Last October I was fortunate enough to be able to attend Sibos Singapore to present a SWIFT institute paper I co-authored with my colleagues Niels Vandezande and professor Peggy Valcke. Our paper, entitled the “Evolution of Third Party Payment Providers and cryptocurrencies Under the EU’s Upcoming PSD2 and AMLD4”, explored the current Anti-Money Laundering (AML) legal framework surrounding both these payment instruments. Especially concerning virtual currencies there was a consistent lack of legal guidance and clarity from regulators on a global level.
During Sibos I had some interesting discussions as to whether and how virtual currencies should be dealt with within an AML context. One of the approaches – one which I personally tend to agree with – is to hold out on regulating virtual currencies. Emerging technologies often need time to be able to grow and find their own sense of direction. Virtual currencies have not been introduced to the masses, perhaps due to skepticism from those who do not grasp their intent or due to lack of legal guidance. However, the potential to challenge the status-quo or to disrupt entire business services and models should not result in the necessity of regulatory guidance to channel future developments. Regulatory reform should at least consider that new innovations should not be crushed by overly-burdensome legal obligations.
Nevertheless, it is equally important to consider the shortcomings of emerging technologies, which is no different in the case of virtual currencies. Due to their qualification as an emerging payment method, virtual currencies have long been under scrutiny of global regulators. Typically focus has been on preventing their use for money-laundering and terrorist financing activities. Whilst most financial authorities have addressed the potential for new technologies to be leveraged as tools to conduct illicit activities, effective regulatory initiatives have not followed suit. Just last year the Fourth Anti-Money Laundering Directive (AMLD4) was adopted in the EU. Whilst the European Banking Authority (EBA) called for a long term solution placing virtual currencies under the scope of the Directive, the final version failed to include any mentioning whatsoever.
In the wake of the Paris terrorist attacks, the G7 of the EU consisting of interior and justice ministers assembled to discuss potential responses and action points to prevent future attacks from occurring. Various reports suggested that Islamic State (IS), who claimed the attacks, is using virtual currencies, such as Bitcoin to fund their activities. Although EU authorities are still investigating whether virtual currencies played a part in funding the Paris attacks, the G7 called for tighter regulation and improved controls of alternative payment methods such as electronic/anonymous payments, virtual currencies and transfers by pre-paid cards.
It is striking that only 6 months after the formal adoption of the AMLD4 the EU suddenly feels the urge to regulate and increase oversight after failing to include it when they had the chance. Especially when considering that there is still no conclusive evidence that the Paris attacks were indeed financed through virtual currencies, as evidenced by the recent Interpol report. The bottom line is that virtual currencies indeed pose a potential risk for terrorist financing. The Financial Action Task Force released a report addressing the risks of new payment services in October 2015. Virtual currencies were indeed recognized as a potential threat – it illustrated such by referring to the fact that terrorist websites promote the use of bitcoin for donations – but no more than traditional payment methods.
Nonetheless, last week (2nd February 2016), the European Commission issued a press release outlining its action plan to strengthen the fight against terrorist financing. The action plan focusses on two key points: i) tracing terrorists through financial transactions and preventing the transferring of funds or other assets; and ii) disrupting the sources of revenue by targeting their fund raising capacities. The primary objective is to improve oversight of payment methods allegedly used by terrorist groups, such as virtual currencies. In particular the plan calls to amend the AMLD4 and bring virtual currency exchange platforms under its scope. This would result in these platforms having to apply due diligence controls when providing exchange services, effectively de-anonymising the users.
The discussion whether and how virtual currencies should be regulated seems to have taken a drastic turn. Whilst re-opening this discussion cannot be argued against, the sudden haste for regulatory reform seems too much of a political sweetener for recent tragic events. Rather, a more nuanced approach should be adopted by global regulators. The potential for misuse of virtual currencies is there, but the same holds true for any technology.