[container section_title=’Container’ fullwidth=’no’ bgtransparency=’0′ top=’20’ bottom=’20’ innerbottomshadowsize=’0′ bordertop=’0′ borderbottom=’0′ collapse=’false’][column type=’12’ last=’1′][title fontfamily=’Muli’ textcolor=’#8224e3′ fontsize=’20’ th_height=’10’ th_margintop=’5′ th_bgtransparency=’0′ th_bgpattern=’3′ animation=’default’]Cryptocurrencies, AML and KYC[/title][text google_font=’Muli’ transparency=’0′ animation=’default’]
The birth of bitcoin – the most famous and most important cryptocurrency in the world – coincided with the crisis of 2008, one of the most difficult moments of global markets in modern history. The creation of Satoshi Nakamoto, described in the famous 2009 whitepaper entitled ” Bitcoin: A Peer-to-Peer Electronic Cash System “, was presented to the world as a decentralized alternative to the traditional monetary model based on the presence of intermediaries and a concept of trust in the system and its players, i.e. banks and intermediaries. That same trust which – it must be remembered – was undeniably shaken by the measures put in place to rush to the rescue of several banks involved in the global crisis. Faced with such a scenario, therefore, it is not surprising that a hint of the fragility of the banking system was codified in the genesis block of the bitcoin blockchain in the form of a reference to the title of the newspaper The Times which on January 3, 2009, titled: “Chancellor on brink of second bailout for banks “.
Since then bitcoin has seen significant growth, albeit at variable speeds, both in terms of market capitalization and adoption, contributing significantly to reflections and legislative interventions in terms of regulation and integration into national legal systems. This exercise immediately proved to be complex, especially due to the fact that Bitcoin was born in the context of the global community and that, although today having an essentially monetary function, it is however not tied to or guaranteed by any sovereign State.
So here we are ten years later, in the midst of a global lockdown due to COVID-19 which promises to inflict damage on all world economies comparable – in intensity and, perhaps, in duration – to that of the 2008 crisis. they, therefore, question the effects of the crisis on the main cryptocurrencies (bitcoin, ether, etc.) and on their ability to maintain a stable value over time, to offer users a safe haven with respect to the inflationary mechanisms that could affect national currencies (currencies fiat ) or increase in value and demonstrate its resilience to economic crises, state measures and global pandemics.
Whatever the future of cryptocurrencies, bitcoin is now an integral part of the global techno-financial landscape and has been the subject of several interventions over time. It is often aimed at countering its illegal use or, in any case, considered a harbinger of illegal practices. In this contribution, we will focus in particular on the international regulations relating to the measures established for the prevention of the use of the financial system for the purpose of money laundering (in short ” Anti-money laundering ” or ” AML “). Also, we will focus on possible developments in light of the role that the cryptocurrencies may take over during the economic crisis and subsequent recovery.
AML Directives and some definitions
The AML discipline is contained in Directive 2005/60 / EC (now repealed by Directive 2015/849 as amended several times over time).
The AML regulation has a particularly vast scope and intersects highly regulated sectors (for example, the banking, financial, and insurance sector). Therefore, regulations around the world must always integrate with what is also established by regulation for each sector of reference and the provisions of the individual supervisory authorities.
Leaving aside the historical reconstruction of the various changes that have occurred over time (today we are in fact in the sixth iteration of the Directive), it is sufficient to investigate how the national discipline today deals with the cryptocurrency theme and what the main obligations to which cryptocurrency operators are subject according to the local regulation.
At the definitory level, the directive offers us a definition of “virtual currencies” and “service providers related to the use of virtual currencies”:
- virtual currency: the digital representation of value, not issued or guaranteed by a central bank or by a public authority, not necessarily linked to a legal tender currency, used as a medium of exchange for the purchase of goods and services o for investment purposes and transferred, archived and electronically negotiated ;
- service providers related to the use of virtual currency: any natural or legal person who provides third parties, on a professional basis, also online, services functional to the use, exchange, storage of virtual currency and their conversion from or in currencies having legal tender status or in digital representations of value, including those convertible into other virtual currencies as well as the services of issue, offer, transfer and clearing and any other service functional to the acquisition, negotiation or intermediation in the exchange of same currencies (hereinafter, for brevity “Service Providers”).
- digital wallet service providers: any natural or legal person who provides, for professional purposes, also online, services to safeguard private cryptographic keys on behalf of their customers, in order to hold, store and transfer virtual currencies
It is useful to dwell briefly on the definition of ” virtual currency “.
Firstly, E-money or electronic money in light of the fact that euros or dollars can also be recorded electronically. The notion of “electronic money”, which is defined at European level as ” the monetary value stored electronically, including magnetic storage, represented by a credit towards the issuer which is issued upon receipt of funds to carry out operations, enters the field. of payment pursuant to Article 4, point 5) of Directive 2007/64 / EC and which is accepted by natural or legal persons other than the electronic money issuer” It is referred to by the European and national regulations on electronic money and payment services. Compared to the definition of virtual currency, that of electronic money is, however, more precise and identifies that particular form of digital writing of legal currency by subjects authorized to do so according to banking regulations. The distinction is not irrelevant since the companies can issue “electronic money” (the so-called “electronic money institutions” or EMI) or also those companies that, also duly authorized, provide “payment services” ( also known as “payment institutions” or PI), specific rules are addressed, both at banking and AML level.
