Recommendations for EU AML and Terror Financing Regulation of Cryptocurrencies

Valentina Covolo - University of Luxembourg

-- Whilst policy-makers are still groping for suitable regulation of the fast-paced industry of crypto-assets, governments and international organizations worldwide are focusing their efforts on combating criminal misuses of cryptocurrencies. Among the most recent landmark steps is the extension of the Financial Action Task Force (FATF) international standards against money laundering and terrorism financing over virtual assets, which led to the publication of detailed guidance in June 2019. This echoed the first legislative measure regulating virtual currencies adopted by the European Union (EU) a year before. Directive 2018/843/EU, better known as the 5th Anti-Money Laundering Directive, brings under its scope of application providers engaged in exchange services between virtual currencies and fiat currencies, as well as custodian wallet providers, thereby imposing on them due diligence rules, monitoring and reporting duties.

The implementation of the anti-money laundering and counter-terrorism financing (AML/CTF) preventive framework over cryptocurrencies schemes, which EU Member States were required to transposed into national law by January 10th 2020, looks however as a new, albeit by many aspects already outdated legal framework. On the one hand, the 5th AML Directive fails to address key technological breakthroughs and new business models, highlighting the physiological slowness of the decision-making process that hardly keeps pace with the swift development of the crypto economy. On the other, one should expect the EU to further amend the its AML/CTF regulation in order to comply with the new FATF Recommendations, which build on the broader notion of virtual assets and longer list of virtual assets service providers.

Drawing on this, my recent working paper, "The EU Response to Criminal Misuse of Cryptocurrencies: The Young, Already Outdated 5th Anti-Money Laundering Directive," provides an in-depth legal analysis of the 5th AML Directive for the purpose of identifying shortfalls and challenges that lay ahead to effectively tackle criminal misuse of cryptocurrencies. To do so, the paper addresses four key issues on which AML/CTF preventive regulation builds upon: (a) how to define the new object of AML regulation considering that legal status of crypto-assets still is an unanswered question; (b) what gatekeepers should regulators target having regards to the decentralized structure of cryptocurrencies schemes; (c) what challenges obliged entities and law enforcement authorities face in detecting and deciphering suspicious transactions that may rely on anonymity-enhancing technologies; (d) last but not least, what is the competent jurisdiction given the intrinsic borderless nature of cryptocurrencies.

The analysis brings me to the conclusion that extending the scope of the current AML/CTF preventive framework cannot dispense with a more integrated supervisory and enforcement system, which should be underpinned by a coordinated regulatory approach throughout Europe. The adoption and implementation of common supranational standards is all the more crucial having regard to the globalized nature of cryptocurrencies transactions. As the Bank for International Settlements emphasized in its 2018 Annual Economic Report, nationless virtual worlds, such as the cryptocurrencies ecosystem, call for ‘a redrawing of regulatory boundaries’ and – one might add – for a reshaping of the very architecture of supervision and enforcement systems that are still rooted in the concept of States’ territory. Taking this stand, the working paper presents some preliminary findings of the CryptoCrime research project, which aims to investigate regulatory needs and enforcement strategies to combat criminal misuse of cryptocurrencies.

Recent reforms and initiatives suggest that the EU is moving forward along this path. On December 18th 2019, the EU legislator adopted Regulation 2019/2175, which confers upon the European Banking Authority (EBA) supervisory and enforcement powers for the purpose of ensuring the effective implementation of the AML preventive regulation within the Union. The day after, the EU Commission launched a public consultation with a view to elaborate proposals for a EU regulatory framework for crypto-assets. 2020 promises to be a stimulating year for further developments and debate.

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