Crypto laws around Europe are about to tighten up: here’s what to expect and why Malta may struggle

Bear with me. We’ve got to talk policy for a minute. Actually, four minutes. 

The focus this time is the European Union's crypto directive, known under the enviably catchy abbreviation of AMLD5 (anti-money laundering directive 5).

Admittedly, it might sound bland, but it’s the single most important, continent-wide piece of legislation concerning crypto to date.

Drawn up and signed in April 2018, EU members have 18 months to implement the directive under the premise of preventing terror financing and crime. Members are now acting upon the directive, led by the UK and the Czech Republic; both of whose draft legislation reportedly goes further than AMLD5 advises.

Critics argue that Europe has had a “regulatory void” which made local crypto exchanges a hotspot for money-laundering. According to Elliptic, a London-based blockchain analysis group, lax AML laws meant criminals could cash-out "significant proportion[s]" of bitcoin without having to identify themselves "using services based in Europe". The group also argues local laws have lagged behind the US in the last 5 years.

AMLD5 means crypto exchanges in all 28 member-countries will now be policed by a common set of underlying rules, without exception; no loopholes, no hiding places, and no KYC short cuts. Indeed, part of AMLD5's aim is to remove any regulatory arbitrage within the EU.

Sources say it's proven a "serious shock" for traditional crypto businesses - here's what you need to know.

What it means

Crucially, this directive means crypto custodians and exchanges will now legally need to:

• Register with local authorities as "obliged entities" like any other traditional financial institution

• Implement measures to counter money laundering and terrorist funding, including due diligence controls (like KYC) and monitoring and reporting of suspicious activity to authorities
  

• Conduct diligent record keeping

This might sound familiar to those who have followed the Financial Action Task Force (FATF)'s recent guidelines, which advised countries globally to force crypto exchanges to share user-information with each other. The difference is that the EU's version is binding.

In brief, that means Europe is getting an early sample of the FATF's proposals, perfectly simulated across jurisdictions.

It's worth noting that requiring exchanges to register and acquire licenses has already been trialed in Japan, which introduced obligatory ‘Virtual Asset Exchange’ licenses last year. Hugh Madden, the CEO of Hong Kong-listed BC Group, noted that mandatory licenses proved helpful in Japan at least, noting how volumes in the country increased "by 450% compared to 18% elsewhere...[including] participation amongst regulated institutions."

Worries for Blockchain island and newcomers

Countries and firms across Europe will now be prepping to get in line with the rules by the start of next year. But there's a select group who may see a particularly serious shakeup. 

One obvious target is Malta - coined "Blockchain Island"- which attracted global attention for its early legal crypto framework. It's had a difficult time with AML vigilance in recent years, facing criticism by the IMF and European Commision despite new laws being introduced in November 2018. Last month, Malta also failed an international AML evaluation; it now has a year to stabilise the ship or faces being blacklisted.

The 2018 directive will therefore only add to the list of new demands facing Maltese crypto exchanges. The country may wish to make an example of rogue companies or indeed invite external helpers to keep up with monitoring of its ever-growing number of crypto firms. Certainly, Bloomberg predicted that "a more coordinated, and tougher, regime for cryptos" like this could make Malta "less accommodating" to firms. As such, it wouldn't be unreasonable to predict that Malta's competitive advantage could begin to shrink?

Another concern around AMLD5 is for smaller crypto organizations, like UK-based London Block Exchange. While major exchanges may see the directive as 'business as normal' given they already comply (sometimes voluntarily) with KYC and AML norms, the cost of compliance can prove crippling for others according to Jesse Spiro, global head of policy at Chainalysis.

“For those that have less resources, less bandwidth, whose business models are maybe less defined in certain ways, who have less of a compliance structure already, it is obviously going to be a heavier lift and more problematic for them," he told The Block earlier this year in regards to FATF's proposals.

Still, some hope could be offered by the CipherTrace and Shyft partnership. The two firms are working to develop infrastructure which will ensure exchanges are compliant in monitoring transactions while guaranteeing the safety of users' data.

Regardless, the reality now is that crypto firms across the EU will be playing by the same rule book for the same time. How Europe's new regulatory environment will compare to the US and Asia in practice awaits to be seen.