It’s been almost two years since the European Union (E.U.) updated its money-laundering regulations to provide guidance for digital currency. The Fifth Anti-Money Laundering Directive (5AMLD) was designed to provide clarity on how governments should oversee digital assets and respond to illicit activity, but there were holes left in the legislation. The European Parliament Research Center (EPRC) has reviewed the guidelines and requirements established by the 5AMLD and asserts that it is already lagging behind accepted best-industry practices. As a result, the EPRC believes that E.U. regulators need to make it a priority to update digital asset definitions and regulations.
Researchers with the organization released the results (in pdf) of their study earlier this month. They explain, “[The] use of cryptocurrencies for criminal purposes is not new and was already covered by our 2018 study Cryptocurrencies and blockchain: legal context and implications for financial crime, money laundering and tax evasion. Since then, there are, however, interesting developments as regards blind spots in the fight against financial crime and how to address the illegal use of crypto-assets via regulation.”
Concentrating on three main areas that need to be addressed, the EPRC explains that platform tokens should be defined as a subclassification of digital currency. In addition, the lack of an existing 5AMLD framework to cover exchanges that offer digital currency-to-digital currency transactions and financial institutions that become involved with digital asset offerings are not covered by the 5AMLD. Transaction processing, which has evolved substantially over the years, needs to be addressed, as well.
The researchers add, “At present, EU financial laws do not prohibit financial institutions from holding or gaining exposure to crypto-assets or from offering services relating to crypto-assets. If financial institutions decide to acquire them and take them on their balance sheets or engage in activities that involve them, they could face enormous losses… As part of a conservative prudential treatment, for now, the best way forward to deal with the uncertainty surrounding crypto-assets, is probably to deduct them from a financial institution’s own funds.”
Also highlighted by the report was the lack of proper classification of unregulated digital currencies. The researchers assert that these need to be defined as high-risk assets, explaining, “Crypto-assets that do not qualify as MiFID II (Markets in Financial Instruments Directive 2018) financial instruments, nor EMD2 (EU E-Money Directive) electronic money, and hence, escape all EU financial regulation, the EU should, at the very least, put appropriate risk disclosure requirements in place, so that investors and/or consumers can be made aware of the potential risks prior to committing funds to these crypto-assets.”
France already weighed in on the publication, believing that it’s too soon to offer precise definitions. The country has always been more accepting of digital currencies and their adoption, but its financial regulator feels that a more limited approach is in order for the time being.
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