Consolidation and centralization: The impact of Europe’s new anti-money laundering regulations on cryptocurrency
With the creation of a new body, some people think the EU will take a more hard-line stance on digital assets now.
According to recent media reports, six European nations, headed by Germany, are collaborating to establish an anti-money laundering (AML) organisation that would include the cryptocurrency sector. While details about the effort are scant, it is known that it includes Germany, Spain, Austria, Italy, Luxembourg, and the Netherlands. The committee is tasked with developing “the mandate and design” of a new worldwide anti-money laundering body with a special focus on crypto, and the European Commission (the EU’s chief executive agency) will serve as the primary forum for debate. What effect will the move have on the European cryptocurrency market?
The mandate of the watchdog
The new task force will focus on “the riskiest cross-border entities among banks, financial institutions, and service providers of crypto assets.” Currently, the idea is awaiting formal discussion. Christian Toms, a partner in the litigation and arbitration practise division at legal firm Brown Rudnick in London, told Cointelegraph:
This is not the first time the media has speculated about the possibility of an EU-wide crypto task force. In July 2021, Reuters reported — using leaked documents — that the European Commission has suggested establishing a new Anti-Money Laundering Authority that would serve as the “heart” of the European crypto regulatory architecture. Additionally, the proposals indicated above contained additional criteria for virtual asset service providers that adhered to the EU’s stringent data collecting regulations.
Directives-based
A frequent criticism levelled towards US crypto regulation is that it is a patchwork of organisations, including the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Financial Crimes Enforcement Network. Europe, on the other hand, has a centralised authority — instead, it is a patchwork of many state agencies, many of which have competence in digital economy-related concerns. As a result, establishing a centralised watchdog becomes more of a need than an adversarial action.
The present lack of such a body is due to the fact that the EU’s anti-money laundering measures are formed via directives, which are pieces of legislation that are not automatically necessary but must be transcribed into national law by each member state. Thibault Verbiest, head of the legal firm Metalaw’s fintech and crypto finance section, explained to Cointelegraph:
The current state of European anti-money laundering enforcement came under fire several years ago when separate national-level investigations established that between 2007 and 2015, over 200 billion euros (approximately $227 billion) of non-resident money flowed through the Estonian branch of Denmark’s largest bank.
Changes in the regulatory environment
With the new enforcement authority in place, we may see a quick consolidation (and clarity) of the EU’s crypto framework. This might diminish the competitive advantage of some outwardly friendly countries, since variations in rule translation, interpretation, and enforcement, in Verbiest’s perspective, will be sorted out. It will be increasingly difficult, if not impossible, for an EU member state to take a position distinct from the others:
The primary trend of fast regulatory consolidation is here to stay, since the problem of money laundering (which is not always connected to cryptocurrency) remains very significant. According to Toms, anti-money laundering laws and regulations are already being tightened in general with each new iteration of EU legislation as the war on dirty money intensifies:
The scenario of a hardline
Another significant aspect is the emergence of the central bank and state-issued digital currency initiatives, which might have a negative impact on the regulatory and supervisory environment, which would be unfavourable to the crypto business. If this trend gains traction throughout Europe, “unregulated” crypto firms and currencies risk being more ostracised and perceived as a fallback option for people who do not want to utilise state-authorized CBDCs for whatever reason.
Such a bleak picture is far from certain, however, given the rapid acceptance of cryptocurrency at the retail and institutional levels, as well as the expanding involvement of the world’s biggest names in finance.
Finally, Europe, whose executive decision-making is probably less constrained by legislative oversight than in the United States, may adopt a stronger position on crypto. The EU is going to adopt a more hardline approach to criminal behaviour and consumer protection, and cryptocurrency is still regarded with mistrust.
However, the game is not one-sided: in a decentralised environment, the crypto sector will need to find out how to handle concerns of transparency and Know Your Customer.