MLD5: EU’s latest AML directive introduces cryptocurrency regulation

5th Money Laundering Directive – The European Union’s regulatory gaze begins to shift towards crypto-currency exchanges and custodian wallet providers

EU MLD5 Regulations

Cryptocurrency exchanges and custodian wallet providers are due to be brought within the scope of regulation at an EU law level. This will arrive in the form of the Fifth Money Laundering Directive (“MLD5”) which is a proposed EU Directive aiming to amend the Fourth Money Laundering Directive (“MLD4”). By way of background, MLD4 applies to a varied range of businesses deemed at risk of being involved in money laundering or terrorist financing.

The European Commission (the “Commission”) has identified cryptocurrency exchanges and custodian wallet providers as the key players controlling access to cryptocurrencies. Accordingly, the Commission aims to bring these entities within the scope of MLD4 for purposes of improving the detection of suspicious cryptocurrency transactions. The Commission explained in its February 2016 communication that cryptocurrency exchange platforms can be considered as electronic currency exchange offices that trade cryptocurrencies for traditional fiat currencies. Further, the Commission views the activities of custodian wallet providers as being akin to payment institutions which offer a payment account, given that such providers offer virtual wallets from which payments in cryptocurrencies can be made or received.

The proposed changes forming part of MLD5 will, if agreed in their current form, extend regulatory coverage to cryptocurrency exchanges providing exchange services between cryptocurrencies and fiat currencies. MLD5 defines virtual (or crypto) currencies as “a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency, and does not possess a legal status of currency or money, but is accepted by natural or legal persons, as a means of exchange, and which can be transferred, stored and traded electronically“.

MLD5 is also due to extend regulatory coverage to include custodian wallet providers which are defined as entities which provide “services to safeguard private cryptographic keys on behalf of their customers, to holding, store and transfer virtual currencies“.

The introduction of MLD5 would capture cryptocurrency exchanges (referred to as “virtual currency exchange platforms”) and custodian wallet providers under MLD4’s definition of “obliged entities”. Accordingly, as “obliged entities” falling under the scope of MLD4, cryptocurrency exchanges and custodian wallet providers will be subject to the same obligations to implement preventative measures and report suspicious activity as other firms under MLD4. The Commission is of the view that the proposed measures will not affect the ability of a cryptocurrency exchange platform to operate its business and will have no negative impact on the benefits offered by distributed ledger technology underlying cryptocurrencies.

In terms of current status, both the European Council and the European Parliament are yet to formally endorse and sign the final compromise text relating to MLD5. Once this is achieved, such text would thereafter be published in the EU’s Official Journal. This publication is expected around mid-2018 – accordingly, MLD5 would to enter into force by the end of 2019 (18 months after its publication).

These moves towards regulation are an example of the European Union’s focus shifting towards addressing the growing area of business related to crypto-currencies and distributed ledger technology generally. It is not unrealistic to expect more from regulators in 2018 on issues arising from new technologies which are disrupting traditional business models, such as the use of blockchain and cryptocurrencies, as well as ICOs. Cryptocurrency exchanges, custodian wallet providers and other businesses related to this space will be confronted with new challenges in achieving legal compliance with the constantly developing measures being put into place to meet the demands of technological advances.

The FinTech Team at Hassans International Law Firm consists of experienced practitioners who act for clients operating cryptocurrency exchanges, custodian wallet provider platforms and other businesses utilising distributed ledger technology. Hassans are actively advising such clients within the existing regulatory framework relating to distributed ledger technology in Gibraltar (which came into force on 1 January 2018). As MLD5 and further developments come into effect in the near future, Hassans will be well placed to continue to guide clients in the crypto space through the rapidly-evolving regulatory landscape.

Hassans is Gibraltar’s largest law firm has been consistently ranked as the leading law firm in Gibraltar by Chambers Europe, Chambers Global and Legal 500 (the most respected industry-standard rating agencies for law firms, globally). The Hassans FinTech team consists of 12 experienced practitioners co-led by partners Anthony Provasoli and Vikram Nagrani. Our FinTech team’s approach is to have a partner actively supervise and involve themselves directly in the advice and support that is provided to clients. It is important to us that you get the best advice and in-depth industry experience we can provide. Should you have any queries on the regulatory regime in Gibraltar in relation to distributed ledger technology, please do not hesitate to contact a member of the Hassans FinTech Team.

Written by David Montegriffo
Edited by Vikram Nagrani