In a press release from the European Commission on Tuesday, they have announced a plan to strengthen rules to tackle terrorism financing, tax avoidance and money laundering. The new rules imposed will include bitcoin companies that operate exchanges and custodian wallets within the EU.
This Commission proposal is the first initiative to implement the Action Plan for strengthening the fight against terrorist financing, and is also part of a broader drive to boost tax transparency and tackle tax abuse.
The Action Plan was first introduced in February of this year, based on previous reports from the European Banking Authority and The Financial Action Task Force (FATF), which is an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction.
In the Action Plan, it states:
“Virtual currency exchange platforms: There is a risk that virtual currency transfers may be used by terrorist organisations to conceal transfers, as transactions with virtual currencies are recorded, but there is no reporting mechanism equivalent to that found in the mainstream banking system to identify suspicious activity. Virtual currencies are currently not regulated at EU level. As a first step the Commission will propose to bring anonymous currency exchanges under the control of competent authorities by extending the scope of the AMLD to include virtual currency exchange platforms, and have them supervised under Anti-Money Laundering / countering terrorist financing legislation at national level. In addition, applying the licensing and supervision rules of the Payment Services Directive (PSD) to virtual currency exchange platforms would promote a better control and understanding of the market. The Commission will examine this option further. The Commission will also examine whether to include virtual currency “wallet providers”.”
The plan clearly states there is a risk that virtual currencies (bitcoin) may be used by or to fund terrorist organizations, but as the plan states, this is a risk without any past proven facts to show this has ever happened or is necessary. Currently, almost all of the bitcoin exchanges already perform KYC/AML practices.
The European Commission takes this a step further, and says “[…] terrorist financing risks linked to virtual currencies,” and proceeds to state:
“to prevent misuse of virtual currencies for money laundering and terrorist financing purposes, the Commission proposes to bring virtual currency exchange platforms and custodian wallet providers under the scope of the Anti-Money Laundering Directive. These entities will have to apply customer due diligence controls when exchanging virtual for real currencies, ending the anonymity associated with such exchanges;”
In the EU, there are many bitcoin exchanges and bitcoin wallet companies, and this new proposal could have broad effects on the entire industry. For exchanges that already have KYC/AML policies in place, this probably won’t be an issue at all. However, for those that don’t keep up with proper policies will now face new stringent rules, which could impact a larger user base in the region.
Under the new proposal, exchanges and wallets would be brought under anti-money-laundering rules that should come into effect by the end of this year. Those platforms would also have to verify the identity of users and monitor transactions, as banks currently do. This new change will require bitcoin exchanges and wallets to report customer information to the national register database, and be available to parties who can show a legitimate interest.
The Commission proposal is in conflict with a report from the UK Treasury who said in April that bitcoin wallet providers would be exempt from the proposed AML rules, which according to the Treasury could potentially put them at risk of being overburdened.
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