Recent media reports claim that six European countries are currently working to launch an Anti-Money Laundering body (AML), which will also include the cryptocurrency market. The details of the initiative are not known, but they include Germany, Spain and Austria as well as Luxembourg, Luxembourg, Italy, Luxembourg, and the Netherlands. The group is currently working on the “remit and design of an international AML watchdog force.” This will place a special emphasis on crypto and the European Commission, the most important executive institution of EU, will be the main platform for discussion. What will this move mean for the European crypto market?
Mandat of the watchdog
The task force will “cover the most risky cross-border entities” among banks, financial institutions, and service providers of crypto assets. Official deliberations are still ongoing. Cointelegraph was informed by Christian Toms (a partner in Brown Rudnick’s London litigation and arbitration practice group).
“Negotiations are still ongoing around its remit and as part these negotiations — presumably due to the growing awareness about the uses and risks around cryptocurrency — there are understood be specific discussions about making the agency’s role in regulating Crypto and related Institutions a key part its mandate. This could even include putting such matters in its foundational Principles.”
The media have speculated about the possibility of an EU-wide crypto task force before. Reuters reported in July 2021 that the European Commission had suggested a new Anti-Money Laundering Authority. This authority would be the “centerpiece” of the entire European crypto oversight architecture. These plans included new requirements for virtual assets service providers, in line with EU’s strict data collection standards.
One common criticism of the United States’ crypto regulation is its dependence on a mix of agencies, such as the Securities and Exchange Commission and Commodity Futures Trading Commission and Financial Crimes Enforcement Network. Europe does not have one authority, but there are many national agencies that specialize in the digital economy. This makes the creation of a central watchdog more necessary than hostile.
This is because directives are pieces of legislation that are not mandatory but that must be transposed into national laws by every member state. The EU’s AML rules were established by directives. Cointelegraph was informed by Thibault Verbiest (head of the Metalaw fintech and cryptocurrency finance department).
“The 5th Anti-Money Laundering Directive entered into force January 10, 2020. Since then, almost all member countries have fully transposed it. However, […] because there is no pan-EU authority, each country regulator must enforce AML rules.
When separate investigations at national level revealed that more than 200 billion euros (or about $227 billion) of non-resident funds had passed through the Estonian branch, Denmark’s largest bank, between 2007-2015, the current state of European AML enforcement was harshly criticized.
Modifications to the regulatory landscape
The arrival of the new enforcement authority could lead to a rapid centralization and clarification of the EU crypto framework. This could reduce the competitive advantage of some conspicuously friendly jurisdictions. Verbiest believes that the differences in rules interpretation, transposition and enforcement will be sorted out. A member state of the EU will have to take a different stance than the rest, which could make it more difficult, if possible.
“The monitoring activities and Anti-Money Laundering/Counter-Terrorist Financing rules across the EU will be uniformized up and consolidated. […] The regulators want to create the most accurate mapping of crypto transactions in order to identify illicit transactions and limit erosion of the tax base. They expect to have stricter reporting requirements, better cooperation among member states on AML/CFT topics, and to improve their coordination.
As the money laundering problem (not necessarily related with crypto) continues to be a major concern, rapid regulatory consolidation will continue to be a trend. Toms says that AML regulations and rules are being tightened with every new EU regulation as the fight against dirty money intensifies.
“The current conflict in Ukraine, and the sanctions against Russia could prove to be a catalyst for tighter regulation across all sectors if there is fear that certain parties may now actively seek to find new ways to bypass AML regulation. […] crypto, which has been in the EU’s sights for some time, could very well be caught up in this situation.”
The extreme scenario
The development of digital currency projects issued by the central bank or state could also be a major factor. This would have a negative impact on the regulatory and oversight environment and make it difficult for crypto investors to believe in the future. This movement could see “unregulated” cryptocurrency companies and currencies become more marginalized in Europe if it gains momentum. It may also be viewed as an option for those who don’t want state-authorized CBDCs.
This dark scenario is not likely, but it is possible, due to the growing adoption of crypto at both the retail and institutional level and the involvement of more big names in finance.
The EU, where executive decisions are arguably more free from parliamentary pressure than in America, might take a stronger stance on crypto. The EU will likely take a more strict stance in regulating criminal conduct and protecting consumers, while crypto is still being viewed with suspicion.
However, it isn’t a one-sided game. The crypto industry will need to find a way to deal with issues such as transparency and Know Your Customer in decentralized environments.