The EU Commission published its proposal for amendments to the 4th Anti-Money Laundering Directive (4AMLD) on 5 July 2016. Whilst welcoming of the Commission's intended inclusion of Virtual Currency Exchange Platforms (VCEPs) and Custodian Wallet Providers (CWPs) within the scope of 4AMLD as a means of mitigating the perceived risks posed by such operators, the European Banking Authority (EBA) has now opined on this area, pointing to areas requiring further attention by the three EU institutions, (the EU Commission, EU Parliament and EU Council) if virtual currencies (VCs) are to be effectively regulated under the proposed amendments. The EBA previously issued its opinion on virtual currencies in 2014, in which it outlined the defining characteristics of such non-fiat currencies as well as its view on the benefits and risks which they pose. The recommendations of its latest opinion, which are discussed in further detail below, cover the logistics of successful implementation, the scope of the amendments, clarifications as to the supervision and regulation of those businesses affected and how to best equip the responsible bodies with appropriate resources to successfully achieve the Directive’s aims.
Deadline for transposition
The EBA has expressed its concern around the proposed timetable and transposition deadline of 4AMLD, which, it says, does not give VCEPs and CWPs enough time to "facilitate the adoption of a consistent approach". The Commission's proposal to bring the transposition deadline forward by 6 months (to 1 January 2017), "risks exacerbating the already considerable legal uncertainty for both national authorities and obliged entities" and will create "significant resource pressure" as Member States seeks to simultaneously create a system for effective supervision and regulation of entities previously outside the Directive's scope, whilst also adopting a new licensing and registration regime (see further below).
Given that such regimes will not yet exist, the EBA opines that the transposition deadline for all entities (including those originally captured by 4AMLD) should be 26 June 2017 at the earliest. This should give sufficient time to all Member States, competent authorities, VCEPs and CWPs to transpose or, as the case may be, implement, the amendments under the 4AMLD.
The EBA supports the Commission's decision not to bring VC transactions within the scope of the Payment Services Directive (Directive (EU) 2015/2366, or PSD2) despite pressure from co-legislators. The EBA agrees that the use of a separate specific regulatory regime (or alternatively, more far-reaching amendments to PSD2) remains a preferable approach. As expressed in its previous opinion on Virtual Currencies published in July 2014, the EBA believes that although some of the provisions in PSD2 could be of assistance in addressing VC-related risks, the technology-specific nature of these transactions distinguish them from those relating to fiat currencies and PSD2 is not, therefore, the appropriate forum for suitably mitigating the relevant risks posed by virtual currencies.
Clarification on status
One of those additional risks concerns the status of VEPs and CWPs regulatory status, particularly where an entity simultaneously provides regulated services and unregulated VEP / CWP activities. The EBA has raised concerns that VEPs and CWPs presenting themselves, intentionally or otherwise, as 'regulated' may be exacerbating a "lack of awareness" as to the MLD4 amendments’ implications. The use of such terminology, which implies a level of regulatory safeguarding that may not in reality exist, exemplifies an indirect consumer risk of VC transactions.
The EBA notes that this is neither an unfathomable nor hypothetical risk, and has occurred when businesses which carry out VC transactions are also permitted by a relevant authority to conduct regulated payment services (under PSD2) and, using this permission, represent themselves to be authorised/regulated in respect of the VC transactions as well.
The EBA recommends that clarifications as to the regulatory status of these businesses should be ensured in order to avoid the risk of such misrepresentations, be they deliberate or innocent.
Exchange of information
In cultivating awareness of VC risks and improving and standardising regulation, the EBA also suggests that the EU Commission should implement "gateways" that will better facilitate the exchange of information between different Member States' competent authorities responsible for financial regulation. This collegiate approach, it explains, is in-keeping with the international nature of the services that characterise VC businesses.
Clarification on eligibility
Whilst noting that the Commission’s proposed amendments require that those holding a management function in, or are beneficial owners of, VEPs or CWPs be "fit and proper" persons, the EBA points out that this requirement is not qualified in any greater detail. Competent authorities should therefore be provided with guidelines as how to carry out 'fit and proper' testing, which will ensure consistency of standards across the EU.
Recognising the competing challenges of a best-fit and a speedy transposition, the EBA suggests that the testing requirements be transferred from existing Directives that have "fit and proper" standards.
Clarification on registration and licensing
The Commission’s proposed amendments will require VEPs and CWPs to be "licensed or registered". Given the flexibility offered in permitting competent authorities to choose a licensing or a registration regime, there is a risk of confusion and inconsistency of the requirements adopted by each Member State. As well as clarifying the status of VCs as regulated (or unregulated) businesses, and the tests imposed on the "fit and proper" standard, the EBA also calls for clarification on the expected standards of these new regimes, be that registration or licensing.
Retention of member states’ sanctioning powers at national level
Turning to enforcement of the amendments, the EBA supports the resulting extension of sanctions under section 4 of the Directive to be applicable to VCEPs and CWPs. To ensure compliance, the EBA recommends that national authorities be equipped with "effective, proportionate and dissuasive sanctions" to be applied to failures of requirements under the Directive, including, it notes specifically, the reporting of suspicious transactions.
Not the end of the story?
Taken on its face, this opinion on the proposed amendments to 4AMLD shows clear support from the EBA for the adoption of a dedicated regulatory framework relating to VCs, though not without qualification. Its recommendations identify key areas to be addressed by the co-legislators, and further emphasise the risks of this new, and evolving, financial commodity. How these are received, or enacted, remains to be seen.