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Fifth EU Anti Money Laundering Directive and virtual currencies

In the trialogue negotiations between the European Commission, European Council and European Parliament on the reform of the Fourth AML Directive, consensus was reached on 15 December 2017 (2016/0208 (COD)). Under the respective proposal for a Fifth AML Directive (“5AMLD”), providers that act as an interface be-tween state and virtual currencies, as well as ones that manage virtual purses, are to be subjugated to the AML regulations.

Financing terrorism with virtual currencies

Europe’s legislators are concerned that terrorist groups could increasingly turn to virtual currencies, thereby circumventing existing AML regulations. It was not possible to fully eliminate the anonymity of the affected transactions because, due to the intrinsic characteristics of virtual currencies, system-internal transactions which have no links to state currency systems whatsoever are executed without involving of a controllable market player. In point of fact, payment methods based on e.g. Blockchain are characterised by their decentralised architectures. Only if the boundary to the “analogue” world of classical currencies (i.e. currencies in the legal sense) is overstepped does anonymity lapse, enabling controlled access by public authorities.

Extending the ambit of the AML Directive

From a technical perspective, virtual currencies are to be integrated by supplementing the catalogue of obliged entities set out in Article 2 (1) No 3 of the AML Directive. Under the new letter (g), “providers engaged in exchange services between virtual currencies and fiat currencies” will be covered. Up to now, regulation only incorporated non-regulated exchanges for trading virtual currencies where state currencies were exchanged with virtual ones. The draft Directive also ventures to provide a le-gal definition of the term “virtual currency”. For the purposes of the Fifth AML Directive, virtual currencies are defined by Article 3 No 18 as 5AMLD 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 per-sons, as a means of exchange, and which can be transferred, stored and traded electronically”). Recital 7a 5AMLD expressly clarifies that virtual currencies are not the same as e-money within the meaning of secondary Union law (and Germany’s Payment Services Supervisory Act (Zahlungsdiensteaufsichtsgesetz, ZAG)). As such, the special AML rules applicable to e-money also do not apply to virtual currencies.

Under Article 2 (1) No 3 (h) 5AMLD, providers of digital purses for virtual currencies (“custodian wallet providers”) are to be subjugated to the reformed AML Directive’s ambit. For them too, a legal definition is to be provided for the first time under European AML law. Article 3 No 18a 5AMLD determines them as “an entity that provides services to safeguard private cryptographic keys on behalf of their customers, to hold, store and transfer virtual currencies.”

Regulatory framework for virtual currencies

Substantively, the Member States must ensure that both the providers of exchange platforms as well as virtual purses are subjected to a registration duty (Article 47 (1) 5AMLD). Moreover, both the exchanges as well as the operators of virtual purses will in future be subjected to the general regulation for obligors under the AML Directive. These include, notably: observation of the due diligence obligations in accordance with Article 13 of the AML Directive (in particular, establishment of identifi-cation); when entering into the business relationship; when executing certain individual transactions; and, in general, if money laundering or terrorist financing are suspected. The entities newly adopted into the circle of obligors must cooperate with the Member States’ registration authorities in this respect (Article 33, AML Directive).

Prospects

The Fifth AML Directive is expected to take effect in the first half of 2018. After that, Member States have 18 months in which to implement it in national law.

The amendments to the AML Directive with regard to virtual currencies only constitute some tesserae in the European Commission’s mosaic-like political agenda to focus more sharply on the FinTech market. It recently presented a comprehensive FinTech Plan of Action (COM(2018) 109/2). This contains an EU Blockchain Observation Unit and Forum which was already set up in February 2018 and will bundle expertise and investigate the areas of application of Blockchain technology over the coming two years.

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