Effects on virtual currencies
Today, the 5th Money Laundering Directive (Directive (EU) 2018/843, the “Directive”) was published in the Official Journal of the European Union. The Directive provides for amendments to the existing 4th Money Laundering Directive, which will also affect virtual currencies such as Bitcoin.
Already in 2014, the European Banking Authority (EBA) classified the risk that virtual currency could be misused for money laundering and terrorist financing as very high (EBA/Op/2014/08). Also in 2014, the OECD-based Financial Action Task Force (on Money Laundering) (FATF) voiced its concerns that the following circumstances relating to virtual currencies result in a potential AML/CFT risk (FATF Report on Virtual Currencies – Key Definitions and Potential AML/CFT Risks):
- the anonymity provided by the trade in virtual currencies on the internet;
- the limited identification and verification of participants;
- the lack of clarity regarding the responsibility for AML/CFT compliance, supervision and enforcement for these transactions that are segmented across several countries;
- the lack of a central oversight body.
The Directive has now paved the way at European level for the first step towards the regulation of virtual currencies by extending the scope of the Money Laundering Directive to virtual exchanges and to custodian wallet providers.
The definition of „virtual currency“
Against this background, the Directive defines the term “virtual currency” for the first time. According to the Directive, a virtual currency is a digital representation of value that
- is not issued or guaranteed by a central bank or a public authority,
- is not necessarily attached to a legally established currency and
- does not possess a legal status of currency or money,
- but is accepted by natural or legal persons as a means of exchange and
- which can be transferred, stored and traded electronically.
The most common virtual currencies such as Bitcoin and Ethereum are therefore virtual currencies within the meaning of the 5th Money Laundering Directive. The explicit objective of the Directive is to cover all potential uses of virtual currencies. In addition to being used as a means of payment (by exchange), virtual currencies can be used, for example, as a means of (risk-)investment.
Extension of the scope of application
The scope of the Directive is extended to virtual exchanges and to custodian wallet providers. These allow access to and management of virtual currencies.
Virtual exchanges are providers engaged in exchange services between virtual currencies and fiat currencies (i.e. coins and banknotes that are designated as legal tender and electronic money, of a country, accepted as a medium of exchange in the issuing country).
Custodian wallet providers are entities that provide services to safeguard private cryptographic keys on behalf of their customers, to hold, store and transfer virtual currencies.
Both virtual exchanges and custodian wallet providers will in the future be subject to various duties of care to avoid money laundering and terrorist financing, which include in particular the identification of the customer, his beneficial owner and, in cases of suspicion, reporting obligations.
Registration, fit & proper
Virtual exchanges and custodian wallet providers will in future also be subject to a registration requirement. The relevant details will have to be determined by the national legislators.
In the future, persons who hold a management function at virtual exchanges and custodian wallet providers will have to be fit & proper. This fit & proper requirement also applies to the beneficial owners of virtual exchanges and custodian wallet providers.
The Directive must be transposed into national law by 10 January 2020. Virtual exchanges and custodian wallet providers therefore have about one and a half years to adapt their internal organisation to the requirements of the directive and to meet the fit & proper requirements.
The information provided in this newsletter is general in nature and does not constitute legal advice. BINDER GRÖSSWANG Rechtsanwälte GmbH cannot assume any liability in respect thereof. Before entering in commercial transactions, professional legal advice should be sought.