The European Commission’s recent decision to delay new anti-money laundering legislation by six-months is the latest in a string of new developments impacting digital currencies in the EU. This proposed directive which will now be pushed back to June 2017, proposes stricter controls around corporate entity structures and virtual currencies, with greater powers granted to tax authorities to investigate crimes. A January 25, 2017 vote of the European Parliament’s Economic and Monetary Affairs has been scheduled before it moves on to a wider vote by the European Parliament.
Terrorist acts in Brussels and Paris, along with tax evasion concerns following the Panama Papers scandal, has led to calls by the European Commission for tightened oversight and regulatory due diligence for banks and financial services firms. Greater accountability and monitoring practices involving digital currencies and other forms of payment have been proposed in an attempt to mitigate money laundering and terrorist financing activities. The commission in particular has targeted bitcoin for increased attention, noting its ease of use in facilitating anonymous funds transactions for criminal purposes.
If enacted, this move would certainly create concerns among exchanges and wallet providers that foster transactions between fiat and virtual currencies as they would likely be required to turn over client lists to authorities. The commission is also exploring the possibility of establishing a mandatory (self declaratory) database of digital currency users to thwart digital money traders from masking their identity. These efforts at capturing user data mirror recent efforts by the U.S. Department of Treasury to identify users of the bitcoin exchange Coinbase.
In addition, national financial intelligence units charged with monitoring suspicious transactions and other data pertaining to money laundering will be issued more powers. This includes the ability to demand information from banking and financial services firms irrespective of whether reports of suspicious activity have been issued.
Finally, beneficial owners of business entities will be more closely watched for tax evasion purposes and would be subject to severe noncompliance penalties and fines.
Efforts at enacting regulatory controls are also afoot on a nation-by-nation basis. Germany and Austria are funding a project targeting financial crimes, again with an emphasis on digital currencies. Concerned about the proliferation of digital currencies being used independent of central banks or other authorities, this collaborative effort known as BITCRIME will bring together funding from the German Federal Ministry of Education and Research (BMBF) and the Austrian Federal Ministry for Transport, Innovation and Technology (BMVIT).
Switzerland is also set to introduce legislation in 2017, which includes licensure for FinTech companies. There are also plans to establish a regulatory “sandbox,” or an innovation ecosystem, for firms involved in experimental early stage innovation projects. Moreover, the Financial Market Supervisory Authority which will serve as the primary regulator, plans to pursue deeper efforts aimed at understanding both digital currencies and blockchain technology.
Joe Ciccolo, Founder of the U.S. based BitAML, which provides regulatory compliance solutions for digital currency startups, sees various pockets of state-by-state regulation as anathema to the purpose of the EU. “State-level licensure has delayed growth and innovation in the United States, and has placed the country at a disadvantage when compared to its peers. The EU appears interested in raising its barriers to entry to match that of the U.S.”
He goes on to note that the U.S. and EU appear to be switching their trajectory on licensure. “In the U.S., regulators and lawyers have been working on piecing together a national license regime or limited charter to alleviate the burden of state-by-state licensing. Meanwhile, the EU appears to be transitioning from a single member-based licensing approach to a country-by-country approach.”
Paweł Kuskowski, CEO and Co-Founder of the compliance and verification platform Coinfirm is on the advisory board of the International Compliance Association, a group responsible for developing knowledge about rules and regulations regarding compliance and AML in Central and Eastern Europe, building international cooperation in the region. Kuskowski says that new EU regulations will put almost the same standards on digital currency entities as current standards for traditional financial concerns. He feels that the crypto and blockchain market is not ready to comply since compliance typically encompasses large investment and ongoing costs, if done in the traditional way. This, he notes, may mean that certain exchanges and wallets could be pushed out of the market.
Says Kuskowski: “In a lot of our discussions with clients and companies in the ecosystem we find that they are spending up to 25 percent of their time and pouring enormous amounts of money into compliance. This is not acceptable. At the end the day, businesses should be able to focus on doing business, serving clients, and developing new products as opposed doing compliance.”
Despite the challenges these developments are creating for the digital currency landscape, Kuskowski also believes that there is a case to be made for regulatory efforts aimed reducing criminal activity and keeping our world safe. “Whether we like it or not, the sector needs regulations to protect the customer and to limit money laundering and terrorist financing. This is a certainty and we see this in Europe with the EU AML Directive and we’re seeing it with the OCC and IRS. Despite having the effect of stunting and damaging the growth of the digital currency ecosystem and creating regulatory uncertainty, I do believe all of this will ultimately provide a clearer path towards commercial and institutional adoption and growth.”
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