The European Parliament recently published a report detailing amendments to the Directive on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing. "Virtual currencies are a marginal phenomenon at present,” the Parliament states, “it is possible that they will become increasingly important."
The directive in question, Directive (EU) 2015/849, is the fourth directive to address the threat of money laundering. Enacted on June 25, 2015, the directive has a two-year window for implementation and all EU member states must be compliant by June 26, 2017.
The very first anti-money laundering directive, 91/308/EEC, was enacted in 1991 and defined money laundering in terms of drugs offenses as well as imposing obligations on the financial sector. The second directive, 2001/97/EC, was enacted in 2001 and extended the scope of the first directive to cover more crimes, professions and activities.
The third directive, 2005/60/EC, was enacted in 2005 and covered terrorist financing for the first time. It also provides, “detailed requirements in relation to customer identification and verification, the situations where a higher risk of money laundering or terrorist financing may justify enhanced measures and also the situations where a reduced risk may justify less rigorous controls.”
The scope of the directive, which was previously extended to bitcoin and other digital currency exchanges and wallet providers by the Commission, has now been extensively widened by the Parliament. In addition to these two categories, the Parliament has added “issuers,” “administrators,” “intermediaries” and “distributors” to the list of covered businesses, noting that they are currently under no obligation to identify suspicious activity. Under the new amendment, Member States must ensure that these businesses are either licensed or registered.
Last July, the Commission proposed several amendments to the directive. The two main amendments assert that digital currency "does not possess the legal status of currency or money" and that they "cannot be anonymous." The former is at the suggestion of the European Central Bank (ECB), whereas the latter was initiated by the Parliament.
"’Virtual currencies' means a digital representation of value that is neither issued by a central bank or a public authority, nor attached to a legally established currency, which does not possess the legal status of currency or money, but is accepted by natural or legal persons as a means of exchange or for other purposes, and can be transferred, stored or traded electronically. Virtual currencies cannot be anonymous."
- European Parliament
The ECB provided its opinion on the regulation last October. While the additional business categories were not defined in the Parliament’s report, the ECB lists nine “key actors” in their February 2015 report, Virtual Currency Schemes.
The Central Bank includes issuers, miners, wallet providers, exchanges, and the inventor, while stating “The ‘ecosystem’ of virtual currency schemes consists mainly of specific, new categories of actors which were not present in the payments environment before.”
The role of issuers has been defined as whoever can “generate units of the virtual currency.” There is a distinction made between a centralized actor or a decentralized group of miners. The role of Wallet Provider includes can either be custodial wallets or only exist as software alone. There is also an “other actors” section, including fund managers, merchant processors, and mixing services.
In addition, the Parliament proposed to add the definition of “custodian wallet provider” as an entity that provides services to safeguard private cryptographic keys on behalf of their customers, to hold, store and transfer virtual currencies.
Citing the aim to improve cooperation between Asset Recovery Offices of the Member States, the Parliament has also proposed setting up and maintaining a central database, “registering users' identities and wallet addresses accessible to FIUs, as well as self-declaration forms for the use of virtual currency users.”
To justify its proposal, the Parliament states that "suspicious transactions using virtual currencies are not sufficiently monitored by the authorities, which are unable to link identities and transactions."
“Competent authorities should be able to monitor the use of virtual currencies in order to identify suspicious activities. This would provide a balanced and proportional approach, at the same time safeguarding both the innovative technical advances offered by such currencies and the high degree of transparency attained in the field of alternative finance and social entrepreneurship.”
- European Parliament
The ECB’s October recommendations also state that the regulation can be misinterpreted as the regulators endorsing the use of digital currencies. The Parliament has since concluded that, “while it is desirable to lay down rules to prevent the use of virtual currencies for money laundering, the European Union should not necessarily do so in such a way that endorses the use of such currencies.”
It subsequently proposed to delete most of Part 7 of the proposal, which states that "the credibility of virtual currencies will not rise if they are used for criminal purposes. In this context, anonymity will become more a hindrance than an asset for virtual currencies taking up and their potential benefits to spread."
“The Union legislative bodies should, however, take care not to appear to promote the use of privately established digital currencies,” states the ECB, “as such alternative means of payment are neither legally established as currencies, nor do they constitute legal tender issued by central banks and other public authorities.”
According to the EU legislative procedure, the directive must now be read by the European Commission, then the Parliament, and finally the Council, before can be adopted. They will all have a chance to propose amendments.
The next step is for the European Council to examine the Parliament’s position to either adopt it or amend it. If the Council chooses to amend, its proposal will be submitted to the Parliament for a second reading. If accepted by the Parliament, the directive is adopted, otherwise, the Council will have a second reading before it will once again amend it or adopt it.
“That Directive, which is to be transposed by 26 June 2017, sets out an updated, transparent, efficient and comprehensive legal framework to address the collection of money or property for terrorist purposes by requiring Member States to identify, understand, mitigate and prevent risks related to money laundering and terrorist financing.”
- European Parliament
Although the EU’s Central Bank first mentioned Bitcoin and other digital currencies in an October 2012 report, the first time that the EU Parliament discussed digital currency was in January 2016, when a committee held a question and answer session to become familiar with the subject and start to decide if it is even necessary to regulate them. While many positive points in their favor was brought up, the outcome was for more sessions to consider proper regulations.
A month later, the European Commission published their Action Plan for combatting money laundering, which for the first time included digital currencies as a means to move value. Their plan at the time was to include virtual currency exchanges under Anti Money Laundering laws, “ending the anonymity associated with such exchanges.” By May, the resolution had been adopted.
The European Commission widened their scope in July 2016, when they adopted a new plan called the “Action Plan for strengthening the fight against terrorist financing.” The plan took aim at terrorist financing, money laundering, and increasing the transparency of payment networks and companies. “The changes proposed will tackle new means of terrorist financing, such as prepaid cards and virtual currencies,” the EC said.
For over six months, the governing bodies of the EU have been quiet on the subject of digital currencies, but then in February the EC revealed a shift in its narrative to embrace blockchain technology as a separate technology. The governing body revealed that starting in 2013 they had been funding the development of several blockchain-based applications, including an altcoin called “Freecoin” and a healthcare data registry. Overall, the EC had spent over ten million euro on the projects to learn more about blockchains, some of which are ongoing.