An Analysis of Virtual Currencies in terms of the Proposed ‘Fifth Money Laundering Directive’.


Tony Stark [an entire­ly fic­ti­tious char­ac­ter] once remarked: ‘Is it bet­ter to be feared or respect­ed? And I say: ‘Is it too much to ask for both?’ One can cer­tain­ly sur­mise that Vir­tu­al Cur­ren­cies are final­ly giv­en the nec­es­sary ‘respect’ through their inser­tion in the ‘Amend­ment to the Fourth Mon­ey Laun­der­ing Direc­tive’ [col­lo­qui­al­ly known as the Fifth MLD] but have all fears and con­cerns re: VCs been allayed accord­ing­ly?

Virtual Currencies insertion.

The Pro­pos­al for a Direc­tive of the Euro­pean Par­lia­ment and of the Coun­cil amend­ing Direc­tive (EU) 2015/849’ has cer­tain­ly been greet­ed with raised eye­brows by a vari­ety of ‘cryp­to-enthu­si­asts’ through­out the world. Is the EU final­ly embrac­ing the obvi­ous fact that the ubiq­ui­tous term: ‘Vir­tu­al Cur­ren­cy’ must be final­ly enshrined and catered for in Nation­al Leg­is­la­tion? Per­haps. A brief appre­ci­a­tion of what is being pro­posed will be dis­cussed accord­ing­ly.

The Explana­to­ry Mem­o­ran­dum notes that ‘the pro­posed revi­sion of the Fourth Anti-Mon­ey Laun­der­ing Direc­tive is also con­sis­tent with glob­al devel­op­ments’. This comes as no sur­prise giv­en the recent waves of ter­ror attacks around the world. So essen­tial­ly, the whole essence of this Direc­tive is to curb the fun­nel­ing of funds for sin­is­ter ter­ror­ism plans so much so that: ‘effec­tive super­vi­sion and enforce­ment are cru­cial to pre­vent mon­ey laun­der­ing, the financ­ing of ter­ror­ism and crime in gen­er­al’.

GDPR and Virtual Currencies. A tangible link?

Con­sid­er­ing the recent GDPR [Gen­er­al Data Pro­tec­tion Reg­u­la­tions], the Mem­o­ran­dum also states that ‘the need to ensure enhanced trans­paren­cy of busi­ness rela­tion­ships, legal stan­dards in the field and par­tic­u­lar­ly all rules regard­ing pro­tec­tion of pri­va­cy and per­son­al data dic­tate that there should be a clear dis­tinc­tion between cat­e­gories of legal enti­ties engaged in the man­age­ment of trusts as a busi­ness, and oth­er cat­e­gories’. This ‘oth­er cat­e­gories’ is inter­est­ing since it allows for a wide inter­pre­ta­tion and indi­rect­ly acts as an ‘umbrel­la pro­vi­sion’ for all oth­er sub­ject per­sons.

And here­in lies the nexus to Vir­tu­al Cur­ren­cies. Extend­ing this notion of ‘per­son­al data’ specif­i­cal­ly to Vir­tu­al Cur­ren­cy exchange plat­forms high­lights the EU’s quest to also attempt to ‘reg­u­late’ Cryp­to-exchanges.

Elevating the status of ‘Virtual Currencies’

After all, it is stat­ed that: ‘Pos­i­tive effects for con­sumers are expect­ed as a result of the pro­posed rules on des­ig­nat­ing vir­tu­al cur­ren­cy exchange plat­forms as oblig­ed enti­ties’. In oth­er words, these ‘exchanges’ will now be ele­vat­ed to the lev­el of ‘oblig­ed enti­ties’ [such as: Com­pa­ny Ser­vice Providers, Trusts, Finan­cial Insti­tu­tions, Cred­it Insti­tu­tions, Notaries, Legal Pro­fes­sion­als etc…]. The scope or pur­pose is crys­tal-clear: ‘Reduc­ing anonymi­ty sur­round­ing VCs will con­tribute to increas­ing trust of their good-faith users’.

