New EU Proposal: Anti-money laundering laws are used to regulate virtual currency exchanges and wallet service providers, ending anonymous transactions and combating terrorist financing (Download the full report)

The European Commission (EC) released a new draft directive last week (download the full text), proposing strict anti-money laundering (AML) supervision on virtual currency trading service providers and wallets. The draft aims to combat various crimes such as money laundering, tax evasion, terrorism, fraud, etc. Once this directive is passed, Bitcoin companies in EU countries must adopt a know your customer (KYC) mechanism.

The main goal of this draft is to combat terrorist financing by restricting the anonymous use of virtual currencies (mainly Bitcoin and its competitors).

The draft released by the European Commission mentioned that compared with traditional financial transfer models, virtual currency transactions are highly anonymous, which will also lead to various potential risks. First, terrorists can easily use the transfer model of virtual currency to hide transactions. In addition, the immutability of virtual currency transactions can easily lead to fraudulent transactions. In addition, the complexity of virtual currency technology and the lack of supervision will bring different degrees of risks.

Therefore, the European Commission recommends that existing anti-money laundering laws be used to regulate virtual currency services, especially exchanges and wallet service providers. In order to prevent virtual currencies from being used for illegal activities such as money laundering and terrorist financing, the European Commission recommends that current anti-money laundering laws be used to regulate virtual currency trading platforms and wallet service providers. Under the supervision of anti-money laundering laws, such companies must terminate anonymous trading services and conduct due diligence management on their customers.

Once the draft is passed, Bitcoin companies must collect customer identity information. Although there is no mandatory regulation from the regulatory authorities, many Bitcoin companies have already done so (because the condition for Bitcoin companies to open accounts in some banks is to adopt the KYC system). In addition, the draft stipulates that Bitcoin companies must monitor every transaction and report any suspicious behavior immediately.

Draft Analysis

The draft does not specify which types of service providers will be affected. At present, we only know that companies that deal with customer funds, such as Bitcoin exchanges and wallet service providers, will be regulated. As for exchanges and wallets that do not host private keys or do not host all private keys in multi-signature addresses, it is not clear whether they will be regulated. The outside world has different views on this.

The European Commission stated that the draft was drawn up with the help of virtual currency market participants, including trading platforms, wallet service providers and representatives of virtual currency holders. The European Commission also mentioned that the draft will not hinder the development of virtual currencies, but will expand their market acceptance.

The provisions of this draft will not have any negative impact on the development of distributed ledger technology for virtual currencies…If virtual currencies continue to be used for criminal activities, their social credibility will continue to decline. Therefore, anonymity is not an advantage, but an obstacle to expanding the acceptance of the virtual currency market.

Individual users

The draft only applies to exchanges and wallet service providers for the time being and will not have any impact on individual Bitcoin users. At the end of the proposal, the European Commission wrote that regulating exchanges and wallets alone is not enough to completely prevent the abuse of virtual currencies. After all, all Bitcoin users can run wallet software on their computers or mobile phones, and this process does not involve any wallet service providers.

In response to this, the draft suggests that in the future, individual users should be tied to their wallet addresses: simply regulating trading platforms and wallet service providers is not enough to completely solve the anonymity problem of transactions, because users can create an anonymous environment for virtual currency transactions for themselves without using the services of the above two. In order to completely solve this problem, the Financial Intelligence Units (FIUs) of EU countries must try to tie virtual currency addresses to the identity information of their holders. This model of encouraging users to voluntarily report to designated institutions needs further evaluation.

The proposal still needs to be passed by the European Parliament (EP) and member states before it can be officially adopted. It is expected to come into force in January 2017. Once the proposal is passed, it will be written into the laws of EU member states. At present, the proposal is still in its early stages, which means that EU member states have the right to amend it before it officially comes into force.