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Cryptoassets and money laundering regulation



Syedur Rahman of Rahman Ravelli assesses the scope and likely impact of anti-money laundering measures in relation to cryptoassets.

There is little doubt that the European Union’s Fifth Money Laundering Directive (Directive (EU) 2018/843, also known as 5MLD) intends to take away any idea of structures of ownership having an element of anonymity. This is an approach that has implications for both trusts and corporates. But equally significantly, 5MLD also tackles anonymity in relation to cryptoassets -  what the EU calls “virtual currencies’’ -  mainly by imposing regulations on crypto exchanges and custodian wallet providers

Exchange Providers

The definition of exchange providers in the Money Laundering, Terrorist Financing and Transfer of Funds (information on the Payer) Regulations 2017, SI 2017/692 (Regulations) covers businesses that exchange cryptoassets for money or other cryptoassets. In the explanatory memorandum to the Regulations, the UK government emphasises that the aim was to cover initial coin offerings. But 5MLD defines exchange providers in more general terms as those involved in exchange services between virtual and fiat currencies.

Wallet Providers

The UK has defined wallet providers as businesses that provide services to safeguard or safeguard and administer:

  • cryptoassets on behalf of their customers (services related to the asset) or
  • private cryptographic keys on behalf of customers to hold, store and transfer cryptoassets (services relating to the keys).

5MLD, however, does not refer to administering. It is focused on safeguarding and does not deal with services related to cryptoassets themselves – it deals solely with services related to the cryptographic key. Time will tell whether the UK’s approach leads to different entities being captured. Puzzlingly, no explanation for this dual-edge approach is given in the UK’s explanatory memorandum to the Regulations.

Cryptoassets

In the UK, a cryptoasset is defined by the UK Cryptoassets Taskforce in its October 2018 Final Report as “a cryptographically secured digital representation of value or contractual rights that uses a form of distributed ledger technology and can be transferred, stored or traded electronically’’. 5MLD, however, refers to “a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally-established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically.’’

The main difference is that while the 5MLD definition is wordier it is actually narrower than the UK definition as it focuses on the form of the asset and its nature while the UK is concerned with form only. As a result, the UK definition is likely to lead to a wider application. The UK has adopted digital representation of value and the notion that cryptoassets can be transferred, stored and traded electronically but has not adopted the extra qualifiers that 5MLD suggests.

The UK Approach Compared to 5MLD

The UK’s wider definition of cryptoassets, exchange providers and wallet providers – as well as the use of the term cryptoasset as opposed to virtual currency – can be taken as an indication that the UK is looking to capture more types of crypto products or tokens than 5MLD. If there was any doubt about this, paragraph 7.9 of the explanatory memorandum makes it clear that it is the UK authorities’ aim to broaden the scope of application beyond the 5MLD concept of virtual currencies while restricting application of the regulations to assets that use distributed ledger technology.

The definitions that have been introduced mean that crypto businesses must now comply with anti-money laundering regulations, just as other financial institutions do. It is a development that will have wide-ranging effects on crypto businesses, which must now meet a series of obligations.

These obligations include:

  • New cryptoasset businesses having to register immediately with the Financial Conduct Authority before they commence trading and existing ones having to register by 10 January 2021.
  • Those registering must have adequate skills and experience, a good track record of compliance and no criminal record.
  • Performing due diligence – and in some circumstances enhanced due diligence – on new and existing customers to identify the owners of assets.
  • Telling customers they are not protected by the Financial Services Compensation Scheme or the Financial Ombudsman’s Service.
  • Reporting suspicions of money laundering to the National Crime Agency.
  • Complying with requests to compile a report detailing their compliance with the Regulations.

Businesses that fail to comply with the requirements can be investigated, suspended from trading and prosecuted. There is little doubt that the introduction of regulation will affect how crypto businesses function. It may even reduce the numbers of newcomers to the market. Yet at the same time, regulation may provide the market with much-needed credibility and safety as far as potential consumers are concerned.

This article was also featured on Lexology.com.

Syedur Rahman

Syedur Rahman

Legal Director

syedur.rahman@rahmanravelli.co.uk
+44 (0)203 910 4566 vCard

Specialist Areas of Practice: Fraud and Business Crime, Compliance and Regulatory, Civil Recovery, Civil Fraud, Corporate Investigations

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