How New European AML Regulations Will Affect Crypto

According to recent press reports, six European countries, led by Germany, are work on the launch an Anti-Money Laundering (AML) body th...



According to recent press reports, six European countries, led by Germany, are work on the launch an Anti-Money Laundering (AML) body that will include the cryptocurrency market within its scope. Details remain scarce, but the initiative is known to involve Germany, Spain, Austria, Italy, Luxembourg and the Netherlands. The group is working on the “mission and design” of a new international AML monitoring force that will have a particular focus on crypto, and the European Commission – the main executive institution of the European Union – will be the main platform of discussing. How will this decision affect the European crypto space?

The mandate of the watchdog

The new task force will aim to “cover the riskiest cross-border entities among banks, financial institutions and crypto-asset service providers.” At the moment, the initiative is still awaiting official deliberation. Christian Toms, a partner in the Litigation and Arbitration Practice Group at London law firm Brown Rudnick, told Cointelegraph:

“Negotiations remain ongoing around his tenure, and as part of those negotiations – likely given the growing awareness of the uses and risks of crypto – there appear to be specific discussions underway about defining the agency’s role in regulating crypto and related activities. institutions a key part of its mandate, perhaps even setting out these issues in its basic principles.

This is not the first time the media has speculated on the idea of ​​a European 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 entire European crypto surveillance architecture. The mentioned plans also included new requirements for virtual asset service providers in line with strict EU data collection standards.

Governed by guidelines

A common criticism of crypto regulation in the United States is that it relies on a hodgepodge of agencies such as the Securities and Exchange Commission, Commodity Futures Trading Commission, Financial Crimes Enforcement Network, and many others. Europe, however, does not have a single authority in charge either – there is only a patchwork of various national agencies, many of which are experts in the digital economy. This makes the creation of a centralized watchdog more of a necessity than a hostile move.

The current absence of such a body stems from the fact that EU AML rules are established by directives, which are pieces of legislation that are not automatically binding and must instead be transposed by each Member State into their national legislation. . Thibault Verbiest, head of fintech and crypto finance at law firm Metalaw, told Cointelegraph:

“Although the 5th Anti-Money Laundering Directive, which entered into force on 10 January 2020 and which has since been fully transposed by almost all Member States, includes in its scope providers of crypto services (in particular exchanges and custodial wallet providers) as obligated entities, […] the absence of a pan-European authority makes it necessary to rely on each national regulator to enforce anti-money laundering rules. »

The current state of the fight against money laundering in Europe came under severe criticism several years ago when separate national investigations proved that more than 200 billion euros (about $227 billion at the time) of money from non-residents through the Estonian branch of Denmark’s largest bank between 2007 and 2015.

Changes in the regulatory landscape

With the arrival of the new enforcement power, we may see a rapid centralization (and clarification) of the EU crypto framework. This could minimize the competitive advantage of some ostensibly friendly jurisdictions because, according to Verbiest, differences in the transposition, interpretation and application of the rules will be ironed out. It will be more difficult, if not impossible, for one EU member state to have a different position from the others:

“Supervisory activities and anti-money laundering and counter-terrorist financing rules in the EU will be standardized and consolidated. […] With stricter reporting requirements to come and better cooperation between Member States on AML/CFT topics, regulators want to map cryptographic transactions as well as possible in order to identify transactions that fall under illicit activities as well as limit erosion of the tax base. ”

The major trend of rapid regulatory consolidation is here to stay as the issue of money laundering (not necessarily crypto-related) remains highly relevant. According to Toms, AML rules and regulations are already tightened in general with each new iteration of European regulations as the battle against dirty money intensifies:

“The current conflict in Ukraine and the sanctions against Russia could prove to be an additional catalyst for stricter regulation at all levels if there is concern that some parties will even more actively seek to find more and more new ways to circumvent AML regulations. […] The crypto, which has already been in the alarmed sights of the EU for some time, could very well find itself caught in the situation.

The pure and hard scenario

Another major factor is the development of digital currency projects issued by central banks and states, which could affect the regulatory and supervisory climate and would hardly be optimistic for the crypto industry. If this movement gains momentum across Europe, crypto companies and “unregulated” currencies could become increasingly marginalized and viewed as a path taken by those who, for whatever reason, do not want to use state-authorized CBDCs.

Such a bleak scenario is far from guaranteed, however, given the growing adoption of crypto at the retail and institutional level and the fact that more and more big names in finance are getting involved. in one way or another.

Ultimately, Europe, where executive decision-making is arguably less burdened with parliamentary pressure than the US, could take a tougher stance on crypto. The EU will likely seek to take an increasingly tough line in regulating criminal behavior and protecting consumers, and crypto is still viewed with suspicion.

But the game is not a one-way street: after all, the crypto industry will have to figure out how to deal with issues of transparency and know-your-customer in a decentralized world.