EU’s new AML watchdog spells trouble for “crypto” crooks

Digital currency businesses will soon face much stricter oversight in the EU via the formation of a new cross-border regulatory body to tackle digital currency-based money laundering.

In July 2021, the European Commission released an “ambitious package” of legislative proposals aimed at strengthening the EU’s anti-money laundering (AML) and countering the financing of terrorism (CFT). The proposals include the establishment of “a new EU anti-money laundering authority” which for the first time will be given explicit oversight of crypto companies’ activities in all EU member states.

The new Anti-Money Laundering Authority (AMLA) aims to improve the detection of suspicious transactions and close regulatory loopholes that allow criminals to launder their ill-gotten gains, including through the use of digital assets. Key to these goals will be strengthening cooperation between financial intelligence units (FIUs) to ensure that private sector operators “correctly and consistently” apply EU rules.

The European Council reached its own agreement on the need for an EU-wide AMLA in June. The council’s vision would empower AMLA to “directly supervise certain types of credit and financial institutions, including crypto-asset service providers, if they are deemed risky.” The powers granted to this AMLA are broad and strict, including the ability to require companies to remove managers deemed to stand in the way of compliance.

The European Parliament is currently on summer break, but the plan is for members to approve their own AML approach shortly after they return. After that, the three bodies will huddle together and devise a unified strategy, but there seems to be broad agreement on the need for a cross-border regulatory agency with the necessary teeth to rein in “crypto” excesses.

‘Code is law’ on life support

The creation of a new AMLA is part of a wider plan to implement the Sixth AML/CFT Directive (AMLD6), in part because digital assets play a much larger role in the economy than when the Fifth Directive was introduced in 2018. Previous efforts resulted in patchy reporting and enforcement across EU member states, a difference that AMLD6 is intended to correct.

This plan includes the Markets in Crypto Assets (MiCA) framework, which was proposed back in 2020 as a means to improve consumer protection, market integrity and financial stability. Provisional agreement on MiCA was reached at the end of June.

There is also the Transfer of Funds Regulation (ToFR), which requires digital asset exchanges to have detailed knowledge of individual customers whether they are sending or receiving digital assets, even if the transfers involve “unhosted” (ie Trezor) or “self-hosted”‘ (ie MetaMask) digital wallets. (Some EU markets have already started applying similar requirements.)

The reaction to these initiatives by the crypto bros has been predictably over the top, mainly because any form of oversight conflicts with their insane insistence that code is law. Cry all you want, but it definitely looks like their days of unlimited fun fun are coming to an end when Daddy takes the Vespa away.

The EU hopes the new AMLA will be up and running by 2024 with a total staff of around 250 by the end of the first year. That could be a tall order, given that José Manuel Campa, head of the European Banking Authority (EBA), recently expressed concern over the challenges of recruiting crypto-savvy employees, including paying salaries competitive with those offered by private sector firms .

That’s a little less of an issue right now, as many exchanges have been forced to dramatically reduce their payrolls. But retaining employees may prove difficult if/when the current ‘crypto winter’ thaws and companies swing back into growth mode. Any staff with insider experience may also be highly valued by private firms looking for tips on how to game the new regulatory system, much in the same way that the perpetual ‘revolving door’ between the public and private sectors has prevented cracking down on the excesses of so many other industries.

Once a thug…

Among the exchanges most likely to be targeted by the EU’s new watchdog is Binance, which, while it obtained operating licenses in France and Italy this year, has nevertheless built its brand on non-compliance with local regulations. Frankly, when AMLA’s criteria for identifying a “high-risk” company includes firms whose “serious, systematic or repeated violations of applicable requirements” go unchecked, Binance is the first name that springs to mind.

But don’t take our word for it. Consider Binance CEO Changpeng ‘CZ’ Zhao’s recent attempt to complain about (other) fraudsters trying to revoke Binance’s status as the largest exchange by trading volume. CZ tweeted that “LinkedIn has 7,000 profiles of ‘Binance employees’, of which only 50 or so are real.”

Getting past the crushing irony of CZ bemoaning LinkedIn’s apparent lack of interest in performing proper “know your customer” (KYC) checks on people who open accounts on its platform, there’s also the issue of CZ recently claiming that Binance has 6,000 employees and planning to hire another 2,000. And yet only 50 of these thousand see value in advertising their affiliation with the sector’s shadiest operator? Which still doesn’t have a permanent headquarters? And who claims to own an asset when it suits Binance’s purpose and then denies ownership the moment that asset is taken in violation of the law? Strange, it…

Binance previously hid behind claims to have (a) obtained a license and (b) established corporate roots in Malta to cater to clients based in other EU markets. That came to a halt in 2020 when Malta’s financial regulator publicly called Binance out for its lies.

Unlike other firms that also chose not to see their Maltese applications to fruition, Binance simply chose to create its own reality, a subversion that went on for years. If regulators in France and Italy prove equally inept at ensuring Binance stays on the straight and narrow, the EU’s new AMLA will have its work cut out for it.

See: BSV Global Blockchain Convention, Law & Order: Regulatory Compliance for Blockchain & Digital Assets

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