The European Union, money laundering and NFTs

Syed Rahman of Rahman Ravelli outlines the EU’s targeting of NFTs in its draft anti-money laundering bill.

Lawmakers in the European Parliament have put forward changes to the European Union (EU) anti-money laundering bill to make it clear that Non-Fungible Token'>NFT (non-fungible token) platforms and those providing NFT-related services are within its scope.

The proposed change to the anti-money laundering (AML) and combating the financing of terrorism (CFT) rules will remove a gap in the EU’s Markets in Crypto-Assets (MiCA) regulation. At present, MiCA does not cover NFTs.

A leaked draft of the EU’s proposal states that NFT platforms are not covered in the current definition of crypto asset service providers under the MiCA Regulation “to the extent they do not provide services in crypto-assets that are fungible and non-unique”.

The proposal adds: “In order to close this gap and mitigate associated money laundering and terrorist financing risks, NFT platforms should therefore be included in the horizontal AML/CFT framework as a separate category of obliged entities.”

Review

The EU has said it will review its policy on NFTs with regard to their absence from the MiCA regulation. It has said that the European Commission will, within 18 months, prepare a comprehensive assessment and a legislative proposal to “create a regime for NFTs and address the emerging risks of such a new market.”

This appears to echo reports that emerged six months ago that stated the European Parliament was looking to include decentralised finance, decentralised autonomous organizations (DAOs) and NFTs in its anti-money laundering measures. These areas had previously not been covered in the original EU AML/CFT proposals. It comes two months after the news that French regulators wanted to see tougher regulations to prevent a recurrence of the 2022 crises involving digital assets.

While the EU now appears determined to ensure its regulation covers all aspects of digital assets, the amendments still have to be passed by a vote on March 28. That will then be followed by a vote on the whole text. If those votes are in favour of the changes, they will usher in a new era for NFT platform operators and issuers.

Loopholes

When, in July 2021, the European Commission announced an ambitious package of legislative proposals to boost the bloc’s AML/CFT rules and create the Anti-Money Laundering Authority (AMLA), it created a regime to oversee digital asset companies’ activities in all EU member states and enforce MiCA.

The aim was to improve the detection of suspicious transactions and close loopholes in regulation. AMLA should be operational in 2024, meaning it will be active in time for the MiCA regulations coming into effect. This should take place if they pass their final vote next month.

There is little doubt that the proposed changes will place a new focus on NFTs. This is reflected in the decision taken last December by Malta’s Financial Services Authority to remove NFTs from its own virtual financial asset regulation because MiCA is expected to come into force. Malta was one of the nations that had already addressed the regulation of NFTs.