MLD5 introduces cryptocurrency regulation
On 19 June 2018, the text of the Fifth Money Laundering Directive (MLD5) was published in the Official Journal of the EU (OJ). The Council of the EU adopted the Directive on 14 May 2018, following adoption by the European Parliament on 19 April 2018. The Directive will enter into force on 9 July 2018. Member states must bring into force the laws, regulations and administrative provisions necessary to comply with the Directive by 10 January 2020. MLD5 makes various amendments to the Fourth Money Laundering Directive as part of the EC’s plan to strengthen the fight against terrorist financing. The EC has stated that the amendments proposed are limited to what is necessary to achieve the objectives of tackling terrorist financing and increasing the transparency of financial transactions and legal entities, and build on rules already in force. Among other amendments, MLD5 extends regulatory coverage to cryptocurrency exchanges and custodian wallet providers.
MLD5 amendments regarding cryptocurrencies
The recitals to MLD5 note that under the current rules, which are to be changed by the adoption of MLD5, providers engaged in exchange services between virtual currencies and fiat currencies (that is to say coins and banknotes that are designated as legal tender and electronic money, of a country, accepted as a medium of exchange in the issuing country) as well as custodian wallet providers are under no Union obligation to identify suspicious activity. As a result, terrorist groups may be able to transfer money into the Union financial system or within virtual currency networks by concealing transfers or by benefiting from a certain degree of anonymity on those platforms. The recitals further state that it is essential to extend the scope of MLD4 so as to include providers engaged in exchange services between virtual currencies and fiat currencies as well as custodian wallet providers. For the purposes of anti-money laundering and countering the financing of terrorism, competent authorities should be able, through obliged entities, to monitor the use of virtual currencies. Such monitoring would provide a balanced and proportional approach, safeguarding technical advances and the high degree of transparency attained in the field of alternative finance and social entrepreneurship. Below is a summary of the amendments that have been made to MLD4 via MLD5 in light of these concerns about virtual currencies.
MLD5 defines “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.
MLD5 defines “custodian wallet provider” as an entity that provides services to safeguard private cryptographic keys on behalf of its customers, to hold, store and transfer virtual currencies”.
MLD5 expands the scope of “obliged entities” to include, among other additions, (i) providers engaged in exchange services between virtual currencies and fiat currencies; and (ii) custodian wallet providers. Accordingly, as “obliged entities”, cryptocurrency exchanges and custodian wallet providers will be subject to the same obligations to implement preventative measures and report suspicious activity as other firms under MLD4. Further, MLD5 requires that Member States shall ensure that providers of exchange services between virtual currencies and fiat currencies, and custodial wallet providers are registered.
Potential for future regulation
The recitals of MLD5 also state that the anonymity of virtual currencies allows their potential misuse for criminal purposes. The recitals also acknowledge that the inclusion of providers engaged in exchange services between virtual currencies and fiat currencies and custodian wallet providers in regulatory coverage 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. To combat the risks related to the anonymity, national Financial Intelligence Units (FIUs) should be able to obtain information allowing them to associate virtual currency addresses to the identity of the owner of virtual currency. In addition, the possibility to allow users to self-declare to designated authorities on a voluntary basis should be further assessed.
The EC is obliged to draw up a report on the implementation of MLD4 (and amendments via MLD5) for submission to the European Parliament and to the Council. MLD5 includes a requirement that such report shall be published by 11 January 2022, and shall be accompanied, if necessary, by appropriate legislative proposals, including, where appropriate, with respect to virtual currencies, empowerments to set-up and maintain a central database registering users’ identities and wallet addresses accessible to FIUs, as well as self-declaration forms for the use of virtual currency users, and to improve cooperation between Asset Recovery Offices of the Member States.
As a result of the amendments made to MLD4 via MLD5, providers engaged in exchange services between virtual currencies and fiat currencies as well as custodian wallet providers are now under a Union obligation to identify suspicious activity and comply with anti-money laundering and counter-terrorist financing regulations. Member states must bring into force the laws, regulations and administrative provisions necessary to comply with the Directive by 10 January 2020.
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