- March 11, 2022
- Posted by: Bogdan
- Category: AML, Bitcoin Regulation, Europe, European Union, Germany, law, Money Laundering
According to recent media reports, six European countries, led by Germany, are working on launching an Anti-Money Laundering (AML) body that will include the cryptocurrency market in its purview. Details remain scarce, but it is known that the initiative involves Germany, Spain, Austria, Italy, Luxembourg and the Netherlands. The group is working on “the remit and design” of a new international AML watchdog force that will have a particular emphasis on crypto, and the European Commission — the key executive institution of the European Union — will be the primary platform for the discussion. How will the move affect the European crypto space?
The watchdog’s mandate
The new task force will aim to “cover the riskiest cross-border entities among banks, financial institutions and crypto assets service providers.” At the moment, the initiative still awaits official deliberation. Christian Toms, a partner in law firm Brown Rudnick’s litigation and arbitration practice group in London, noted to Cointelegraph:
“Negotiations very much remain ongoing around its remit, and as part of these negotiations — presumably given the growing awareness of the uses of and risks around crypto — there are understood to be specific discussions taking place about making the agency’s role in regulating crypto and related institutions a key part of its mandate, potentially even spelling out such matters in its foundational principles.”
This isn’t the first time the media has speculated on the idea of an EU crypto task force. In July 2021, Reuters — citing leaked documents — reported that the European Commission had proposed a new Anti-Money Laundering Authority, which would become the “centerpiece” of the whole European crypto oversight architecture. The mentioned plans also included new requirements for virtual asset service providers in accordance with the EU’s strict data collection standards.
Governed by directives
A common critique of United States crypto regulation is that it relies on a mishmash of agencies such as the Securities and Exchange Commission, Commodity Futures Trading Commission, Financial Crimes Enforcement Network and many others. Europe, though, also does not have a single authority in charge — there is only a patchwork of various national agencies, many of which expertise in matters of the digital economy. This makes creating a centralized watchdog more of a necessity than a hostile move.
The current absence of such a body stems from the fact that the EU’s AML rules are established by directives, which are pieces of legislation that are not automatically mandatory and instead need to be transposed by each member state into their national laws. Thibault Verbiest, head of the fintech and crypto finance department at law firm Metalaw, explained to Cointelegraph:
“Although the 5th Anti-Money Laundering Directive, which entered into force on January 10, 2020 and since has been fully transposed by almost all member states, includes within its scope crypto service providers (notably, exchanges and custodian wallet providers) as obliged entities, […] the absence of a pan-EU authority imposes to rely on each national regulator to enforce AML rules.”
The current state of European AML enforcement came under harsh criticism several years ago when separate national-level investigations proved that over 200 billion euros (about $227 billion at the time) of non-resident money flowed through the Estonian branch of Denmark’s largest bank between 2007 and 2015.
Changes to the regulatory landscape
With the arrival of the new enforcement power, we might witness a rapid centralization (and clarification) of the EU crypto framework. That could downplay the competitive advantage of certain conspicuously friendly jurisdictions, as, in Verbiest’s opinion, the differences in rules transposition, interpretation and enforcement will be ironed out. It will be more difficult, if not impossible, for an EU member state to have a stance different from the others:
“The monitoring activities and Anti-Money Laundering/Counter-Terrorist Financing rules across the EU will be uniformized up and consolidated. […] With stricter reporting requirements to come and better cooperation between member states on AML/CFT subjects, regulators wish to establish the best possible mapping of crypto transactions so as to identify transactions that pertain to illicit activities as well as limit the erosion of the taxable base.”
The major trend of rapid regulatory consolidation is here to stay as the money laundering issue (not necessarily related to crypto) remains highly relevant. According to Toms, AML rules and regulations are already being tightened up in general with each new iteration of EU regulations as the battle against dirty money intensifies:
“The current conflict in Ukraine and the sanctions against Russia may prove to be a further catalyst for tighter regulation across the board if there is a fear certain parties may now be even more actively seeking to find more and more novel ways to circumvent AML regulation. […] Crypto, which has already been in the EU’s alarmed sight for a while, may very well find itself caught up in the situation.”
The hardline scenario
Another major factor is the development of central bank and state-issued digital currency projects, which could affect the regulatory and oversight climate and would be hardly optimistic for the crypto industry. If this movement picks up steam across Europe, “unregulated” crypto companies and currencies could become increasingly marginalized and viewed as a route taken by those who, for some reason, don’t want to use state-authorized CBDCs.
Such a dark scenario is far from guaranteed, however, given the increasing adoption of crypto at the retail and institutional levels and with more and more of the big names in finance becoming involved with it somehow.
At the end of the day, Europe, where executive decision-making is arguably less burdened with parliamentary pressure than in the U.S., may come up with a tougher stance on crypto. The EU will likely seek to take an increasingly hard line in regulating criminal conduct and consumer protection, and crypto is still viewed with suspicion.
But the game is not one-sided: After all, the crypto industry will have to figure out how to manage issues of transparency and Know Your Customer in a decentralized world.