New AML Regulations in the EU May Have a Heavy Impact on the Crypto Industry

The European Union’s (EU) new 5th Anti-Money Laundering (AML) Directive (known as 5AMLD) officially entered into force on January 5, these regulations may heavily impact the crypto industry. Besides tracking illicit gains, the law introduces restrictions which may influence crypto companies to the scale never seen before.

This arrangement in the EU aims at preventing money transfer to different countries by regulating the organizations operating in legal grey area, which troubled the public for a long time.

The trend seemed to persist — until 2016, when Panama Papers began to circulate. The papers exposed a range of offshore companies used by Panamian law firm and corporate service provider Mossack Fonseca for illegal purposes.

Since then, the public awareness about illicit financial activity rose steadily, which urged governments to crack down on criminals. However, monitoring money is not an easy task. In the past four years, regulators and governments started to take a closer look on anonymous offshore companies. And it seems that they created regulations which may negatively influence the crypto industry.

Analysis of 5AMLD

The Anti-Money Laundering (AML) was drafted in response to Panama Papers. The 5AMLD is its latest implementation, which addresses money laundering and terrorist financing in Europe.

Although the new law will seek to increase security EU-wide, it will also impact the cryptocurrencies. It states that certain crypto services, like crypto-fiat exchanges or custodian wallet providers, will be within its regulatory domain.

This may contradict the strong belief of anonymity as key feature of cryptocurrencies. Authorities will be watching crypto transactions in order to prevent possible illegal or deadly activity sponsored this way.

According to 5AMLD fact sheet, the law will increase transparency about owners of legal entities, which means that regulators will have wider access to the information kept in bank accounts.

Companies that operate on cryptocurrency, are under increasing pressure of imposing the new requirements on their clients. This may become industry-wide with the law regarding information exchange between regulators and the European Central Bank.

The European Union is a robust economic and political centre. Due to huge numbers of well-off consumers, governments often need to improve business regulations. This is one of the reasons why non-EU companies urge their governments to upgrade existing regulations to the EU standard — they will have unrestricted access to European market.

Benjamin Kirschbaum, a German lawyer for Winheller Attorneys at Law & Tax Advisors, notes that 5AMLD may influence countries globally:

“The European Union is the strongest market after the U.S. By complying with their rules, you get access to over 500 million people with above average purchase power. Therefore, even highly independent countries like Switzerland comply with most EU regulations, such as data protection law.”

European police embraces the new law

An expert from Europol’s Financial Intelligence Unit detailed how the new law helped create the definitions of ”custodian wallet providers” and ”virtual currencies”, which will force wallet providers to give information about suspicious transactions to the authorities:

“Legal entities involved in this kind of activities must follow due diligence measures and report information on suspicious transactions to their correspondent FIUs. Based on this, EU Authorities could monitor the use of virtual currencies, providing a balanced and proportional approach to the field of cryptocurrencies and social entrepreneurship.”

Europol is familiar with crime involving crypto, as it was a major player in the shutdown of several dark-net services providing illegal products, such as stolen personal data or drugs, for cryptocurrencies.

Though blockchain transactions are transparent, individuals conducting them are not immediately identified. Prior to 5AMLD, it was done confidentially by blockchain analytics organizations. The new law allows authorities to obtain the information identifying people behind the transactions. A Europol representative stated:

“Receiving that information, Europol, as the EU information hub, would provide better both analytical and operational support as well as an add value to investigations to dismantle criminal organizations misusing cryptocurrencies.”

Experts speaking about the 5AMLD

Winheller Attorney Kirschbaum noted that now, with stronger KYC procedures cryptocurrency trading will get out of the gray market, which may rise volumes in the space and decrease volatility.

The CEO and founder of Polyx, as well as the backer of a recently launched AML checker app Traceer, Stan Chernukhin, also stated that minimizing risks by ensuring transparency may bring in more institutional investments.

While the cost of complying with the 5AMLD may be high, the price of resistance is definitely higher. Austria’s financial regulators plan to fine non-compliant companies a maximum of 200,000 euros. Kirschbaum also stated that several other EU countries develop similar measures.

This state of affairs sparked privacy-centered debates in the crypto community. Kirschbaum explained that de-anonymization is necessary for intelligence services and justice systems to continue to protect citizens. He also noted that only truly private coins such as Monero (XMR), can withstand de-anonymization, but it may be completely outlawed.

Exchanges and wallet providers are feeling the impact

Many exchanges and wallet providers are caught in the crossfire with the new law. While 5AMLD shows that lawmakers started to regard crypto seriously, it also shatters the primary concept of cryptocurrencies — anonymity.

For some companies this law may be a last straw. Bottle Pay, a United Kingdom-based crypto wallet provider, shut down on December 23, citing the law as a primary reason for closure.

Other companies seemed to suppose that compliance rules may change, and beefed up their demands in advance. Yehor Lastenko, certified anti-money laundering specialist and head of the EDD division of the U.K.-based CEX.IO exchange, stated, that the company was fully compliant with the law since 2014:

“We understand the importance of compliance procedures and providing a transparent and trusted service. This is why we implemented mandatory verification long before the adoption of 5AMLD. We introduced verification for fiat-related transactions in 2014, and in December 2018, we also made it mandatory for crypto-to-crypto transactions.”

David Carlisle, head of community at the Elliptic crypto forensics company, echoed these words, stating, that many companies are prepared for tough challenges of implementation of the law, submitting their registration and approval requests to regulators.

Latsenko believes that, though KYC requirements may be awkward for users, they are necessary to keep balance in the industry, which gains recognition of the wider financial world:

“Customers may find additional compliance measures burdensome, especially since the anonymity attached to cryptocurrency is believed to be among the key advantages for many crypto users. At the same time, crypto exchanges and wallet providers become mature financial market players, providing a better experience and, most importantly, safety for customers.”

Even if the U.K. will leave the EU, it is doubtful, that it will become an offshore paradise. Latsenko stated that “Despite the inescapable Brexit, the new U.K. Money Laundering Regulations 2019 transposed requirements of the 5th EU Directive to local legislation such as the Money Laundering Regulations 2017, the Terrorism Act 2000, and the Proceeds of Crime Act 2002.”

To stay or not to stay — that is the question

Although the new law will put companies in a comply-or-die situation, there is a third way: moving offshore. Despite the 2016 leak, Panama is still open for companies who seek a less restrictive legal environment.

For instance, Deribit B.V. stated that on February 10 it delegates its trading platform to its daughter company, DRB Panama Inc, to avoid the 5AMLD. The company stated that the amount of information it would have to provide was prohibited.

Carlisle believes that such moves may be a threat to company, as it may be denied to operate:

“Those proactive businesses that take an AML-first mindset can expect to thrive and protect their businesses against illicit activity, even if compliance does pose some near-term challenges. However, crypto businesses that are unprepared and have not taken steps to implement appropriate compliance arrangements may find that EU regulators do not give them the approval they need to operate.”

Lennix Lai, financial market director of the Malta-based OKEx exchange, said that the company expects regulated and non-regulated companies to develop similar attitude regardless of the legislation they are forced to comply with:

“Unregulated would be looking more like a regulated venue in respect to market integrity, internal control, disclosure, and investor education and protection, whilst regulated players would be expected to add more products, more underlying, more trading expiries and instruments, and lowering margin requirement as in unregulated exchange.”