Whereas the European Union is going to enlarge the scope of its AML/CFT-regulations in the near future with its 5th EU-AML-Directive to providers engaged in exchange services between virtual currencies and fiat currencies as well as custodian wallet providers, such services are already in the scope of Swiss AML/CFT-regulations.
Cryptocurrencies in the scope of 5th EU-AML-Directive
The European Parliament and the European Council decided to apply its regulations on anti-money laundering (AML) and countering the financing of terrorism (CFT) in the near future also to cryptocurrencies respectively virtual currencies. In this respect, virtual currencies are going to be defined as a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically.
Presently, providers engaged in exchange services between virtual currencies and fiat currencies (i.e. coins and banknotes that are designated as legal tender and electronic money, of a country, accepted as a medium of exchange in the issuing country) as well as custodian wallet providers (i.e. entities that provide services to safeguard private cryptographic keys on behalf of its customers, to hold, store and transfer virtual currencies) are in the European Union (EU) under no obligation to identify suspicious activity. Therefore, the European Parliament and the European Council see the risk of terrorist groups transferring money into the EU-financial system or within virtual currency networks by concealing transfers or by benefiting from a certain degree of anonymity on those platforms.
This will lead into the amendment and enlargement of the scope of the Directive (EU) 2015/849 under the common acronym of the 5th EU-AML-Directive so as to include providers engaged in exchange services between virtual currencies and fiat currencies as well as custodian wallet providers. For the AML-/CFT-purposes, competent authorities should be able, through obliged entities, to monitor the use of virtual currencies. Such monitoring would provide a balanced and proportional approach, safeguarding technical advances and the high degree of transparency attained in the field of alternative finance and social entrepreneurship. Therefore, to combat the risks related to the anonymity, national Financial Intelligence Units (FIUs) should be able to obtain information allowing them to associate virtual currency addresses to the identity of the owner of virtual currency. In addition, the possibility to allow users to self-declare to designated authorities on a voluntary basis should be further assessed.
AML-Regulations of Cryptocurrencies in Switzerland and Implication of the 5th EU-AML-Directive
The 5th EU-AML-Directive will not be directly applicable to Switzerland because Switzerland is neither a member of the EU nor of the European Economic Area (EEA). However, the Swiss Financial Market Supervisory Authority (FINMA) had already enlarged and enacted the scope of its FINMA-AML-Ordinance to virtual currencies in connection with money transmitting/remitting services on 1 January 2016.
In general, the Swiss Act on Anti-Money Laundering (AMLA) states that anyone who provides payment services or who issues or manages a means of payment is a financial intermediary subject to the AMLA. With this regard, FINMA published its guidelines for enquiries regarding the regulatory framework for initial coin offerings (ICOs) on 16 February 2018 (FINMA-Guidelines), which confirmed the then already practiced market standard that issuing of payment tokens constitutes the issuing of a means of payment subject to Swiss AML-regulations as long as the tokens can be transferred technically on a blockchain infrastructure. According to the FINMA-Guidelines, payment tokens (synonymous with cryptocurrencies) are tokens which are intended to be used, now or in the future, as a means of payment for acquiring goods or services or as a means of money or value transfer. Cryptocurrencies give rise to no claims on their issuer.
Further under current FINMA practice, the exchange of a cryptocurrency for fiat money or a different cryptocurrency falls under the Swiss AML-regulations. The same applies to the offering of services to transfer payment tokens if the service provider maintains the private key (custody wallet provider). However, at present, the latter will often even be subject to Swiss banking regulations according to the report of the Federal council regarding virtual currencies on 25 June 2014 and the explanatory report on the draft of the amendment of the Swiss Banking Act and the Swiss Banking Ordinance (FinTech) on 1 February 2017: Payment tokens respectively cryptocurrencies of token holders being in a wallet held with a wallet provider/operator may qualify as deposits similar to FIAT currency and therefore be subject to banking regulations if:
- the token holder cannot dispose over its payment tokens at any time without the involvement of the wallet provider/operator;
- the wallet provider has a repayment obligation towards the token holder; and
- the payment tokens fall into the bankruptcy assets of the wallet provider/operator in the event of bankruptcy of the wallet provider/operator.
Therefore, the provision of custody wallet provider services requires a thorough analysis for each individual case regarding the potential applicability of the Swiss banking regulations.
In general, Swiss AML-regulations give rise to a range of due diligence requirements including the requirement to establish the identity of the beneficial owner and the obligation either to affiliate to a self-regulatory organisation (SRO) or to be subject directly to FINMA supervision.