up to date and as informative as possible.

Disclaimer: Digital currencies and cryptocurrencies are volatile and can involve a lot of risk. Their prices and performance is very unpredictable and past performance is no guarantee of future performance. Consult a financial advisor or obtain your own advice independent of this site before relying and acting on the information provided.

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