Regulators are worried about the fact that criminals are increasingly using cryptocurrencies for illegitimate activities with money laundering, terrorist financing, and tax evasion being the most important. Even though the full scale is not known, the estimated market value of virtual currency misuse exceeds €7 billion worldwide. Due to the novelty of the virtual currencies, very few regulations are made concerning these currencies. There are a few challenges the EU has to overcome regarding cryptocurrencies.
Anonymity and Pseudonymity
The anonymity prevents cryptocurrency transactions from being adequately monitored, allowing dishonest transactions to occur outside of the purview of regulators. This enables criminal organizations, in a relatively easy way, to launder money.
In addition to anonymity, the cross-border nature of cryptocurrencies, crypto markets, and crypto players is a problem. The main issue is that it could be possible for crypto markets and players to be located in jurisdictions that do not have sufficient or effective money laundering and terrorist financing controls in place. Due to the cross-border nature, rules only will be adequate when they are taken at an international level.
No central intermediaries
Another challenge for the EU is the fact that there are often no central intermediaries with cryptocurrencies. However, for a lot of projects there is no central issuer of the currency, everything will be handled by the network itself. Therefore no control can be exercised.
All in all the existing European legal framework is failing in dealing with the issues mentioned above. There are no rules unveiling the anonymity associated with cryptocurrencies, making it highly improbable for regulators to do something about it. The framework cannot be activated. To exchange information, the authorities must have it in the first place.
The essence of the problem lies with how to unveil the anonymity related to cryptocurrency transactions and how to track illegal transactions.
AMLD5 on Virtual currencies
The Fifth Anti-Money Laundering Directive (AMLD5) is a natural consequence of virtual currency boom. The proposal of the fifth revision of the AMLD takes the approach of including both virtual currency exchanges and custodian wallet providers. Going forward, these entities will have to apply customer due diligence controls when exchanging virtual for fiat currencies. Effectively ending a big portion of the anonymity associated with such exchanges and wallet providers. These entities will also have to report suspicious transactions to the Financial Intelligence Units. In addition, these entities will need to be licensed or registered. The option between licensing and registrations is left open by the Commission.
These are just the first steps in regulating virtual currencies. In the supranational risk assessment of the money laundering and terrorist financing report published on the 24th of June, 2019, it is stated that the increasing use of such instruments is posing higher risks and further regulatory steps may be needed.
Binance, one of the biggest exchanges by volume in the world, has banned its US passport holders from signup for the platform and using its services, due to the uncertainty and legality surrounding cryptocurrencies in the US. The chairman of the Securities and Exchanges Commission (SEC), an extended arm of the US government, Jay Clayton has come out and said that he views most (if not all) of the utility tokens are in actuality security tokens and should be treated as such.
However, SEC hasn’t acted on that statement yet. Only a few ICOs have been targeted by the SEC for anti-touting violations. Similar to the EU, the US will also require exchanges to be registered or licensed.
Experts on the matter have also speculated on what to expect regarding regulations in the US. One of those aspects of regulations is surrounding reporting requirements and audit trails. The SEC regulations require publicly owned companies to disclose data on a regular basis to the SEC and to the company’s stockholders, in quarterly and annual reports. This would also be true for cryptocurrencies. Currently, (almost) none of the companies that raised via ICOs are disclosing financial or relevant business information.
Comparable to the rest of the world, the Netherlands also is lacking in regulations surrounding cryptocurrencies. However, because the European Union’s laws supersede the national laws of the Netherlands, all matters decided on European level will take precedence over laws and regulations in the Netherlands.
The “Nederlandsche Bank” (DNB), the national bank in the Netherlands, also has announced that wallet providers and businesses with services offering exchange of cryptocurrencies to fiat currencies will have to be registered with the DNB.
Blockchain technology and cryptocurrencies are still in their infancy. The Bitcoin whitepaper was released on 31th of October 2008 and the first block was mined on the 3rd of January 2009. Because of the rise of blockchain technology in its whole, no regulation was in place to fill in the blanks spots. With the characteristics of cryptocurrencies, regulation can only work with a global effort. The question then remains is, when cryptocurrencies are regulated to the standard of fiat currencies, will it still be a safe haven for the public?