With the prospec­tive amend­ment to Arti­cle 2 of the 4th Mon­ey Laun­der­ing Direc­tive, the Com­mis­sion is attempt­ing to pro­vide clar­i­ty and cer­tain­ty as to what is meant by Vir­tu­al Cur­ren­cy. In this con­nec­tion, vir­tu­al cur­ren­cies will hence­forth be defined as:

”a dig­i­tal rep­re­sen­ta­tion of val­ue that is nei­ther issued by a cen­tral bank or a pub­lic author­i­ty, nor nec­es­sar­i­ly attached to a fiat cur­ren­cy, but is accept­ed by nat­ur­al or legal per­sons as a means of pay­ment and can be trans­ferred, stored or trad­ed elec­tron­i­cal­ly”.

This def­i­n­i­tion is cer­tain­ly paving the way towards reg­u­la­tion and ‘accep­tance’ of Cryp­to-cur­ren­cies. In a way, the EU is almost seem­ing­ly ele­vat­ing VCs to the posi­tion of ‘accep­tance’ already enjoyed by tra­di­tion­al FIAT cur­ren­cies.

Possible harmonization of ‘Virtual Currencies’ at EU Level.

By des­ig­nat­ing vir­tu­al cur­ren­cy exchange plat­forms as ‘oblig­ed enti­ties’ whilst also clear­ly defin­ing VCs, the EU is attempt­ing to ful­ly har­mo­nize Mem­ber States’ approach to Cryp­to-cur­ren­cies. Reg­u­la­tion there­fore is the key to accep­tance and even­tu­al day-to-day usage of VCs. It goes with­out say­ing that the fears of most peo­ple are in a way abat­ed as ‘legal cer­tain­ty’ slow­ly begins to pre­vail.

More­over, as seen in Pre­am­ble (7) of the Direc­tive ‘to com­bat the risks relat­ed to the anonymi­ty [of VCs], nation­al Finan­cial Intel­li­gence Units (FIUs) should be able to asso­ciate vir­tu­al cur­ren­cy address­es to the iden­ti­ty of the own­er of vir­tu­al cur­ren­cies.’ This is already being catered for in Mal­ta with the Gov­ern­ment also seek­ing to work in tan­dem with the both the MFSA and FIAU accord­ing­ly.

Why the need to Regulate Virtual Currencies?

The Com­mis­sion goes on to explain the neces­si­ty of hav­ing such text in place and this is because there are obvi­ous risks ‘relat­ing to the irre­versibil­i­ty of trans­ac­tions, means of deal­ing with fraud­u­lent oper­a­tions, the opaque and tech­no­log­i­cal­ly com­plex nature of the indus­try, and the lack of reg­u­la­to­ry safe­guards’.

The need for Mem­ber-State Reg­u­la­tion as is already being done here in Mal­ta [with three impor­tant Bills cur­rent­ly being tabled] was also rein­forced in the text as well as ensur­ing that there are laws cov­er­ing: ‘cus­to­di­an wal­let providers that oper­ate as gate­keep­ers’. Cru­cial­ly, as oblig­ed enti­ties, Cryp­to-Exchanges will now have the legal oblig­a­tion to imple­ment pre­ven­tive mea­sures and report sus­pi­cious trans­ac­tions to local/EU author­i­ties.

Excit­ing times lie ahead!

Dis­claimer: The above-men­tioned arti­cle is sim­ply based on inde­pen­dent research car­ried out by Dr. Wern­er and Part­ner and can­not con­sti­tute any form of legal advice. If you would like to meet with up with any of our rep­re­sen­ta­tives to seek fur­ther infor­ma­tion please con­tact us for an appoint­ment.


About Dr. Michael Calleja

Dr. Michael Calle­ja, born on the 07.01.1988, stud­ied law at the Uni­ver­si­ty of Mal­ta from 2006 till 2012. He grad­u­at­ed Bach­e­lor of Laws & Euro­pean Stud­ies in 2009 with a Sec­ond Class Upper Degree and grad­u­at­ed Notary Pub­lic in 2010. He suc­cess­ful­ly defend­ed his the­sis enti­tled: ‘Beyond the Bosman Rul­ing: Con­trac­tu­al Dis­putes in Foot­ball and the Spe­cif­ic Nature of Sport in the Euro­pean Union’ in 2012 and obtained his Doc­tor of Laws (LL.D) accord­ing­ly.

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