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Euro Central Bank backs money laundering rules for virtual currency exchanges

But 'illegal activities might continue to be financed'

Plans to bring virtual currency exchanges and digital wallet providers within the scope of EU anti-money laundering (AML) legislation have been backed by the European Central Bank (ECB).

he ECB said it "strongly supports" the proposals to extend the Fourth Anti-Money Laundering Directive (AMLD4), noting that "terrorists and other criminal groups are currently able to transfer money within virtual currency networks by concealing the transfers or by benefitting from a certain degree of anonymity on such exchange platforms".

However, in a recently published opinion (9-page / 483KB PDF), it raised a number of issues with the way the draft legislation is currently worded.

The ECB warned that illegal activities might continue to be financed under the proposed new regime. This is because digital currencies "do not necessarily have to be exchanged into legally established currencies" and could instead be "used to purchase goods and services" without those transactions "requiring an exchange into a legal currency or the use of a [digital] custodial wallet provider" which would not be covered by "control measures" envisaged under the draft legislation for virtual currency exchange platforms and custodian wallet providers.

The ECB said that the definition of 'virtual currencies' should be amended under the draft legislation to make it explicit that "virtual currencies are not legal currencies or money". It also said "it would be more accurate" to regard virtual currencies as "a means of exchange, rather than as a means of payment", reflecting that they may have "non-payment" uses such as forsaving or investment and to account for the fact that virtual currencies are not considered to be currencies under EU law.

Virtual currencies should instead be defined as "a digital representation of value that is neither issued by a central bank or a public authority, nor attached to a legally established currency, which does not posses the legal status of currency or money, but is accepted by natural or legal persons, as a means of exchange and possibly also for other purposes, which can be transferred, stored or traded electronically", the ECB said.

The ECB also called on EU policy makers not to champion the use of virtual currencies, highlighting concerns such as their "volatility" and the potential for them to "affect the central banks' control over the supply of money", which it said has "potential risks to price stability" if reliance on virtual currency "substantially increased".

The proposal to extend EU AML rules to virtual currency exchanges and digital wallet providers stem from a European Commission action plan to fight funding for terrorism published earlier this year.

In August the European Banking Authority (EBA) said that EU law makers were pushing for the updated AML rules for virtual currency exchanges and digital wallet providers to take effect from the beginning of next year, to coincide with apparent plans for early transposition of AMLD4 into national legislation across the EU. However, the EBA proposed in respect of these amendments that they are not to come into effect until "26 June 2017, at the very earliest".

Currently, AMLD4 does not need to be implemented into national laws in EU countries until 26 June 2017 but the EBA said it "understands that member states have committed to transposing the Directive earlier, by December 2016". It said the Commission "appears" in the amendment to be proposing to bring virtual currency exchanges and digital wallet providers within scope of the AML rules and that AMLD4, along with the amendments, are to become effective from 1 January 2017, in light of recent terrorist attacks.

Copyright © 2016, is part of international law firm Pinsent Masons.

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