In less than one decade we have witnessed a steep rise of the whole new market, which from an instrument of exchange in narrow IT-communities developed into a financial instrument competing with more traditional ones in interest and agitation. The attention cryptocurrencies get does not always come from potential investors, participants of the market or IT and financial experts – but also from the states and their financial regulatory agencies, ministries and intergovernmental organizations. And those are the powers which can define the status of cryptocurrencies and their future development.
For quite a while this has been a virtually unregulated area, even though the volume of transactions and turnover kept growing in an amusing way. Nevertheless, for some time authorities did not understand or simply underestimated the significance of the newly appeared blockchain technologies and cryptocurrencies. We can recall an infamous statement of the ex-Chairman of the U.S. Federal Reserve Alan Greenspan who in 2013 said that bitcoin is a bubble without intrinsic value.
As a result, authorities in different countries take very different approaches in this area: from Japan which recognizes digital currencies as payment method under the Payment Services Act, to Russia where cryptocurrencies are neither recognized nor banned, to China where financial institutions were prohibited to perform bitcoin transactions in 2013, ICO’s were banned in 2017, and now restrictive measures on mining are being expected.
Unlike China, in Europe the attitude varied from highly positive in some countries (like Sweden) to neutral, unregulated and seemingly indifferent. There was no centralized policy on cryptocurrencies either, so each Member State was allowed freedom to decide on its own policy. Partly it can be attributed to the lack of understanding of the area and its inherent risks rather than lack of interest. Even major banks struggled with this new concept, let alone more conservative governmental and legislative bodies. There have been talks on consolidated European legislation on cryptocurrencies as numerous concerns were voiced repeatedly, one of recent examples would be a speech by the Vice-President of European Commission, V. Dombrovskis, at the Roundtable on cryptocurrencies in February 2018.
The concerns can be divided into two general types – concerns related to the state interests and concerns related to the interests of individuals.
To the first type we can relate anonymity of cryptocurrencies transactions (it is one of the main concerns), anti-money laundering and terrorist risks, threats to the financial market, cybercrime and increased possibilities for illicit activities. On the other side there are concerns about personal data, vulnerabilities of exchange platforms, fraudulent cryptocurrency start-ups etc.
Indeed, transactions with cryptocurrencies are much more obscure comparing to the regular bank transactions which are always under high scrutiny – as banks belong to a highly regulated financial market.
Eventually, these discussions brought about an effect. Gaps continue to exist, but certain steps have been taken very recently. The Directive [(EU) 2015/849] on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing has been amended also to address some of the issues of cryptocurrencies. First suggested in 2016, these amendments have been voted for by the European Parliament in April 2018. The idea was to make the 4th AML directive apply to the exchange platforms (businesses) and wallet providers. Interestingly, exchange service providers are covered by the directive only insofar they conduct exchange with fiat currencies – therefore, exchange platforms which conduct only cryptocurrency to cryptocurrency exchange will remain exempt.
Entities which are covered by the AML Directive are now obliged to employ the same AML/CTF measures and safeguards as, for instance, tax advisors or trust offices. First and foremost, of course, this implies ‘know your client’ policies which is a serious step towards de-anonymizing the cryptocurrency exchange.
On a side note, it should be remembered that the EU officially does not operate with the term “cryptocurrency”. Instead, they use Virtual currency and virtual currency schemes (VCS). First time these terms have appeared in a report by the European Central Bank in 2012, and stayed in the official European lexicon since. The amended Directive now officially defines ‘virtual currency’ as a digital representation of value, and confirms that it can be used as a means of exchange.
Next, Article 47 establishes an obligation for Member States to ensure that the exchange platforms and wallet service providers are registered (but for now, at least, there is nothing about licensing) – and through the legislation of each EU state it will eventually become a duty for the entities in question.
Finally, the General Data Protection Regulation (GDPR) applies to any service provider having customers in Europe – this includes cryptocurrency exchange platforms and wallet services, as they also work with information which falls into the scope of the regulation. For this reason, adoption of the GDPR was accompanied with heated discussions in the cryptocurrencies community and caused quite a negative reaction. Not all the providers are willing or able to comply with it. And at this moment it might be even more important from the point of view of businesses – while the amended AML Directive is yet to be reflected in laws and regulations on national level, the GDPR has already established grounds for penalizing non-compliant entities, and the amounts can be very serious.
At this moment there is no information on what supervising authority will take the responsibility for cryptocurrencies. Of course, as part of the AML Directive’s requirements, a supervising authority has to be designated by each Member State for all types of entities covered. There are no limitations or conditions for the appointment of such supervising authority, so each state will decide according to its own views on cryptocurrencies and practices in the financial area. It is most logical that these functions will be assigned to already existing supervising institutions for the financial area and/or securities market. For example, in the Netherlands it will likely be the Dutch Central Bank (DNB).
In Europe the Dutch are among the most open and vocal supporters. The Netherlands has long established itself as a forward-looking and innovative country, and cryptocurrencies are not an exception. There is the Dutch Blockchain Coalition – a partnership between the government, industry and knowledge institutions which work toward promoting a safe and responsible implementation of cryptocurrencies, opening possibilities for their use and assisting state and stakeholders with research and expertise on matters related to this technology. In May 2018 it presented the first national blockchain research agenda, and the movement is backed up by members of the royal family.