The Impact of 6AMLD on Virtual Currencies
March 25, 2021
In recent years, consumer demands and technological innovations have instigated a radical transformation of the payments space. The rise of FinTech in particular has been a significant mobilizer of change, driving faster, cross-border payments. Among the latest developments, is an ever-growing adoption of cryptocurrency into the mainstream, including by big players such as PayPal and Square, adding greater legitimacy and interest.
This trend has raised concerns among financial institutions and governments about the related risks, leading to the advancement of regulatory frameworks designed to prevent fraud, money laundering and terrorist financing. In the European Union specifically, the anti-money laundering directive (AMLD) was created and helped to close AML compliance gaps between European nations. A fundamental development that emerged from its fifth iteration and strengthened later in the sixth AMLD, is the requirement for all digital wallet providers and crypto-asset exchanges to comply with Know Your Customer (KYC) processes.
Anonymity vs Transparency
Due to more stringent checks and processes imposed by AMLD, it has become increasingly difficult to mask criminal activity behind traditional means of banking. As such, cryptocurrency has historically served as a better alternative due to its pseudonymous quality. That is, until last year, in 2020, when the application of regulatory checks extended to cryptocurrency exchanges as well.
The push towards greater transparency and customer due diligence, however, is no easy undertaking. The elements of cryptocurrency that allow for the benefit of user anonymity, are also the obstacles that make KYC and AML policies near impossible to implement. Built on blockchain technology, virtual currency sits in a decentralized network and transactions do not necessarily have any attachment to real-world identities. This makes it challenging to see who is on the other side of a payment and how one entity is tied to another. In an effort to find out, many organizations may find themselves caught in regulatory delays; thus, impeding their fulfillment of customer demands built on instant gratification. To overcome this issue, we may just see a second wave of Legal Entity Identifiers (LEI).
Initially created in Europe following the financial crisis of 2008, an LEI code is a 20-character alphanumeric code designed to uniquely identify any legally distinct entity that engages in financial transactions. This includes financial and non-financial companies, trusts and businesses. By streamlining access to reliable data and acting as a standardized, universally recognized digital identifier, LEIs could reign in the dispersed, global nature of cryptocurrency.
Tougher Climate, Tougher Sentences
In addition to KYC/AML practices, 6AMLD has also clarified the definition of money laundering. Submitting a list of 22 predicate offenses in support of this definition, notably the addition of cybercrime, it explains what might amount to money laundering. More importantly, the directive expands the scope of culpability. For one, anyone who is found ‘aiding and abetting’, ‘inciting’ or ‘attempting’ any of these offenses will be held accountable. Put simply, accomplices – willing or not – will face the same penalties as criminals directly involved. Moreover, ‘legal persons’ will now include, not only organizations, but individuals as well.
In an environment that has witnessed a surge in crime, organizations would do well to seek appropriate tools to gather intelligence on issues like fraud and cyber threats. In fact, virtual currency could be considered to be interdependent with the ransomware industry. Often, criminals demand ransom payments in the form of cryptocurrency and hackers use it to purchase ransomware-as-a-service from the dark web, with anonymity being among the chief benefits.
The key will be to find solutions that can strike a balance between preserving the anonymity of crypto customers, while meeting increasing regulations; all with minimal friction to enable real time payments.
Learn more about AML compliance & regulations for virtual currencies.
