The reform of the Anti-Money Laundering regime revolutionizes the crypto world

The reform of the Anti-Money Laundering regime revolutionizes the crypto world

The new Anti-Money Laundering (AML) regulation puts the spotlight on crypto transactions. In the last years, cryptocurrencies have broken into the worldwide economy making the foundations of traditional markets tremble. In 2020 it has been estimated that the global market capitalization of cryptocurrencies already reaches figures of more than one quadrillion dollar and it is expected to triple both its capitalization and market value in the next ten years.

The exponential growth of this market in the number of transactions, investors and capitalization, linked to the decentralization and the ability to maintain the anonymity of users thanks to the benefits of implementing the Blockchain technology, has encouraged the European Regulatory Authority to be interested in it, take notice and act against the opacity of ownerships and transactions inside this market.

The end of the anonymity of crypto users

The European Comission, following the Financial Action Task Force (FAFT) Recommendations, has proposed several reforms and legislative developments to be made in the Directive in order to prevent the use of the financial system for purposes of money laundering or terrorism financing. This proposal affects to one of the main providers of crypto services: Exchanges.

This legislative reform against money laundering and terrorism financing forces Exchanges to collect information from senders and recipients of cryptocurrency transactions and from wallet owners.

This new regulation takes Exchanges out of that deregulated grey area, forcing them to embrace Know Your Customer standards (KYC), which European finance systems and banks have been applying to Financial Institutions and the Fintech sector during the last decades.

The objective is to ensure the traceability of transactions executed using cryptocurrencies, which would prevent and detect the use of crypto markets for money laundering or terrorism financing.

Through this package of measures anonymous crypto wallets will be banned. This idea has been widely criticized by cryptocurrency markets for being unfair and misleading, because the Blockchain system and crypto wallets are anonymous by default.

Therefore, we must understand that what the Comission refers to is that Exchanges will not be able to maintain the anonymity or opacity of their customers and the transactions they carry out, rather than the technical crypto market anonymity through Blockchain technology.

Cryptocurrency platforms and wallets will be forced to inform about the money laundering

Once the new regulation comes into force, Exchanges and crypto wallets should demonstrate that they meet the requirements and processes established by the European Comission for the prevention of money laundering through the crypto market.

The European Directive establishes that both Exchanges and wallets must be registered in their national regulator (Banco de España) and in the Financial Supervisory Authority (SEPBLAC in the case of the Spanish market).

Once registered, they must demonstrate and comply with an adequate level of compliance the procedures and the internal organizational measures about Know Your Customer (KYC) and Anti-money laundering (AML), established by the European Directive.

Exchanges and wallets will be forced to carry out these policies and collect information from their users. Hence not only have they the duty to inform regularly the Supervisory Authority, but also in case of suspicious transactions inside the crypto markets and transactions between the crypto market and the traditional market (FIAT-to-crypto). At the present time, it is established that any transaction over 10.000 euros must be reported and supervised.

Other aspects of the new Anti-money laundering regulation

In the legal reform of the European Directive not only the package of measures that has already mentioned (Register-KYC-Report) is involved, but also coercive measures, specifically aimed at Exchanges and Wallets, are implied.

Another objective of the Directive is the harmonization among types of crimes related to money laundering, cryptocurrencies and the personal and corporate responsibilities derived from the infringement of the Directive and in cases in which a criminal offence takes place.

Exchanges and Wallets are required to ensure that their staff is trained in order to identify the risks associated to illegal activities, otherwise they could be criminally and civilly responsible for a money laundering crime.

This liability regime is linked to a penalty system for those Exchanges or Wallets that somehow could be penally or civilly liable for taking part in a money laundering crime. The system includes financial penalties and even the permanent cessation of the activities.

Cryptocurrencies and other digital assets are likely to establish themselves as payment methods and stop being a speculative and volatile market. Furthermore, the digitalization of national currencies seems unavoidable.
Big investors are taking up considerable positions related to cryptocurrencies, as this market is entering a maturity stage at the same time that is being globally recognized.

As a result, regulators all over the world are beginning to be more receptive to the idea of cryptocurrencies and, therefore, they are taking steps to create regulatory ecosystems in which these cryptocurrency businesses can operate, while mitigating the risks of money laundering and the cybercrime associated to them.

Nevertheless, the novelty of cryptocurrencies makes the crypto assets regulation a scenario yet to be completely discovered. With such a wide spectrum of uses and the sophisticated technology involved, regulators around the world will be challenged to try to understand how cryptocurrencies fit into the broader regulatory landscape.

At Letslaw we are experts in Blockchain technology and cryptocurrencies, being able to offer you legal advice in a comprehensive way.