By Simone D. Casadei Bernardi, Senior Managing Partner at Blockchain ConsultUs Ltd.
Pressured by the realities of the modern world, with the risk of terrorist attacks higher than ever, new virtual currencies changing the way we think about money, and unprecedented attempts to access to complete financial anonymity, the EU decided to follow US’s lead and enforce new legislation aimed at dealing with these potential threats. It is the first time when an EU-wide directive regarding cryptocurrency entities is adopted, but far from likely to be the last.
How did we get here and why?
Simone D. Casadei Bernardi, Senior Managing Partner, Blockchain ConsultUs Ltd.
As the world evolves and current reality becomes more complex with every passing year, so must the State’s policies. In the past decade, we’ve seen world-changing events and found ourselves dealing with a new order of things. Scandals like the Panama Papers, the horrendous rise of terrorism and its migration into the heart of first world countries, mainly European countries, proved decisive in making EU regulators launch a crackdown on money laundering and terrorism financing.
One of the products of EU’s new “iron fist” policy when it comes to the movement of money on its territory is the creation and adoption of the 5th Anti-Money Laundering Directive or 5AMLD for short. An upgrade of the 4AMLD, its declared purpose is to strengthen EU member states’ grip on money transfers, particularly regarding beneficial ownership, electronic identity, and for the first time, over entities that deal with virtual currencies.
To understand how determined EU regulators are to add as much transparency as possible in the financial world, it worth considers the fact that the first AMLD was introduced in 1991. It took 25 years for two updated versions, the 2- and 3-AMLD, to be introduced, yet in the past three years, we’ve seen the 4th and 5th renditions, while the 6AMLD is already on its way.
The directives of the 5AMLD must be implemented in all EU States by the 10th of January 2020, which might prove unrealistic since a few members have yet to enforce the rules imposed by the 4AMLD, although the deadline for that has already passed.
5AMLD: an overview
The most notable change brought by the latest version is the broadening scope of the affected parties.
In simple terms, what the 5AMLD does is take the 4AMLD’s policies and make them mandatory to more financial actors, or “obliged entities” as they’re referred to in the official text. It also focuses on additional transparency provisions regarding beneficial ownership, heightened security measures surrounding third-world countries that present a high risk for either terrorism or money laundering, and a decrease to 100 Euro of the benchmark at which prepaid card users have to be identified.
It is also the first EU-wide regulatory directive that deals explicitly with cryptocurrencies by including virtual currency exchange platforms and wallet providers into the list of “obliged entities.”
After January 2020, when the 5AMLD will be implemented on State level, both wallet providers and virtual currency exchanges will have to comply with the 5AMLD’s set of anti-money laundering requirements. This means they’ll have to carry out identity checks for clients and beneficial owners, plus report on suspicious transactions. The aim is to reduce the anonymity that comes with using cryptocurrencies in an attempt to cripple criminal organisations by restricting their new-found financial freedom of movement in the virtual currency world.
Change is inevitable though, and a long-term approach is best, both in terms of company policy and the cryptocurrency world as a whole.
How will 5AMLD affect the Crypto-industry?
Although the description used to identify virtual currencies in the official 5AMLD document is broad, as to include as many options as possible (“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”), not all parties dealing with virtual currencies are subjected to the new directive.
Crypto to crypto exchanges, for example, are exempt of the 5AMLD, whereas fiat to crypto exchanges are specifically targeted for compliance. The reasoning behind it is that the 5AMLD’s role is to limit unlawful behaviour, especially one that can facilitate purchases using fiat currency to do harm. It is a sign that the EU is interested in fighting financial crime rather than stripping virtual currencies of their most valued attribute, that of anonymity. Even so, it is expected that regulations be even more inclusive of further entities in the future.
The same goes with wallet providers, where only custodian wallet providers, identified as those that maintain control using a private cryptographic key over their customers’ wallets, are included in the “obliged entities”. Non-custodian wallets, where just the users hold their private keys, are exempt, which again points to show the EU is interested in controlling the gatekeepers to limit money laundering and terrorism, rather than crack down on the virtual-currency concept.
Crypto significant figures mostly welcome the new regulations and view them as a great tool to bring more professionalism into the industry through heightened transparency and the exclusion of “shady” business.
The AMLD is an attempt to tighten the spectrum of the law and set a standard set of rules among EU member states. It is to be expected that some countries, following their own agenda, will either welcome the new changes brought on by the 5AMLD, or they’ll try to push back and delay its effects as much as possible.
Change is inevitable though, and a long-term approach is best, both in terms of company policy and the cryptocurrency world as a whole. Those who will jump at the change to be in line with the latest requirements as soon as possible, while placing great emphasis on making the transition hassle-free for clients and partners, are set to win over new business and position themselves as pioneers.