The European Commission – the executive arm of the European Union – has proposed a directive aimed preventing the use the financial system for terrorist financing which includes a central database for bitcoin and virtual currency users’ identities and wallet addresses accessible to government financial intelligence units (FIUs).
The proposal seeks to require member states to bring into force the regulations necessary to comply with this directive by Jan. 1, 2017.
The updated anti-money laundering rules adopted May of 2015 marked an important step to improve the effectiveness of EU attempts to combat money laundering from criminal activities and to fight financing terrorist activities, the proposal noted.
The global financial system makes it easy to hide and move funds by creating layers of companies, crossing borders and hiding money streams. Terrorists and other criminals can cover their tracks.
The proposal seeks to address the gaps in the oversight of terrorist financial tactics, including the use of virtual currency, and at the same time avoid unneeded obstacles for law-abiding businesses. It noted the need to balance the need to improve security and the need to protect fundamental rights, including economic freedom and data protection.
On Feb. 2, 2016, the commission gave an action plan to strengthen the fight against terrorist financing, focusing on two main areas: 1) tracing terrorists through financial movement and preventing the movement of assets, and 2) disrupting the sources of revenue terrorist organizations use.
On Feb. 12, 2016, the EU’s Economic and Financial Affairs Ministers Council (ECOFIN) asked the commission to offer a proposal to amend the Fourth Money Laundering Directive (4AMLD) by the second quarter. On April 22, ECOFIN also sought action to improve the accessibility of beneficial ownership registers.
The new proposal provides a framework to enable member states to be up to date and better equipped to meet challenges.
The amendments seek a single market for payments establishing more innovative and safer payment services across the EU. They also seek a framework for private and public online services, electronic commerce, a reformed data protection regime, and a digital single market for Europe.
Because organized criminal and terrorism financing can damage the financial sector’s stability and threaten the internal market, any measures adopted solely at the national level could have adverse effects on the EU Single Market. Given the cross-border nature of the terrorist threats, the proposed rules must be consistent at the Union level to be effective.
To allow authorities to monitor suspicious virtual currency transactions, all gatekeepers that control access to virtual currencies should be defined as obliged entities under 4AMLD, especially wallet providers and exchanges, the proposal noted.
The commission consulted with public authorities on the proposal, along with representatives of the payment services sector, financial sector, financial intelligence units, Europol, consumer organizations, and virtual currency market players (wallet providers, exchanges and others.)
The commission completed surveys on Jan. 27, 2016 of member states on how national authorities collect data to assess suspected terrorist activities and to what extent the information can be used by national authorities to detect terrorist financing. The survey also examined the extent to which prepaid instruments and virtual currencies have been used in terrorist financing.
The proposal’s impact assessment noted the following:
1) Suspicious transactions involving high-risk countries are not efficiently monitored due to uncoordinated customer due diligence requirements;
2) Suspicious transactions through virtual currencies are not sufficiently monitored by the authorities;
3) Current measures to mitigate money laundering and terrorist financing risks associated with anonymous prepaid instruments are insufficient;
4) FIUs are limited in ensuring timely access to – and exchange of – information held by obliged entities;
5) FIUs lack access to information on the identity of holders of payment accounts.
The option to improve detection of suspicious virtual currency transactions consists of a combination of means: bringing virtual currency exchange platforms and custodial wallet providers under the scope of the directive, while allowing more time to consider options for a voluntary self-identification of virtual currency users.
The option retained to provide FIUs access to information on the identity of payment account holders is to put in place an automated central mechanism – such as a central registry or an electronic data retrieval system – at the member state level. This mechanism would be directly accessible to national FIUs and other authorities active in the field of anti-money laundering or counter-terrorist financing.
The commission proposes to amend Article 2, to add to the list of obliged entities virtual currency exchange platforms as well as wallet providers.
A number of risks were highlighted in respect of providers of exchange services between virtual currencies and fiat currencies. The proposal noted virtual currency transactions benefit from a higher degree of anonymity than classical financial fund transfers and therefore entail a risk that virtual currency may be used by terrorist organizations.
The EU does not monitor virtual currency transfers, since no rules have been set. To adequately respond to risks, it is necessary to provide a regulatory framework for the functioning of exchanges as well as of custodian wallet providers.
The proposal noted the credibility of virtual currencies will not improve if they are used for criminal purposes. In this context, anonymity will be more of a hindrance than an asset for virtual currencies.
The inclusion of virtual exchange platforms and wallet providers in the directive will not fully address the issue of anonymity connected to virtual currency transactions since a large part of the virtual currency environment will remain anonymous as users can also transact without exchange platforms or wallets, the proposal noted.
To counter the risks related to the anonymity, national FIUs should be able to associate virtual currency addresses to the identity of the owner of virtual currencies. In addition, the possibility to allow users to self-declare to authorities voluntarily should be considered.
The proposal defines “virtual currencies” as “a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically.”
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