The European Commission published a draft directive last week proposing to amend existing anti-money laundering rules to include virtual currencies such as bitcoin. If adopted, exchanges as well as custodial wallet providers will need to collect customers' identity documents and report suspicious activity on their platform to relevant authorities.

In an attempt to avoid regulatory overreach, a group of Dutch Bitcoin startups and experts is now reaching out to the Dutch Ministry of FInance offering their expertise, hoping to potentially adjust the proposed directive amendment.

Uncertainty still exists over the extent of the proposed directive; in particular over what are considered "wallet providers offering custodial services of credentials necessary to access virtual currencies."

Some legal experts maintain that the amendment would concern only companies that fully control customer funds (such as Circle or Xapo ). Other legal experts think it may also apply to wallet providers that merely hold onto a single key of a multisig-address (such as BlockTrail or GreenAddress ); an interpretation that was confirmed by German Bitcoin-news site bitcoinblog.de , which reportedly spoke with an E.U.-representative.

Additionally, Bitcoin-services that are not really designed as wallets but do hold private keys (such as ChangeTip and SatoshiPay ), may fall under the new regulation as well.

Jouke Hofman is CEO of Bitcoin-brokerage Bitonic and exchange BL3P and initiated the outreach to the Dutch Ministry of Finance as well as Dutch Bitcoin-startups and experts.

Speaking to Bitcoin Magazine , Hofman explained:

This sentiment is shared by Corné Plooy, the main developer behind Amiko Pay , a payment channel network sharing similarities with the Lightning Network. As part of the initiative, Plooy is reaching out to the Dutch Ministry of Finance in hopes of giving them a better understanding of the technological potential of the Bitcoin protocol - and possible consequences of regulatory overreach.

Explaining his perspective to Bitcoin Magazine , Plooy said:

He continued:

If the directive is adopted without sufficient provisions for startups and room for innovation, Hofman and Plooy, who are accompanied by representatives from BlockTrail and Bitmymoney , worry it will stifle Bitcoin innovation - or drive that same innovation out of the European Union. They maintain that any regulation targeted at wallet providers should be withheld for now, and they prefer a so-called "wait and see" approach in this domain.

"The core issue is that regulation cannot take into account the advantages or demands of future inventions, because we don't know what those future inventions will be," Plooy explained. "We need a space where new ideas can be deployed, where they can grow in freedom, so they can prove their use to the world. If the E.U. doesn't provide that space, innovation will happen elsewhere, and Europe will always stay behind."

On top of that, the initiative questions whether the proposed regulation will accomplish the stated goals in the first place. In the directive draft, the European Commission argues it needs to impose KYC-checks on the gatekeepers of virtual currencies in order to prevent criminal abuse. But since Bitcoin is a peer-to-peer protocol by design, it's unclear that regulating specific types of wallet services will have any effect in that regard at all, they argue.

"We concede that on- and off-ramps - the exchanges and brokerages where Bitcoin is traded for fiat currency and back - can be considered gatekeepers of the system. We also understand these may need to be regulated to some extent," Hofman explained. "But this directive proposes to apply full KYC/AML-checks on certain wallet providers. We don't believe these companies work as gatekeepers at all, since anyone can trivially send, receive and store Bitcoin without these companies anyway. They're service providers, sure - but not gatekeepers."

As the initiative limits itself to reaching out to Dutch policymakers, Hofman hopes Bitcoin industry players in other E.U. member states undertake similar steps. He has been reaching out to several of them over the past week, suggesting they may want to take action as well.

"In the end, I think it is mostly a lack of understanding of the underlying principles of Bitcoin - and in particular the pay-scripts - that had the European Commission come up with this phrasing," Hofman said. "But since it is a draft, there are still ways to alter the content. All E.U. member states will have input on the paper, so other European companies that believe the directive needs to be adjusted should contact relevant government officials and perhaps offer them their knowledge. I don't know for sure if this will actually help, but at least we need to try."

The European Parliament and the European Council must approve of the directive for it to be adopted. If any adjustments are to be made to the draft proposal, it will need to happen on short notice for regulatory standards: The proposal is scheduled to be enforced by 2017, while the council will discuss the draft as early as next week. Once adopted, E.U. member states are expected to implement national laws based on the directive.

The author of this article was approached for - and has provided - input to a letter addressed to the Dutch Ministry of Finance drafted by the initiative as well.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.