The issue of regulation of cryptocurrencies is a knotty one and which has world governments and financial regulators divided.

Introduction

Regulation in itself goes against the principles of the originators of cryptocurrencies. Cryptos were built to be decentralized, devoid of government control or interference in any manner (which includes regulation). However, different governments across the world in general and Europe in particular, have had their own ideas of what regulation stands for.

Some EU countries opted to regulate the scope of what the technology itself could be used for, which raised the question of whether blockchain technology should be used to create digital assets for trading (cryptocurrencies) or whether they should be devoted totally to real-world use cases.

Then there were those who wanted to allow cryptocurrency trading but wanted it regulated just the way stocks, currencies, and other financial assets are regulated. There were also those who want to regulate cryptos differently, taking into account the peculiarities of the asset class itself.

However, a new directive known as 5AMLD or Fifth Anti-Money Laundering Directive is set to change the game forever. It seeks to create a harmonized format for cryptocurrency regulation across the EU. So the coming of 5AMLD would, in theory, take all the variant formats of crypto regulation and bring it all into one solid box.

State of Cryptocurrency Regulations In Europe

Previously, Gibraltar, Malta, and Estonia were the only countries in Europe with a defined regulatory setup for cryptocurrencies. However, a new ruling by the EU is set to change all this. The European Union’s 5th Anti-Money Laundering Directive has mandated member starts to commence regulation of crypto assets by January 10, 2020. By this ruling, all crypto exchanges are to be covered by the same regulations and protocols under which banks and crypto trading brokers operate.

According to the document announcing these changes, “Directive (EU) 2018/843 (AMLD5), once transposed into member state legislation, will extend the list of obliged entities to virtual currency exchanges and custodian wallet providers”. The rule is to be extended to the 28 member states of the EU.

Furthermore, the EU is preparing stiff penalties on defaulting member countries and these will become effective in February 2020. Furthermore, increased reporting will be the norm.

How is the Compliance with 5AMLD in the EU Member States?

It would appear that this rule is now in effect. My account with a European crypto exchange was temporarily put on hold and reactivated after some days because I had already fulfilled KYC requirements months earlier. Some others I know who have not fulfilled KYC requirements have been asked to withdraw their crypto holdings and close their accounts if they are unwilling to go forward.

So how are EU member states domesticating this directive?

UK

The United Kingdom has been championing the regulation of the cryptocurrency market for quite some time. As expected, it has been one of the first to quickly announce new rules for crypto exchanges. The Financial Conduct Authority (FCA) is in charge of financial market regulation in the UK and it has taken over the function of crypto regulation. In a recent announcement, the FCA declared that it is now the “anti-money laundering and counter-terrorist financing (AML/CTF) supervisor of UK crypto-asset businesses…”, which in simple terms, means it is now the crypto trading regulator. The regulation would apply to all crypto exchanges, peer-to-peer platforms, initial coin offerings (ICOs), token issuers and wallet providers. Virtually everyone involved in some sort of crypto business that involves buying and selling any asset that is based on blockchain technology will come under FCA’s strict regulation.

What is still not clear with the UK situation is what happens when Brexit is concluded on January 31, 2020. That is the date when the UK leaves the EU: would the FCA then be mandated to carry out an EU-derived regulation? Time will tell how this plays out.

Finland

I mentioned something about my account being locked for a while and then reinstated: the exchange in question is Localbitcoins, Finland’s number one peer-to-peer crypto exchange. Finland’s regulator, the Financial Supervisory Authority (Fin-FSA), began implementing regulatory protocols in May 2019. As of January 2020, the country has started implementing full regulation of all the five approved exchanges.

Malta

Malta already had three laws and a regulatory agency specifically designed to apply those laws in the regulation of cryptocurrencies. Malta is presently adapting the changes described in 5AMLD into its existing process.

Austria

The Austrian Financial Market Authority (FMA) has produced circular informing crypto exchanges, custodian wallet providers and other crypto-based businesses that they need to comply or face fines of up to €200,000 for default.

Countries such as Germany, Lithuania, and the Netherlands have all started to comply with 5AMLD.

The Fallout from 5AMLD

If we can borrow a leaf from the effect of the forex and CFD trading regulations that were brought on by the European Securities and Markets Authority (ESMA) in 2018, we can say that the crypto trading market in Europe is bound to undergo some form of upheaval. ESMA imposed leverage caps on currency trading as well as trading of CFDs on stocks, indices, and cryptos. Many firms left the EU, and those who stayed had to open new offshore branches to cater to clients who found themselves locked out by the leverage caps. Those without deep pockets are having it tough staying in business. New markets are now being sought in places that were forgotten hitherto, with Africa now a preferred destination.

This experience with ESMA is likely to play out once again. Many exchanges will find themselves unable to abide by the rules set out by 5AMLD and they will seek new homes for their business outside of Europe. Already, the Deribit exchange is exiting the Netherlands on February 10 and is opening shop in Panama, long known for its more accommodative stance on financial market regulation. They will likely take most of their trading clients with them.

Some other companies have contacted their clients indicating that they will be closing shop. KyberSwap is leaving Malta and BottlePay left the UK in December 2019.

After all, one of the draws of cryptocurrency trading was not having to submit all the documentation required for KYC, as well as the occasional emails asking to explain transaction patterns and the like. Exchanges will now be mandated to report to financial intelligence units, so-called suspicious transactions. So if you are a hefty volume trader, you should prepare to receive periodic emails asking to know where you are getting your funds from.

With 6AMLD scheduled to kick into effect in December 2020, we wait to see how various European countries work with 5AMLD in achieving full EU-wide regulation.

Michael Kuchar



