How will the money laundering system change after the regulation of crypto – assets?

In the face of dynamically changing cryptocurrency market, the European Union is tightening anti – money laundering and anti – terrorist financing regulations with a number of changes affecting certain of cryptoasset holders.

What is crypto – asset anyway? It means a digital representation of a value or right that can be transferred and stored electronically using distributed ledger technology or similar technology. In some situations, despite fulfilling these characteristics, legally we will not be dealing with crypto – asset. The provisions of the UE Regultion referred to below specify these situations, by referring to subjective, subject – matter exclusions, to the unique and non-interchangeable nature of certain crypto – assets, or to another qualification of them as cash.

Drafw law on cryptoassets

On 22 February 2024, a draft law on crypto – assets was published. The draft law is a result of adoption of Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 on markets in crypto – assets and amending Regulations (EU) No 1093/2010 and (EU) No 1095/2010 and Directives 2013/36/EU and (EU) 2019/1937 and Regulation (EU) 2023/1113 of the European Parliament and of the Council of 31 May 2023 on information accompanying funds transfers and certain cryptoassets and amending Directive (EU) 2015/849 (hereinafter: the „Regulation”).

Draft law aims to consolidate supervisory capabilities for the Financial Supervision Authority. This, in turn, is connected with amendments to the Act of 1 March 2018 on counteracting money laundering and terrorist financing (i.e. Journal of Laws 2023, item 1124, 1285, 1723, 1843) (hereinafter the „AML Act”).

What will change?

The institutions required  to comply with the AML regulations will be crypto-asset service providers in the sense of Article 3 (1)(15) of Regulation 2023/1114, providing one or more of the crypto – asset services referred to in Article 3 (1)(16) of that Regulation, with the exception of the crypto – asset advisory service referred to in Article 3 (1)(16)(h) of that Regulation.

Going therefore, in turn, crypto – asset service provider means a legal person or other undertaking whose occupation or business is the provision of one or more crypto – asset services to clients on a professional basis, and that is allowed to provide crypto – asset services in accordance with Article 59.

Crypto – asset service means any of the following services and activities relating to any crypto – asset:

1. Providing custody and administration of crypto – assets on behalf of clients
2. Operation of a trading platform for crypto – assets
3. Exchange of crypto – assets for funds
4. Exchange of crypto – assets for other crypto – assets
5. Execution of orders for crypto – assets on behalf of clients
6. Placing of crypto – assets
7. Reception and transmission of orders for crypto – assets on behalf of clients
8. Providing advice on crypto – assets
9. Providing portfolio management on crypto – assets
10. Providing transfer services for crypto – assets on behalf of clients

The obligation to use financial security measures will apply to occasional transactions involving crypto – assets with a value of € 1,000 or more, regardless of whether the transaction is carried out as a single operation or several operations that appear to be linked.

Obliged institutions will be required to:

– identify and assess the money laundering and terrorist financing risks associated with transfers of crypto – assets directed to or originating from a non – hosted address (a non – hosted address means an address of a distributed registry unconnected to either a crypto – asset service provider; or to a non – Union – based entity providing services similar to those of a crypto – asset service provider);

– set out in an internal procedure the principles for identifying and assessing money laundering and terrorist financing risks associated with crypto – assets transfers.

For business relations or occasional transactions involving transfers of crypto – assets directed to or originating from a non – hosted address, obliged institutions shall, in addition to applying financial security measures taking into account the risks indentified, take one or more of the following actions:

1. Obtain information, based on risk analysis, in order to identify and verify the identity of the originator or beneficiary of a transfer directed to or originating from non – hosted address, or the beneficial owner of the origination or beneficiary of such transfer, inclusing throught reliance on others
2. Request additional information on the origin and destination of the transferred crypto – assets
3. Intensify the current monitoring of client’s economic relations
4. Other activities, not listed in points 1 to 3, aimed at reducing and managing the risk of money laundering and terrorist financing, as well as the risk of non – implementation and evasion of restrictive measures, including restrictive measures related to proliferation financing

Are regulations of crypto – assets… possible to like?

The new EU regulations aim to make crypto – assets investments safer, protecting investors from illegal activities and helping to stabilise the market.

So far, we have already witnessed one significant metamorphosis in the crypto – assets market, when crypto – asset exchanges implemented KYC (know your client) procedure requirements. Already this time, there was deep dissatisfaction among cryptocurrency investors,  justified by the departure from the original idea of blockchain, i. e. anonymity and unfettered freedom of action. Despite the numerous opponents of the regulatory changes, there are voices of investors praising the new regulations. Enthusiasts of regulations see these measures as a step towards greater adaptation of the cryptocurrency market. Stricter regulations and verification procedures may influence greater public confidence in crypto – assets, which may increase interest in the market and attract larger investors. It should be remembered that despite constatnt amendments related to anti – money laundering regulations, decentralised exchanges remain commited to full anonymity, while KYC is implemented on centralised exchanges.

Which direction we are going in?

The UE announced further changes in the crypto – assets market. On 19 March 2024, a majority of the European Parliament’s chief committees approved new anti – money laundering regulations. The UE will ban anonymous cryptocurrency transactions to hosted wallets offered by external service providers. MEP Patrick Breyer – a fighter for digital freedom – spoke out in the discussion with a post on his social media: EU Committe approves: Prohibition of cash payments over € 10.000, Prohibition of anonymous cash payments over €  3.000 and prohibition of anonymous crypto payments to hosted wallets, even for the smallest amounts, without any threshold. The restrictions on anonymous cash payments will apply to obliged entities and service providers. This means war on cash and gradual erosion of our financial freedom.