The European Parliament and the Council of the European Union have proposed amending a directive on preventing money laundering and terrorist financing that will require cryptocurrency exchanges and wallets to identify suspicious activity, a directive that would include identifying bitcoin users.
The directive constitutes the main legal instrument to prevent the EU financial system from being used for money laundering and terrorist financing. The directive, to be transposed by June 26, 2017, establishes a framework to require member states to identify and mitigate risks related to money laundering and terrorist financing.
Technology has created alternatives for financing that are beyond the scope of EU legislation that should no longer be justified, the proposal [PDF] noted. To keep pace with evolving trends, new measures to improve the existing preventive framework are needed.
As of May 2015, the directive made no mention of cryptocurrencies. If and when cryptocurrencies are included among AMLD directives, anonymity during transaction exchanges between crypto and fiat currencies will be obsolete.
The European Parliament in May approved a proposal for a task force to investigate the role of cryptocurrencies like bitcoin and blockchain technology.
The vote to establish this task force came soon after the European Parliament’s Committee on Economic and Monetary Affairs (ECON) recommended that the EU Commission consider revising EU payment laws, on the basis of its assessment of cryptocurrencies and blockchain technology.
The push for the amendments came amid increased regulatory debate about cryptocurrencies following the 2015 terrorist attacks in Paris. Much of the debate focused on the anonymity provided by cryptocurrency exchanges and prepaid cards.
The proposal for the amendment came within a week of Europe’s central law enforcement authority, Europol, published a report explicitly stating that there is no evidence of ISIS using bitcoin as a means to finance its activities.
Exchange services between cryptocurrencies and fiat currencies and custodian wallet providers are not presently required to identify suspicious activity, the new proposal stated.
Terrorist groups can benefit from the anonymity provided by cryptocurrency platforms and can transfer money into the EU’s financial system, the proposal noted. Hence, it is essential to extend the scope of EU Directive 2015/849 to require exchange services between cryptocurrencies and fiat currencies as well as custodian wallet providers.
For anti-money laundering and countering the financing of terrorism, authorities should be able to monitor the use of cryptocurrencies, the proposal stated. It would safeguard technical advances and the high degree of transparency attained in alternative finance and social entrepreneurship.
The anonymity of cryptocurrencies enables their misuse for criminal purposes. Requiring exchange services between cryptocurrencies and fiat currencies and custodian wallet providers will not fully address the issue of anonymity of cryptocurrency transactions since the virtual currency environment will largely remain anonymous since users can also transact without these providers.
To combat risks related to the anonymity, national Financial Intelligence Units should be able to associate cryptocurrency addresses to the identity of the owner of such currencies. The possibility of allowing users to self-declare to authorities on a voluntary basis should also be considered.
The proposal defines “virtual currencies” as a digital representation of value that can be digitally transferred, stored or traded and accepted by natural or legal persons as a medium of exchange, but does not have legal tender status.
It defines “custodian wallet provider” as an entity providing services to safeguard cryptographic keys on behalf of customers, to holding, storing and transferring virtual currencies.
Under the new proposal, member states are required to ensure that exchange services between virtual currencies and fiat currencies, and custodian wallet providers, are registered.
The proposal also addresses anonymous prepaid cards, which are easy to use in financing terrorist attacks and logistics. Hence, it is essential to deny terrorists this means of financing their operations by further reducing the limits and maximum amounts under which obliged entities aren’t required to apply certain customer due diligence measures provided by Directive (EU) 2015/849.
It is important to lower the thresholds for anonymous prepaid cards and to identify the customer in the case of remote payment transactions exceeding 50 Euros, the proposal noted.
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Last modified: March 4, 2021 4:53 PM