A New World: Crypto-Exchanges and the EU’s Sixth Money Laundering Directive

A Paradigm Shift is Coming to Europe’s Oversight of Virtual Currencies 

Gabriel “Gabe” Hidalgo is a managing director at K2 Intelligence.  His bio can be found here.

With recent announcements from the Financial Action Task Force about upcoming cryptocurrency regulation in 2019, increased money laundering penalties laid out in the EU’s Sixth Anti-Money Laundering Directive, and the sanctions actions taken by the U.S. Treasury to target actors in Iran and Venezuela using virtual currency to evade sanctions, cryptocurrency regulation has taken on a far more global scope.   

The European Union’s Fifth Anti-Money Laundering Directive (Fifth Directive) recently became binding upon EU Member States. This directive must be enacted by member states by January 10, 2020 and  it follows the implementation of the Fourth Anti-Money Laundering Directive, which went into effect in June 2017. 

Specific provisions in the Fifth Directive represent a paradigm shift in the EU virtual currency regulatory landscape and provide a strong indication of how the EU plans to tackle the money laundering and terrorist financing risks that stem from virtual currencies. While regulators look to balance the needs of law enforcement with the desire not to hamper innovation and technological progress, there is little doubt that these new requirements will have a major impact on this rapidly growing industry. Additionally,  given the tougher punitive penalties introduced for predicate money laundering offences in the Sixth Money Anti-Laundering Directive including “fines, temporary or permanent exclusion from access to public funding, including tender procedures, grants and concessions, temporary disqualifications from the practice of commercial activities or temporary bans on running for elected or public office”, virtual currency firms will need to be even more vigilant in building their compliance programs to mitigate the risks.



Staying Ahead of the Anti-Money Laundering Curve

The crafting and implementation of robust AML and KYC policies will become even more important as companies continue to evaluate their ongoing European regulatory exposure and EU member states begin to take new action in response to the Fifth and Sixth Directives. Yet meeting today’s requirements for AML and counterterrorism financing compliance presents major challenges for financial institutions. The regulatory landscape is constantly evolving, imposing new obligations on financial services firms. 

While the EU virtual currency regulatory effort currently lags behind the efforts undertaken by federal and state regulators in the United States, such as those implemented by the New York Department of Financial Services, our analysis conducted at K2 Intelligence suggests that many country-level regulatory rulemaking and enforcement efforts to take significant steps forward in the near future. Virtual currency exchanges and wallet providers should take additional measures to ensure that they are staying apprised of and remain compliant with any new regulations that will be rolled across the EU at the country level.



Monitoring Virtual Currency Transactions



One of the most important changes found in the Fifth Directive—and one we expect to see repeated by local regulators across the EU in the coming years—is the broadening of the scope of obliged entities to include virtual currency exchange platforms and custodian wallet providers. This represents a major change from the Fourth Directive. 

In its release announcing the Fifth Directive, the Commission stated that it was seeking to address the anonymity and potential misuse of virtual currencies by terrorist and criminal organizations. It was in that spirit that the Commission added virtual currency exchanges and wallet providers to the list of obliged entities covered and monitored by national financial intelligence units (FIUs). The Fifth Directive also requires exchange platforms and wallet providers to register with member state AML regulatory authorities. 

Previously, virtual currency exchanges and wallet providers were not subject to EU legal obligations to regularly monitor transactions, identify suspicious activity, or implement robust customer due diligence controls. Under the Fifth Directive, that will change—these companies will face the same regulatory requirements as banks and other financial institutions and will be required to identify their customers and report any suspicious activity to member state FIUs. They will also have to be registered with the AML regulatory authority in their jurisdiction.

With implementation of the Fifth and Sixth Directives  to take place at the member state–level over the next 18 months, and with continued calls by outgoing Chair of the Supervisory Board at the European Central Bank, Danièle Nouy, as well as European lawmakers for a centralized European AML regulatory authority, the regulatory environment in Europe will likely remain challenging for virtual currency exchanges and custodian wallet providers for the foreseeable future. 

Notably, the global AML watchdog, the Financial Action Task Force (FATF), has also set June of 2020 as its target date when it expects to roll out new rules for countries requiring the licensing and regulation of virtual currency exchanges and some wallet providers. The new FATF rules will likely further accelerate the adoption, by EU Member states, of the Fifth and Sixth Directive AML and virtual currency provisions. By keeping up to date with new regulations as they are rolled out across the EU, virtual currency entities and institutions can ensure that they have appropriate compliance programs in place that protect their customers and are able to withstand any regulatory scrutiny.  

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