Article written by Charis Georgiadis

Introduction

The adoption of the 5th Anti-Money Laundering Directive (EU Directive 2018/843 of the European Parliament and of the Council of 30 May 2018 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 Directives 2009/138/EC and 2013/36/EU) has significantly changed the legal status of cryptocurrencies by making them more transparent, setting out at the same time the necessary safeguards, to effectively prevent the use of cryptocurrencies as a vehicle through which money launderers may achieve to conceal their illicit activities.

The term “cryptocurrency” under the Directive defined as follows: “a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency, and does not possess a 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”. The definition is quite broad and many of the current cryptocurrencies could fit within the definition.

Why Change is Required?

Initially, it should be noted that none of the entities in the cryptocurrency scheme, were directly or indirectly included in the list of obliged entities of the 4th AML Directive (Directive (EU) 2015/849). By the end of 2020, there were thousands of tokens and cryptocurrencies across the world. The majority of them, were scam projects managed by untrustworthy persons. The referred reason, the fact that cryptocurrencies were used as a money laundering method by criminals who could transfer their money internationally using cryptocurrencies, as well as the opportunity of trading in cryptocurrencies without the application of any due diligence measures, led to the adoption of specific measures to pull cryptocurrencies out of the regulatory dark.

Changes to cryptocurrency regulation under the Fifth AML Directive

The 5th AML Directive aimed to add an element of regulation to cryptocurrencies and persons who use them. Therefore, cryptocurrency operators will have to adopt a number of measures in order to comply with the requirements of the directive, as they are now considered to be liable. Several companies, complying with the requirements of the new directive, have already started to apply due diligence procedures, which are considered necessary and essential when performing their activities. In addition, as a result of the adoption of the 5th AML Directive, some banks have expressed a desire to provide cryptocurrency services to their customers, which demonstrates the positive impact as regards the international economic interaction and the further development of cryptocurrencies. Below are stated some of the most important amendments/additions to the relevant ΑML regulatory framework.

1. Obliged Entities

The scope of application of the Directive has been significantly expanded to also cover entities operating in the cryptocurrency sector, provided that the following requirements apply:

  1. “Providers engaged in exchange services between virtual currencies and fiat currencies”. For example, cryptocurrency exchange platform, cryptocurrency exchanges, etc.
  2. “Custodian wallet providers” which refers entities that provides services to safeguard private cryptographic keys on behalf of its customers, to hold, store and transfer virtual currencies.

These service providers are considered as obliged entities which have to comply with the requirements of the Directive and meet the same requirements as financial institutions having in place, inter alia, the following:

  1. Risk Management and Procedures Manual;
  2. Compliance Committee (where applicable);
  3. Internal Audit Committee (where applicable);
  4. Internal AML Compliance Officer;
  5. Reporting obligations (monthly, quarterly, annually).

They are also required to be registered in the Registry of Cryptoasset Service Providers created and kept by CySEC, provided they meet the relevant criteria set by CySEC.

2. Due Diligence & KYC

By bringing these gatekeepers who deal with the cryptocurrency market with the EU’s legal framework in relation to Anti-Money Laundering and Terrorist Financing, the 5th AML Directive imposes the same obligations on virtual currency exchange platforms and custodian wallet providers as on any other obliged entity. The referred service providers must incorporate the following measures and procedures:

  1. Appropriate due diligence measures to identify and verify the transacting parties;
  2. Appropriate due diligence measures to identify the UBOs (Ultimate Beneficial Owners) of the transacting parties;
  3. Ongoing sufficient monitoring of transactions, to verify that clients are operating in legal manner and with transparency;
  4. Record-keeping.

Conclusion

Many companies considered the imposed framework as unbearable and therefore, the relocation or shutting down their activities completely, as a better option. A representative example is the “Deribit”, which is a bitcoin trading platform which decided to transfer its headquarters from Netherlands to Panama, in order to avoid the “strict” provisions of the 5th AML Directive. In any case, it is commonly accepted that services and activities in relation to cryptocurrencies should continue within a strict legal framework. Finally, it should be noted that the inclusion of cryptocurrencies in the scope of the directive is an important step and the definition of the cryptocurrencies is sufficient to combat money laundering, terrorist financing, even tax evasion. However, this cannot be considered as the last step. Further steps need to be taken to regulate these service providers more effectively, since the shortcomings and weaknesses of the measures adopted will become apparent over time.