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Jun 11, 2018
By Araba Eshun
New EU Money Laundering Rules are Positive for Cryptocurrencies

Aligning practices from the cryptocurrency and the traditional financial markets isn’t always easy. The interactions between the two are still subject to friction and chokepoints.
Cryptocurrencies are a nascent market and some traditional financial institutions have reacted to digital assets like bitcoin with distrust, disdain or even fear. As the market value of cryptocurrencies has increased and the supporting infrastructure has evolved, there are now real business interests at play too.

It’s important to remember that some of the differences between the two markets are fundamental.

A cryptocurrency is a digital bearer instrument, allowing the possessor of a private key to move value at will. The traditional financial system relies on the linking of accounts to identities and on rules that try to deter illegal activity.

Another key difference is that many crypto assets are decentralised by nature, having been designed specifically to allow the exchange of value without intermediaries. By contrast, the movement of value in the traditional monetary system relies on changes to the centrally maintained ledgers of commercial and central banks.

But the gap between the cryptocurrency and traditional financial markets is not unbridgeable. Relations between the two communities are steadily becoming more regularised and the incoming fifth version of Europe’s Anti-Money Laundering Directive (‘AMLD5’) is an important step along this path.

AMLD5, which is likely to come into force in late 2019 or early 2020, will bring cryptocurrency exchanges and cryptocurrency wallet providers within the scope of EU legislation. When I was at ACAMS 14th Annual AML & Financial Crime Conference last week, it was clear that the Directive was, generally, being positively received by Europe’s compliance circles.

As ‘obliged entities’, exchanges and wallet providers will be subject to the same requirements as other financial institutions: these include putting into place measures to help prevent money laundering and, where necessary, the reporting of suspicious activity.

For Coinfloor, being compliant with AMLD5 will not represent a cultural change. Even though EU-based cryptocurrency exchanges had not previously been subject to any regulation, we have chosen to be ‘preemptively compliant’, modelling our strict anti-money laundering procedures on existing regulation, including thorough identity and security checks for potential clients during the account opening process.

Our business philosophy centres on demonstrating best practice as a leading on-off-ramp between the fiat currency and cryptocurrency markets. Our robust Know Your Customer (‘KYC’) and Anti-Money Laundering (‘AML’) procedures are our first line of defence in ensuring our platform provides services only to suitable market participants. In deterring money laundering we also leverage the public nature of the blockchain, using the services of specialist blockchain analysis tools such as Chainalysis and Elliptic.

Other cryptocurrency exchanges may view their role in the space differently, but anyone choosing to open an account with Coinfloor will appreciate that we take compliance seriously and that we err on the side of caution.

We welcome the changes to European AML rules set out in AMLD5 and embrace the opportunity to be held to the same standards as traditional financial services institutions. An increased focus on consumer protection will help raise standards across the industry. It will also create a more level playing field for all participants in the crypto asset markets.

Among the raft of changes being brought forward by AMLD5, I believe the following three herald a particularly positive shift in the EU’s compliance landscape.

In a previous job, I have had to tussle on occasion with fund administrators to find out who a fund’s ultimate beneficiaries were. So having publicly accessible registers of beneficial ownership for companies operating within the EU seems a great idea. I have often wondered why more countries do not copy the UK Companies House model of offering free access to information on corporate structures. On the other hand, I believe the stronger powers proposed for national Financial Intelligence Units (FIUs) need to be more clearly defined. Giving FIUs the right to access data without informing companies they are under investigation could cause a range of problems.

Finally, I believe that the proposal to lower the ownership threshold from 25% to 10% for entities which present a specific risk of money laundering and tax evasion is a progressive one.

As Coinfloor’s Money Laundering Reporting Officer (‘MLRO’), I welcome AMLD5. Designing legislation to bring cryptocurrencies within the scope of traditional regulation at such an early stage of the crypto market’s development is a challenge and I feel that the draft Directive has struck the right balance.

We at Coinfloor are happy to assist in bringing best practice, regulation, and guidance to the cryptocurrency space.

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