£5,004 is a lot of money, right? What could you buy with it? A second-hand car, a mid-line Rolex, or how about one bitcoin? Virtual currencies are the new emerging market, they are currently valued at $400bn, yet little is known about how they work and the uncertainty about how to regulate them is growing ever more prevalent. Now, more than ever regulators across the globe are demanding regulation for virtual currencies, much like fiat money. Currently, the UK does not recognise virtual currencies, (such as bitcoin) as legal tender; according to the Bank of England any virtual currency should however adhere to the same anti-money laundering standards as any financial institution, that is, if they wish to trade on exchanges.
As it stands there is no EU regulation, recognising and controlling the market ‘flow’ of virtual currencies. The BOE, for example, does not consider virtual currencies to be essentially important and neither does the FCA. Regulators, such as these, have issued consumer warnings on the possible impacts of purchasing virtual currencies, (VCs) yet none have begun to introduce laws and regulations to protect the consumer. On the other hand, however, the HMRC does in fact treat currencies, such as Bitcoin, as legal tender. The HMRC suggests that virtual currencies are in intangible asset and so are subject to Capital Gains Tax; ironic perhaps, given that the consensus within the EU, is that VCs should not be treated as such.
In February of this year, the EU Commission met to discuss its views on VCs; this included the implications, risks and opportunities associated with their use. A notable point taken from this meeting was that VCs expose investors to substantial risk- far more so than any other financial product. Particularly, there is an inherent lack of transparency with regards to the identity of issuers and their underlying flow of assets. Recent price fluctuations across all digital currencies, combined with the influx of initial coin offerings has also led regulators to become increasingly concerned about who such currencies are being traded with and what they are being used for. Notably Bitcoin made its ‘breakthrough’ after its initial use on the infamous Silk Road, allowing the free flow of trade of black market products.
So what regulation should be enforced?
As of 19th April of this year, the European Parliament published a press release, announcing its adoption of a fifth Anti-Money Laundering Directive (5MLD). 5MLD will go into effect 20 days after its publication in the Official Journal of the European Union, (EU Member States will have to wait a further 18 months for this to be transposed into national law). The proposed changes forming part of 5MLD include coverage of virtual currency exchanges, specifically with regards to the exchange of services between fiat and virtual currencies. Providers will now have to consider whether their services fall under the scope of 5MLD, and if so the adequate AML/KYC checks on users of their platform that need to be carried out.
To address the issue of anonymity, 5MLD also proposes that a central database registering users identities and addresses is established and made accessible to national Financial Intelligence Units. However, this proposal will only be introduced via separate legislation if the European Commission determines such a measure ‘necessary and appropriate’. Nonetheless, the proposal for a national register would be a significant development in addressing the anonymity and AML concerns in relation to virtual currencies and would be a step forward in the effort of introducing effective legislation.
So where do we come in?
Here at Lysis Financial we can help you prepare for 5MLD in various ways, no matter how big or small your firm is. We work with Cryptocurrency firms to design, implement and embed AML governance frameworks which helps protect firms being used to launder money, as well as enabling them to conform to future regulatory requirements.
We can also help you to prepare by:
Conducting a comprehensive assessment of current compliance to the existing anti-money laundering regulations;Providing a current and future state AML Maturity
Assessment of a firms’ AML and financial crime strategic and operational capability; Reviewing business lines to assess the impact 5MLD will have on operations; and
Designing a roadmap which will monitor change and ensure compliance to the new directive, providing assurance and oversight to key stakeholders.