On the other hand, if we consider the phenomenon of cryptocurrencies based on a blockchain infrastructure, the applicability of the definition of virtual currency appears much more evident. The most widespread cryptocurrencies in fact ( bitcoin and ether ) have the features referred to in the definition as they exist in digital form, they are neither issued nor guaranteed by any sovereign state or by a public authority and can be used for the purchase of goods or services, even if on a voluntary basis. Therefore, cryptocurrencies fall within the definitions contained in the directive, within the scope of the AML measures.
Main obligations for those who work with virtual currencies
As for the obligations applicable to those who operate in the “virtual currencies” sector, it should be noted that the degree presents a setting based on the identification of certain categories of “obliged parties” (for example, “bank and financial intermediaries”, “other financial operators” and “non-financial operators”) by applying the procedures referred to in the directive to each of the categories/entities.
The main obligations are:
To identify the customer and the beneficial owner as “the natural person or natural persons, other than the customer, in whose interest or for whom, in the last instance, the ongoing relationship is established, the professional service is rendered or the operation is performed “):
- on the occasion of the establishment of an ongoing relationship;
- at the time of the execution of an occasional operation, ordered by the customer, which involves the transmission or movement of means of payment for an amount equal to Euro 15,000.00 (regardless of whether it is performed with a single transaction or with multiple split transactions) o consists of a transfer of funds (banknotes and coins, scriptural and electronic money) in excess of 1,000.00 Euros; and in any case, it is necessary to proceed with the proper verification of the customer and the effective owner;
- when there is a suspicion of money laundering or terrorist financing or when there are doubts about the adequacy of the data previously obtained for identification purposes.
The measures adopted are proportional to the extent of the risks detected and must take into account a series of customer characteristics (legal nature, type of transaction, geographical area of residence, etc.);
- to keep the documents, data and information useful to prevent, identify or ascertain any recycling activities (an activity that will provide for the conservation of the documents acquired on the occasion of the adequate verification of the customers and which, in any case, will allow reconstructing the characteristics transaction);
- to report suspicious transactions when there is reason to believe that money laundering or terrorist financing operations are underway or have been attempted with regard to the characteristics of the transaction);
- to report cash transfers for an amount equal to or greater than 3,000.00 Euros (threshold destined to gradually decrease). In this regard, particular attention must be paid to the definition of “cash” which does not include “virtual currency”;
- to train its staff and to prepare internal measures aimed at mitigating and managing the risks of money laundering and terrorist financing.
The regulation establishes that the adequate verification of the client is carried out through the identification of the client and his identity through an identity document or other document of recognition of the client himself (or a representative). The due diligence obligations are certainly not monolithic but can be modulated due to the risk of money laundering or terrorist financing. In all these cases it is essential to verify the characteristics of the customer and the operation.
AML and virtual currencies – a brake on development?
Given these brief notes on the AML discipline (and a necessary reference to the discipline on money changers), we can try to focus on how the crypto community will be able to navigate the world of anti-money laundering obligations, now that social distancing is a crisis that promises to be profound it will stimulate a profound change in the world of digital wealth. The challenge is certainly complex in many ways.
The first change is certainly ontological. In fact, cryptocurrencies were created with the aim of decentralizing and disintermediating governments and market operators, yet today the provision of services relating to virtual currencies (including the wallet providing ) are included in the scope of AML legislation with the effect of introducing obligations verification, internal organization and reporting to operators. What about decentralized finance (or DeFi ), in which decentralized counterparts of the most common financial and banking services seem to escape the legislative power and supervisory power of individual states?
Certainly, the bitcoin community will be able to have reservations about the interventions of the national legislator (led as known by the European one), but precisely the current world crisis can be a strong stimulus to the adoption of cryptocurrencies and more interested in accessing the economic and financial potential of cryptocurrencies. Precisely, these new users may then not perceive any forcing in the imposition of AML safeguards (including, in particular, adequate verification) but, indeed, security and an extra incentive in approaching a world that certainly is not still mainstream.
Moreover, even bitcoin purists cannot fail to notice the benefits of an AML regulation when considering the incentive that it would produce in the diffusion of technology and the reputational benefits, for individuals and for the global community, which derive from unlawful use of cryptocurrencies.
However, aspects that will merit (indeed, will require, if the adoption of cryptocurrencies should accelerate) remain an intervention of the national and supranational legislator with reference to cryptocurrencies.
The first could be the identification of an optimal balance between the need to counter the illicit use of virtual currencies and the awareness by the legislator that – at least with reference to cryptocurrencies such as bitcoin – there is no way to effectively govern the technology used. This is obviously an important change of perspective compared to the traditional approach to the circuits of “non-virtual” wealth.
The second is the need to find a regulatory and regulatory equilibrium point that is respectful of the intrinsically global nature of the cryptocurrency phenomenon. Regulatory solutions with the national scope or linked to limited political and economic areas can only give rise to regulatory arbitrage phenomena without limiting a technology which, as widely observed in this contribution, is not based on the existence of nor finds legitimacy in a sovereign power or in a public authority.
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