Time is almost up. The Fifth Anti-Money Laundering Directive dubbed 5AMLD will soon take effect. This piece of legislation brings custodial wallets and fiat-to-crypto exchanges across the European Union under a new first-of-its-kind regulatory infrastructure.
All exchanges in Europe must achieve compliance with the new rules by January 10, 2020, for them to remain operational. As time passes by, some exchanges are scrambling while others are ready to adopt these compliance procedures.
An ex-specialist in the United States Treasury Anti-Money Laundering (AML), David Carlisle, knows something about crypto regulations. Currently, he is the Head of Community at Elliptic and he highlighted the imminent transition facing the crypto industry across Europe.
Through Elliptic, exchanges monitor and protect themselves against suspicious activities linked to dark web interactions, illegal funding, and crypto-wallets controlled by cyber-criminals.
The company is tasked with researching and identifying all illicit actors who may be sitting behind various crypto addresses and assists businesses to stay away from them.
What Is 5AMLD?
This legislation’s main effect on the cryptocurrency industry is that all the EU member countries must implement all AML regulations. All exchanges operating in the region must follow Know Your Customer (KYC) rules enabling them to monitor customer transactions and file all suspicious activity reports.
KYC proves that the customers are who they say they are and they are legitimate. KYC ensures that customers are not posing behind fake identities trying to abuse the exchanges or other crypto platforms for malicious intentions.
Up to now, crypto firms in the EU have provided their services without any KYC and AML controls in place. Carlisle believes that the lack of regulations has resulted in competitive problems:
“It affects a lot of the big U.S. exchanges, like Coinbase, that were already subject to regulation elsewhere. Many of them already do, in effect, comply with AML requirements.”
However, with the new rules coming into place across the EU, the playing field will become level for all competitors.
Are The Crypto Exchanges Prepared?
The current outlook is somewhat mixed up. Businesses with operations in other regions apart from Europe already know what is in store for them. They are prepared since they have dealt with compliance in other jurisdictions. However, some of the Euro-centric businesses are showing cause for concern.
In theory, 5AMLD offers a seamless infrastructure for how to regulate cryptos. But in practice, there is a lot of divergence from one country to the next with regards to how they plan to implement the regulation. Some of the firms may not be fully prepared to guarantee that they are compliant in all countries where they operate across Europe.
Even though 5AMLD sets a minimum regulatory threshold, it accommodates further regulations and procedures that differ from one jurisdiction to the next. Kraken is readying for the forthcoming changes while following the developments keenly. It is striving to ensure that it continues to provide high-quality services to all its EU clients.
Exchanges operating in multiple EU member states must apply for the necessary licenses in all jurisdictions. This is a major area of concern for effective 5AMLD preparation. Some companies are facing the new challenge head-on while others are procrastinating. All exchanges must ensure compliance operations are functional on time and that they have enough access to the necessary monitoring tools.
Why In Europe?
Criminal activity is increasing with the European crypto exchanges processing large volumes of illicit activity compared to regions with regulations set in place. Little criminal activities take place in areas like the US where regulation has been established for several years.
Some of the notable criminal activities in the EU include the notorious BTC-e, an eastern European exchange that was a nexus for money-laundering. Also, drug-trafficking networks across the Netherlands and Spain used lax crypto companies and crypto ATMs to launder their money.
How Will 5AMLD Affect Crypto?
In the near-term, the regulation will prove to be a pain-point for crypto companies. They must budget for the new costs to ensure that they are compliant. But in the medium and long-term, the regulation will result in adoption and success for the companies that embrace it. Carlisle stated:
“People using an exchange want to know that the platforms they’re using are safe and that their funds and personally identifiable information will not be jeopardized.”
Getting the perfect balance between regulatory safety and user privacy is also a major challenge since the balance point is always moving. Exchanges will have to make sure that they only collect the information needed to meet regulatory and banking requirements while upholding customer privacy.
The exchanges that want to thrive will take a proactive stand towards compliance and ensure that they protect themselves from financial crime.