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If you have plans to obtain a cryptolicense in the EU or set up a company for cryptoactivities in the EU Member State in the near future, then this blog post may be of interest to you.

One of the issues associated with cryptocurrencies is their potential use for illicit activities including money laundering. The European Union has been trying to solve the problem for several years, but it has not been very successful so far.

It is noteworthy that the impact of cryptocurrencies on money laundering is sparse in comparison to cash transactions. However, the biggest concern is related to the anonymity issue. Operations with digital currencies can be well performed anonymously. Also, virtual currency transactions are not tied to specific jurisdictions. They are allowed almost everywhere and do not require any centralized intermediary. To send virtual currencies to another part of the world, it is enough to have access to the Internet. These features make the control of these transactions particularly difficult.

That is why, for several years now, public authorities at European level have felt the need for a new approach to regulation.

This approach includes:

  • mandatory creation / licensing of a “governing body” for each virtual currency;
  • AML and extension of anti-fraud rules in virtual currency transactions;
  • adoption of general operating rules for market participants.

Given the complexity of the proposed integrated approach, as well as the urgent need to respond quickly to virtual currencies, European regulators plan to extend the AML directives to virtual currency exchange service providers in the near future.

At the same time, the European Commission systematically conducts risk assessments in order to identify and respond to risks, including new ones affecting the EU internal market, which facilitates global decisions to respond to these threats at the international level. For example, following the recent disclosure of several high-profile money laundering cases, the Commission established a joint working group with the European Supervisory Authorities and the European Central Bank. Based on the recommendations of the working group, the Guidelines on strengthening the anti-money laundering system and prudential rules to strengthen the role of European financial management.

Regulatory approach to cryptocurrencies

The European legislator's approach to regulating the use of virtual currencies consisted of including VCEP and CWP in the list of entities covered by the AML rules. Therefore, cryptocurrencies will be governed by rules similar to those established for traditional banks, and other financial institutions. For example, they will need to put in place the necessary reliability rules, monitor transactions, identify high-risk customers  and report any suspicious activity to the relevant national authorities.

The competent authorities will be able to control the use of virtual currencies and issue a license to exchange cryptocurrencies. However, the EU authorities have acknowledged that this new approach will not completely eliminate the problem of anonymity associated with cryptocurrency transactions, as users can still bypass the new regulatory framework.

Therefore, by early 2022, the EU Commission has been tasked with developing proposals for self-declaration of virtual currency holders. Also under close scrutiny now is the maintenance by the Member States of central databases recording user identities and wallet addresses.

It is likely that other European legislative initiatives will soon emerge to cover other aspects of virtual currencies and obtaining a license for cryptocurrencies. 

If you plan to set up a crypto-exchange in Europe, please note that the EU Council also intends to introduce minimum rules for defining crimes and penalties in the field of money laundering, to remove obstacles to judicial and police cross-border cooperation in money laundering investigations, to harmonize EU rules with international obligations, including the Council of Europe Convention on money laundering, detection, seizure, confiscation of proceeds of crime.

The rules will provide for a maximum prison term of 4 years for money laundering, and additional sanctions may be imposed on violators.

IQ Decision UK specialists provide assistance in registering a company under the cryptocurrency exchange in Europe and advise on cryptocurrency regulation in the EU.