New anti-money laundering legislation will require crypto firms to provide more oversight on transactions over €1,000
by Isaac Hanson
The EU reached a provisional agreement on stricter anti-money laundering (AML) legislation on 18 January in a move that will bring crypto-asset service providers (CASPs) further in line with other financial services providers.
The legislation, if approved by the European Parliament, would force CASPs and other money-handling institutions, including banks, casinos and real estate agencies, to perform checks on any transactions amounting to €1,000 ($1,087) or more.
Following on from the 2023 introduction of the Markets in Crypto Assets Regulation (MiCA), this legislation cements the EU as a world leader in the regulation of cryptocurrencies and their providers. These increased efforts come in the wake of fears over illicit uses of crypto, which made the news last year following an Israeli crackdown on cryptocurrency accounts it claimed were linked to Hamas.
Martin Cheek, managing director of UK-based AML compliance firm SmartSearch summed up these fears to Electronic Payments International: “The new anti-money laundering legislation has the potential to have a significant impact on the ability for criminals to hide their money laundering activities using cryptocurrencies, and I welcome them fully, because for too long this industry has not been regulated well enough.
“While the changes propose tighter regulations on the crypto industry when compared with other financial institutions, I believe it will only bring the industry in line with other regulated industries like banking or gaming, due to the current accessibility and ease for criminals to use cryptocurrencies to launder money.”
Does regulation hurt the industry?
Crypto providers have historically been vehemently opposed to increased scrutiny, with crypto influencer Preston Pysh arguing in Bitcoin Magazine that regulation reducing privacy in the industry would limit “the potential and the very essence of American citizens and builders within this country.”
While this may be overstating the case, it is true that crypto platforms are not the havens of fraudsters and criminals they are sometimes made out to be, with some estimates showing that less than 0.2% of transactions are related to criminal activity.
In light of this, it is possible that increasing regulation to this degree will have an outsized impact on the fledgling industry despite its benefits.
Haydn Jones, Managing Director and Global Head of Blockchain and Cryptocurrency Solutions at risk advisory firm Kroll told Electronic Payments International: “The EU’s Anti-Money Laundering Regulations are designed to bring crypto asset providers in line with credit institutions by imposing comparable obligations. However, the increased due diligence required of crypto firms has sparked debate over whether this truly levels the playing field.
“The crypto industry now faces stricter requirements for low-value payments than traditional financial firms. This is central to a broader strategy to combat money laundering and sanctions evasion. These developments reflect the EU’s effort to ensure consistent and thorough anti-money laundering measures across the bloc. Yet, the intensified scrutiny and the need for detailed customer due diligence could strain the operational capabilities of crypto service providers, particularly smaller firms or those new to the market.”
Until this point, the EU’s regulation does not seem to have had a major impact on its ability to attract CASPs.
Europe remains the second-largest market for deals relating to cryptocurrency globally, though far behind North America, which is driven by US deals. The implementation of this regulation may be onerous in the short term, but firms are clearly willing to comply if it provides access to the bloc.
Nothing to hide, nothing to fear
If it is indeed true that a minority of crypto transactions are fraudulent, the increased clarity of this legislation could in fact be a boon.
Marcin Zarakowski, Executive Committee Member at the BSV association told Electronic Payments International: “The AML Package brings significant benefits to the industry. In principle, [it] adopts the principle of ‘technological neutrality’ (same rules for same risks) and it is expected that it will establish harmonization of the procedures that the CASPs will follow, in line with the ones followed by the traditional financial intermediaries.
“Despite the objections coming from some Virtual Asset Service Providers who complain about lack of proportionality, the new AML Package is expected to benefit the crypto-assets community. [This is because] banks, which have a fiduciary duty to provide banking services, now will be obliged to develop risk monitoring onboarding procedures to assess the riskiness of entities with direct or indirect exposure to crypto-assets. This was not the case so far, and the consequence was that most of the projects with crypto-asset exposure remained un-bankable.”
The BSV Association is the custodian of the BSV Blockchain protocol and a supporter of crypto regulation.
GlobalData associate analyst Harry Swain agrees with him, saying: “Importantly, the European Parliament has reassured stakeholders that the regulatory measures do not seek to outlaw privacy-enhancing crypto technologies. In May 2023, the EU Crypto Initiative called on lawmakers to reconsider planned restrictions on privacy tools, advocating for a clear distinction between prohibited anonymous high-risk accounts and high-risk anonymising instruments.
“The legislative process, albeit complex, has culminated in a robust regulatory package, addressing diverse aspects of crypto-related money laundering risks and reinforcing the EU’s commitment to maintaining financial integrity in the evolving landscape of digital finance.”
The article was first published by MEED’s sister site Electronic Payments International
