Legislators and regulators continue to calibrate their response to crypto-assets. The European Parliament’s latest policy papers on crypto-assets suggest some extra regulation for key players in the market. It remains to be seen which of these policy ideas will be taken forward.
Focus of the reports
The European Parliament has recently published two reports on crypto-assets. The first report explores the risk of crypto-assets being used to further financial crime. This topic has also been the focus of national legislators and regulators (see our recent UK alert FCA letter to banks on crypto-assets).
The second report focuses on the response of central banks to crypto-assets. Again, these are considerations which are being actively considered at the national level (see our recent UK alert PRA letter on how firms should handle exposures to crypto-assets).
Crypto-assets and financial crime
The first paper, Cryptocurrencies and blockchain: legal context and implications for financial crime, money laundering and tax evasion addresses the following key points:
- Failure to deal with pseudonymity: The paper acknowledges that the existing European legal framework fails to deal with the pseudonymity of crypto-assets. This feature makes it practically impossible for authorities to find out users’ identities.
- The impact of new regulation: The latest version of the European AML rules (AMLD5) extend to virtual currency exchange services and custodian wallet providers. These providers will need to perform customer due diligence and report suspicious transactions to financial intelligence units.
- Extending the scope of regulation: Some key players in crypto-asset markets are not included in AMLD5. According to the paper, this approach risks opening weak spots in the fight against money laundering. The report therefore suggests that the scope of AMLD5 should be extended. Miners, pure crypto-asset exchanges, non-custodian wallet providers, trading platforms and coin offerors could be caught.
- Additional measures: The report considers other approaches, including: mandatory registration to reveal the identity of crypto-asset users; applying Funds Transfer Regulation rules to crypto-asset transactions; a ban on aspects of crypto-assets that are designed to make users untraceable.
- Focus on the use of crypto-assets: Blockchains themselves should not be targeted by additional regulation as it would not be wise to discourage future innovation. The report argues that the fight against money laundering should focus on the illicit use of crypto-assets rather than their underlying technology.
Response of central banks to crypto-assets
The three key takeways from the second report, Virtual currencies and central banks monetary policy: challenges ahead are:
- Taking a proportionate approach: Policy makers and regulators should not ignore crypto-assets, nor should they attempt to ban them. Crypto-assets should be treated by regulators like any other financial instrument, proportionally to their market importance, complexity and associated risks.
- International collaboration: Given their global, trans-border character, the report recommends harmonising such regulations across jurisdictions. According to the report, investment in crypto-assets should be taxed similarly to investment in other financial assets.
- No threat to financial stability: The report argues that crypto-assets do not challenge the monetary dominance of major central banks and currencies. This view is shared by the Bank of England (see our alert on the UK government’s Digital Assets Inquiry). Nevertheless, the report notes that crypto-assets may have a greater impact in less economically stable countries (such as Venezuela’s sovereign virtual currency, the “petro”).
What’s happening next?
These papers propose ways for the EU to respond to the financial crime risks of crypto-assets. With a busy agenda in the short-term, we do not expect the European Parliament to put forward any legislative changes this term. However, it is possible that some of these ideas could be picked up by the new Parliament after next year’s elections.