Cryptocurrency and Money Laundering | European Union

Cryptocurrency and Money Laundering

The DIRECTIVE (EU) 2015/849 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of May 20, 2015 is one of the European Union’s central regulatory pillars for preventing the use of the financial system for money laundering or terrorist financing.

Recently, on April 19, 2018, the European Parliament adopted a legislative resolution amending Directive 2015/849.

The main change has been to extend the application of the anti-money laundering and terrorist financing Directive to:

1. Providers of services that exchange virtual currencies for fiat currencies (commonly known as exchanges);

2. Providers of custody services for and e-wallets

To this end, and for clarification, it has incorporated two definitions into its text:

“Virtual Currencies”:

A digital representation of value not issued or guaranteed by a central bank or public authority, not necessarily associated with 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 and which can be transferred, stored, and traded electronically;

“Custodial Wallet Service Provider”:

An entity that provides services to safeguard private cryptographic keys on behalf of its clients, for the holding, storage, and transfer of virtual currencies.

Among the reasons that have motivated this decision, the following have been put forward:

1st.- Providers of services exchanging virtual currencies for fiat currencies (i.e., banknotes and coins designated as legal tender and electronic money of a country accepted as a medium of exchange in the issuing country), as well as providers of custodial wallet services, are not obliged by the Union to detect suspicious activities.

This would allow for the possibility of transferring money into the Union’s financial system or within virtual currency networks, concealing transfers or enjoying a certain degree of anonymity on these platforms.

2nd.- The anonymity of virtual currencies allows for their potential misuse for criminal purposes. However, it is recognized that the inclusion of providers of services exchanging virtual currencies for fiat currencies and providers of custodial wallet services will not fully resolve the issue of anonymity associated with virtual currency transactions, as anonymity largely remains within the virtual currency environment.

The Directive will enter into force 20 days after its publication and will grant a transposition period of 18 months to the Member States. For more information on the objectives of the DIRECTIVE, you can find more details on the European Parliament’s website.

European Regulatory Context in 2018

At the time this article was published, European regulations on cryptocurrencies and money laundering were in the process of being expanded. The main concern was to ensure that certain services related to virtual currencies did not fall outside the controls designed to prevent money laundering and the financing of terrorism.

The initiative in question sought to strengthen the traceability of certain transactions and expand the scope of application of anti-money laundering regulations, particularly with regard to those who facilitated the exchange between virtual currencies and fiat currencies or provided electronic wallet custody services.

Exchanges and e-wallet providers

One of the central aspects of the reform was the inclusion of two types of operators: providers of services for exchanging virtual currencies for fiat currencies—commonly known as exchanges—and providers of electronic wallet custody services.

The significance of these operators lay in their ability to serve as links between the traditional financial system and the virtual currency ecosystem. For this reason, their inclusion in the anti-money laundering framework was intended to reduce opportunities for anonymity and facilitate the detection of suspicious transactions.

Risks Associated with Anonymity in Virtual Currencies

Regulatory concerns were not focused solely on the existence of virtual currencies, but rather on the possibility that certain transactions could be used to conceal the origin or destination of funds. Anonymity, the electronic transfer of value, and the absence of traditional intermediaries could make it difficult to identify the parties involved.

For that reason, the reform aimed to impose stricter oversight requirements on operators providing exchange or custody services, while recognizing that the inclusion of these entities did not completely eliminate the problem of anonymity in the virtual currency environment.

Lawyers Specializing in Cryptocurrencies at IN DIEM

The IN DIEM Abogados practice area specializing in Cryptocurrencies and Bitcoin has extensive experience and a high degree of knowledge in New Technologies and Cryptocurrencies. We operate and advise not only in relation to the virtual currency Bitcoin but also with all existing cryptocurrencies including: Ethereum, Ripple, Litecoin, Dash… and investments in ICOs (Initial Coin Offerings), offering our clients the appropriate operational strategy and the necessary advice for their transactions and investments.

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