According to recent media reports, six European countries, led by Germany, are working on launching an anti-money laundering (AML) body that will include the cryptocurrency market in its purview. Details remain scarce, but Germany, Spain, Austria, Italy, Luxembourg and the Netherlands are known to participate in the initiative. The group is working on “the role and design” of a new international anti-money laundering watchdog force that will put a special focus on cryptocurrencies, and the European Commission – the main executive institution of the European Union – will be the main platform for discussion. How will this move affect the European cryptocurrency space?
The mandate of the control body
The new task force will aim to “cover the riskiest cross-border entities between banks, financial institutions, and crypto asset service providers.” For the time being, the initiative is still awaiting official deliberation. Christian Toms, a partner in the litigation and arbitration practice group at law firm Brown Rudnick in London, told Cointelegraph:
“Negotiations are still ongoing around his mandate, and as part of these negotiations – presumably given the growing awareness of the uses and risks around cryptocurrencies – it is understood that there are specific discussions taking place to make that the agency’s role in regulating cryptocurrencies and related institutions be a key part of its mandate, potentially even spelling out these matters in its founding principles.”
This is not the first time that the media has speculated on the idea of an EU working group on cryptography. In July 2021, Reuters – citing leaked documents – reported that the European Commission had proposed a new Anti-Money Laundering Authority, which would become the “centerpiece” of the entire European cryptocurrency supervisory architecture. The mentioned plans also included new requirements for virtual asset service providers in accordance with the EU’s strict data collection rules.
governed by directives
A common criticism of cryptocurrency regulation in the United States is that it relies on a hodgepodge of agencies like the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Financial Crimes Enforcement Network, and many others. However, Europe does not have a single authority in charge either: there is only a patchwork of various national agencies, many of which are experts in matters of the digital economy. This makes the creation of a centralized watchdog more of a necessity than a hostile move.
The current absence of a body of this type is due to the fact that the EU rules on the fight against money laundering are established by means of directives, which are pieces of legislation that are not automatically mandatory and that, instead, must be incorporated by each Member State to its national legislation. Thibault Verbiest, head of the fintech and crypto finance department at law firm Metalaw, explained to Cointelegraph:
“Although the 5th Anti-Money Laundering Directive, which entered into force on January 10, 2020 and has since been fully transposed by almost all member states, includes service providers within its scope of application of cryptocurrencies (in particular, exchanges and custodial wallet providers) as obligated entities, […] the absence of a pan-European authority imposes reliance on each national regulator to enforce AML rules.”
The current state of enforcement of European anti-money laundering regulations came under heavy criticism several years ago, when separate investigations at the national level showed that more than €200 billion (about $227 billion at the time) time) of non-resident money flowed through the Estonian branch of Denmark’s largest bank between 2007 and 2015.
Changes in the regulatory landscape
With the arrival of the new enforcement power, we could see a rapid centralization (and clarification) of the EU crypto framework. This could reduce the competitive advantage of some clearly favorable jurisdictions, since, in Verbiest’s opinion, differences in the transposition, interpretation and application of the rules will be ironed out. It will be more difficult, if not impossible, for one EU Member State to take a different stance from the others:
“Control activities and anti-money laundering and terrorist financing rules across the EU will be standardized and consolidated. […] With stricter reporting requirements looming and better cooperation between member states on AML/CFT, regulators want to establish the best possible mapping of crypto transactions to identify transactions that pertain to illicit activities, as well as limit the erosion of the tax base.
The great trend of rapid regulatory consolidation is here to stay, as the topic of money laundering (not necessarily related to cryptocurrencies) remains very relevant. According to Toms, AML rules and regulations are already tightening in general with each new iteration of EU regulations as the battle against dirty money intensifies:
“The current conflict in Ukraine and the sanctions against Russia may prove to be a further catalyst for stricter regulation across the board, if there are fears that certain parties may now be even more actively seeking newer ways to circumvent AML regulation. […] Cryptocurrencies, already in the EU’s alarmed sights for some time now, may very well be caught up in the situation.”
The toughest stage
Another important factor is the development of central bank projects and state-issued digital currencies, which could affect the regulatory and supervisory climate and would be less than optimistic for the crypto industry. If this movement gains momentum across Europe, “unregulated” cryptocurrencies and companies could become increasingly marginalized and seen as a route taken by those who, for whatever reason, do not want to use state-sanctioned CBDCs.
However, such a dark scenario is by no means guaranteed, given the increasing adoption of cryptocurrencies at the retail and institutional levels and with more and more big names in finance getting involved in them in some way.
All things considered, Europe, where executive decision-making is arguably less fraught with parliamentary pressure than in the US, may eventually take a tougher stance on cryptocurrencies. The EU is likely to try to take an increasingly tough line on regulating criminal behavior and protecting consumers, and cryptocurrencies remain viewed with suspicion.
But the game is not one-sided: Ultimately, the crypto industry will have to figure out how to manage transparency and know-your-customer issues in a decentralized world.
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