According to recent media reports, six European countries, led by Germany, are working to launch an anti-money laundering organization (AML) that will take the cryptocurrency market into its purview. Details remain scarce, but the initiative is known to involve Germany, Spain, Austria, Italy, Luxembourg and the Netherlands. The group is working on “the brief and design” of a new international AML watchdog that will place a particular emphasis on crypto, and the European Commission – the European Union’s main executive institution – will be the primary platform for the discussion. How will the move affect the European crypto space?
The watchdog’s mandate
The new task force will target “the riskiest cross-border entities among banks, financial institutions and crypto asset service providers.” The initiative is currently awaiting official deliberation. Christian Toms, a partner in the litigation and arbitration practice of London law firm Brown Rudnick, commented to Coin-Crypto:
“Many negotiations are still underway around his task, and as part of these negotiations – presumably given the growing awareness of the uses and risks surrounding crypto – specific discussions are expected to take place on how to define the role of crypto. agency in regulating crypto and related matters. institutions are an important part of its mandate, and may even describe such matters in its fundamental principles.”
This is not the first time the media has speculated on the idea of an EU crypto-task force. In July 2021, Reuters reported – citing leaked documents – that the European Commission had proposed a new anti-money laundering authority, which would become the “center” of the entire European crypto oversight architecture. The said plans also include new requirements for virtual asset service providers in line with strict EU data collection standards.
Ruled by guidelines
A common criticism of crypto regulation in the United States is that it relies on a hodgepodge of agencies such as the Securities and Exchange Commission, Commodity Futures Trading Commission, Financial Crimes Enforcement Network, and many others. However, Europe also lacks a single authority in charge – there is just a patchwork of different national agencies, many of which have expertise in the digital economy. This makes creating a centralized watchdog more of a necessity than a hostile move.
The current absence of such a body stems from the fact that the EU’s AML rules are set by directives, which are pieces of legislation that are not automatically mandatory and must instead be transposed into their national law by each Member State. Thibault Verbiest, head of the fintech and crypto finance division at law firm Metalaw, explained to Coin-Crypto:
“While 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 crypto service providers (particularly exchanges and custodian wallet providers) as obliged entities, […] the lack of a pan-EU authority forces reliance on each national regulator to enforce the AML rules.”
The current state of European AML enforcement was harshly criticized several years ago when separate investigations at national level showed that more than €200 billion (then about $227 billion) of non-resident money flowed in through the Estonian branch of Denmark’s largest bank between 2007 and 2015.
Changes in the regulatory landscape
With the advent of the new enforcement power, we can witness rapid centralization (and clarification) of the EU crypto framework. That could downplay the competitive advantage of certain remarkably friendly jurisdictions because, in Verbiest’s view, differences in transposition, interpretation and enforcement of rules will be smoothed out. It will be more difficult, if not impossible, for one EU member state to take a different position than the others:
“Monitoring activities and anti-money laundering and anti-terrorist financing rules across the EU will be unified and consolidated. […] With stricter reporting requirements and better cooperation between member states on AML/CFT, regulators want to establish the best possible mapping of crypto transactions to identify transactions related to illegal activities and limit the erosion of the taxable base. †
The main trend of rapid regulatory consolidation will continue as the money laundering issue (not necessarily crypto related) remains highly relevant. According to Toms, AML rules and regulations in general are already tightening with each new iteration of EU regulations as the fight against black money intensifies:
“The current conflict in Ukraine and sanctions against Russia could prove to be a further catalyst for stricter regulation across the board if there are fears that certain parties are now looking even more actively for more and more new ways to regulate AML. bypass. […] Crypto, which has been in the EU’s troubled gaze for some time, may very well end up in the situation. †
The hard scenario
Another important factor is the development of central bank and state-issued digital currency projects, which could affect the regulatory and supervisory environment and hardly be optimistic for the crypto industry. As this move picks up steam across Europe, “unregulated” crypto firms and currencies could increasingly be marginalized and seen as a route taken by those who for one reason or another do not have state-authorized CBDCs. want to use.
However, such a dark scenario is far from guaranteed given the increasing adoption of crypto at the retail and institutional levels and with more and more big names in the financial world getting involved in one way or another.
At the end of the day, Europe, where executive decision-making is arguably less burdened with parliamentary pressure than the US, may take a tougher stance on crypto. The EU is likely to try an increasingly tough line in regulating criminal behavior and consumer protection, and crypto is still viewed with suspicion.
But the game is not one-sided: after all, the crypto industry will have to figure out how to manage transparency issues and Know Your Customer in a decentralized world.