The European Banking Authority proposes the establishment of a virtual currency-specific regulator to strengthen information sharing on Bitcoin services

The European Banking Authority (EBA) has recommended that the European Commission establish a specific regulatory regime for virtual currencies, such as Bitcoin. Some commentators believe that the regime will modify the existing European Anti-Money Laundering Directive, and the EBA said that in the long run, the regulation of digital currencies will not fall under conventional anti-money laundering regulations, but will be the responsibility of a dedicated EU agency.

In a response in August, the banking authority said that existing anti-money laundering directives “are not currently suitable to mitigate all the risks arising from [virtual currency] transactions. Instead, a separate regulatory regime, or more far-reaching amendments […] will be required.”

Impact on Bitcoin Addresses and Miners

In July 2016, the European Commission published a draft directive proposing strict anti-money laundering (AML) regulations and “combating the financing of terrorism” (CFT) measures for Bitcoin service providers. Specifically, the directive will apply to virtual currency trading services and custodial wallet providers.

The draft directive also hints that further regulation may be needed in the future, possibly including ownership of Bitcoin addresses. The EBA’s response suggests that they agree with this, and suggests that mining should also be regulated:

“[Virtual currencies] create additional technical risks that distinguish them from traditional fiat currencies which fall within the scope of [existing anti-money laundering directives]. For example, there is the risk of a so-called ‘51% attack’, where a single pool of miners gains 51% of the hashing power and has the ability to prevent transactions from being processed.”

Therefore, the banking authority said that amendments to the current anti-money laundering directives may not be sufficient in the long term. They are in favor of creating a special virtual currency regulator in the future.

European Directives

Although the EBA recommends that the European Commission should establish a regulatory system specifically for virtual currencies, it also supports revising existing anti-money laundering regulations. Because the establishment of a new regulatory system takes a considerable amount of time, the revised proposal can serve as a good intermediary link.

The EBA said:

“Such a regulatory regime […] would require several years to develop, consult, finalize and transpose. Given the short time frame in which the Commission was asked to develop a proposal, this is not an option. It would therefore be advisable for the Commission and its co-legislators to initiate a comprehensive analysis as soon as possible to assess whether there is an optimal regulatory regime for virtual currency transactions.”

However, the EBA indicated that the draft directive needs to be refined. In particular, the banking authority noted that both European authorities and European digital currency companies should prepare for the new legislation. This may require some additional time before the new directive can be applied.

According to the EBA:

“In order for these amendments to reduce the risk that virtual currencies are misused for money laundering or terrorist financing, the European Commission and legislators should ensure that competent authorities have appropriate tools at their disposal to ensure effective supervision of [custodial wallet providers] and [virtual currency trading platforms] in their compliance with AML/CFT obligations.”

The new directive will come into force on 1 January 2017, but the EBA believes that 26 June 2017 would be a more realistic target.

Shared data

The EBA is also looking at the international quality of virtual currencies, such as Bitcoin.

An EU directive is not a law in itself, but serves as a guideline for individual member states to draft national laws. This means that the laws that end up being enacted by individual member states may differ from each other.

And because digital currencies exist on the internet, and most service providers — like digital currency exchanges and custodial wallet providers — also offer their services online, the EBA warns that national laws can be easily circumvented.

The EBA suggested that different EU member states need to work closely together, noting that risks in the political union can be addressed as long as relevant national agencies cooperate.

According to the EBA:

“It is important that competent authorities from different Member States can liaise and exchange information about [virtual currency trading platforms] and [custodial wallet providers] operating in their territories. The EBA therefore believes that the European Commission and legislators should further amend the relevant legislation to ensure that competent authorities assume responsibility for AML/CFT supervision and open channels for exchanging relevant information with each other.”

For specific details and more advice on the EBA’s draft EU directive, read the full opinion published by the banking authority.