The EU has taken many steps in the last several years to reduce potential funding for terrorist activities and with the implementation of the Fifth Money Laundering Directive (“MLD5”) it has taken another step. MLD5 amends the Fourth Money Laundering Directive (“MLD4”) to include Cryptocurrency exchanges and custodian wallet providers.
“The new directive is of particular interest to the FinTech sector as, amongst other things, MLD5 includes measures to increase transparency around more recently developed instruments of payment — namely cryptocurrencies and prepaid cards. Both these instruments lend themselves to anonymity and raise concerns that they could be used to help fund terrorist activities.
The new legislation will also require virtual currency exchange platforms and custodian wallet providers to perform due diligence on their customers, including KYC checks. Such entities will also need to be registered for AML purposes. Consequently, these entities will be regulated for AML purposes in the same way as financial services firms (and subject to the same AML regulatory obligations). This will be a significant change for relevant businesses, and is likely to increase their regulatory compliance costs substantially.”
The US is moving in the same general direction as the EU, but is only just beginning get public attention and is currently regulated under numerous laws including the SEC, Fincen, the Bank Secrecy Act and Anti-Money Laundering regulations to name a few. There is also news that a “Virtual Commodity Association”, an industry non-profit focused on self-regulation amongst exchanges will be created which has precedent in the US. Typically the industry proposes limits and latitudes while the regulators gain a better understanding of the true product offerings and where the inherent risks are that require true government oversight. Either way regulation is coming, due to the volatility in cryptocurrency and initial coin offerings (ICO’s) as well as the anonymity associated with purchase, transfer or exchange of these currencies.
Overview by Sue Brown, Director, Prepaid Advisory Service at Mercator Advisory Group
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