The European Banking Authority has published an Opinion, which criticizes the Commission’s approach to virtual currencies (VCs) and its proposed amendments to the 4th Anti-money Laundering Directive (4AMLD).

In its 2014 “Opinion on virtual currencies“, the EBA described some of the many benefits and risks associated with VCs. It also argued (for example) that (a) regulated financial institutions should be discouraged from buying, holding and selling VCs; and (b) VC exchanges and custodian wallet providers (E&WPs) should be brought within the scope of 4AMLD, which was being negotiated at that time.

These recommendations were ignored … until Paris was attacked in November 2015. Since then, the European Council, Parliament and Commission have been calling for 4AMLD to be amended to include VC E&WPs.

The Commission published its 4AMLD-amending proposals in July 2016 (our posts are here and here). The EBA’s latest Opinion is in direct response to those proposals.

The EBA makes 6 key points:

  1. The current transposition deadline is 26 June 2017. The Commission is proposing to amend this to 1 January 2017. This “risks exacerbating the already considerable legal uncertainty for both national authorities and obliged entities (including credit and other financial institutions) and creates significant resource pressure, as Member States and competent authorities will be required to create and implement a licensing and registration regime as well as decide on a supervisory approach for entities that have so far been outside of the Directive. [E&WPs] too, would be required in a very short time frame … to implement policies and procedures to [comply] with the Directive … sufficient time should be given to transpose and implement the amendments, taking into account that the AML/CFT regime for [E&WPs] does not yet exist … the EBA proposes to align the transposition deadline for these new amendments with the current … deadline, i.e. 26 June 2017, at the very earliest“;
  2. The EBA agrees with the Commission, when it argues that it would better not to amend the second Payment Services Directive (PSD2) so that it applies to VCs, as the Parliament and Council have suggested. As “the EBA Opinion [of] 2014 … suggests … while some of … PSD2 could … address specific risks arising from virtual currencies, … technology-specific risks … make them distinct from conventional fiat currencies … Further legal and business model analysis would therefore be required before bringing VC schemes … into the scope of PSD2 … a separate regulatory regime, or more far-reaching amendments to PSD2, would be required, the elements of which the EBA … proposed in its Opinion of July 2014. Such a regulatory regime, or such amendments to PSD2, would require several years to develop, consult, finalise and transpose … “;
  3. … most [of the] risks … the EBA … identified in its 2014 Opinion remain unaddressed. This includes risks arising from fraudulent or failed transactions; [and] insolvency … there is a risk that consumers and business partners of VC [E&WPs] may not be aware that the imposition of requirements … for AML/CFT purposes does not include or imply consumer protection or prudential safeguards … The lack of awareness of the meaning of the amendments may be further exacerbated by [E&WPs] describing themselves as “regulated” or “authorised”, thereby implying that respective regulatory safeguards are in place that actually are not … The risk of misrepresentation … has already materialised in jurisdictions where the same legal entity carries out VC transactions [and] regulated payment services … The co-legislators should therefore consider taking steps that address how such mis-perception and misrepresentation can be avoided. In the long run … this could be achieved by subjecting VC to a comprehensive framework. In the meantime … the co-legislators may want to assess the merits of one of the other recommendations the EBA …published in 2014, which was for a legal entity that carries out regulated activities not to be allowed also to carry out VC transactions, and should also consider introducing means to inform the public about what the amendments to the Directive do and do not mean“;
  4. Unless and until there is a sectoral Directive for VCs and E&WPs, E&WPs will not have a passport. They may therefore have to be registered or licensed in every Member State. However, VCs and E&WPs “are characterized by the international nature of the services provided“. This also creates “practical difficulties for a competent authority that imposes national registration or licensing requirements to prevent entities that are not licensed or registered in its jurisdiction from providing VC-related services in its jurisdiction. It is therefore essential that competent authorities from different Member States are able to liaise and exchange information in relation to the [E&WPs] on their territory … the exchange of information … can … be hampered by legal obstacles … the EU Commission and co-legislators should therefore introduce further amendments to section 3 of the [4AMLD] to ensure that competent authorities responsible for the AML/CFT supervision … have gateways in place to exchange relevant information with one another“;
  5. The Commission’s proposed 4AMLD amendments introduce a fit and proper requirement for those who hold a management function in, or are the beneficial owners of, an E&WP. However, unlike the existing sectoral directives, the 4AMLD doesn’t say what fit and proper means. “In the absence of a sectoral Directive“, it should;
  6. The Commission’s amendments will require the Member States to ensure that E&WPs are “licensed” or “registered”, so there’s “a common legal basis for the implementation of the recommendations by the Financial Action Taskforce (FATF) … FATF distinguishes between a licensing regime, which is obligatory for ‘core’ credit and financial institutions, and a less intrusive registration regime, which applies to anyone else … This differentiation appears to have been mirrored in the Directive … However, by giving Member States a choice …, it is likely that different Member States will adopt very different regimes…“. So, the Commission and co-legislators should choose between licensing and registration, or at least specify the features they should have.

The Council, Parliament and Commission didn’t listen to the EBA in 2014. It’s not clear whether they’ll listen now either. More to follow…