Bitcoin & AML: Proposal of the European Commission.

Stefano Capaccioli

The European Commission has published on 05.07.2016 the Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and amending Directive 2009/101/EC.
The proposal was discussed during the first part of 2016, with stakeholders and European Commission Institutions and contains a definition of virtual currencies and the prevision of some entities as obliged to the AML rules.
The analysis leads to identify some qualified actors as relevant for the AML procedure to trace and identify the point of contact between fiat and virtual currencies.
The proportionality and the search to avoid stifling innovation motivated the European Commission in proposing to amend Directive 2015/849 obliging providers of exchange services between virtual currencies and fiat currencies (currencies declared to be legal tender) as well as custodian wallet providers for virtual currencies to AML provisions.
The Exchangers are clearly defined – new letter (g) in in point (3) of Article 2(1) – as providers engaged primarily and professionally in exchange services between virtual currencies and fiat currencies.
The providers obliged are the actors that act primarily (that means as relevant activity) and professionally (that means with an organization) in exchanging virtual currencies as trader.
Under this perspective and basing on the analysis of ECB Virtual currency schemes – a further analysis, the difference between providers is:

7) Exchanges offer trading services to users by quoting the exchange rates by which the exchange will buy/sell virtual currency against the main currencies (US dollar, renmimbi, yen, euro) or against other virtual currencies. These actors, most of them non-financial companies, can be either issuer-affiliated or a third party. They generally accept a wide range of payment options, including cash, credit transfers and payments with other virtual currencies. Moreover, some exchanges also provide statistics (e.g. volumes traded and volatility), act as wallet providers and offer (immediate) conversion services for merchants who accept VCS as an alternative payment method.
8) Trading platforms function as marketplaces, bringing together buyers and sellers of virtual currencies by providing them with a platform on which they can offer and bid among themselves. In contrast to exchanges, however, the trading platforms do not engage in the buying and selling themselves. Some trading platforms, such as, give their customers the option of locating potential customers nearby.

The proposal takes into consideration that the financial privacy could be exposed at high risks with user identification, because wallets and transaction are public by default, with anybody that can easily access to these data without any restrictions.
In fact, in the explanatory note the Commission highlights that:

The inclusion of virtual exchange platforms and custodian wallet providers will not entirely address the issue of anonymity attached to virtual currency transactions, as a large part of the virtual currency environment will remain anonymous because users can also transact without exchange platforms or custodian wallet providers”.

The whereas considers that To combat the risks related to the anonymity, national Financial Intelligence Units (FIUs) should be able to associate virtual currency addresses to the identity of the owner of virtual currencies.
The amendment considers also the possibility to allow users to self-declare to designated authorities on a voluntary basis should be further assessed.
In this way exchangers are obliged entities under AML Directive, but to complete the regulation, exchangers must be licensed under national law.
The same rule applies to “(h) wallet providers offering custodial services of credentials necessary to access virtual currencies.”.
The  proposal defines virtual currency with an amendment to Article 3 adding a point (18).

“(18) ‘virtual currencies’ means a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically.”.

This definition takes into consideration the Judgment C-264/14 of ECJ that considers bitcoin as simple mean of payment.
The European Commission set in in the  Article 47, paragraph 1 the need for a license for the entity obliged, clarifying that exchangers and custodian wallet providers are activities NOT covered by any European Directive, because failing that it is not needed the modification with this text:

“47(1). Member States shall ensure that providers of exchanging services between virtual currencies and fiat currencies, custodian wallet providers, currency exchange and cheque cashing offices, and trust or company service providers are licensed or registered, and that providers of gambling services are regulated.”

Last modification for bitcoin and cryptocurrencies is the addition of a second paragraph in the art. 65:

“The report shall be accompanied, if necessary, by appropriate proposals, including, where appropriate, with respect to virtual currencies, empowerments to set-up and maintain a central database registering users’ identities and wallet addresses accessible to FIUs, as well as self-declaration forms for the use of virtual currency users”.

The proposal comes after the Resolution of the European Parliament of 25.05.2016 that asked to include exchangers as obliged entities under AML

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