Should They Stay or Should They Go? Crypto Firms in the EU Must Decide
The European Union lately has been a hotbed for political and regulatory developments that could have a considerable impact on the day-to-day operations of the continent’s financial service providers. While the United Kingdom finally following through on its pledge to leave the bloc introduced political uncertainty for businesses with U.K. operations, implementation of new EU-wide Anti-Money Laundering legislation brought about regulatory certainty — along with the compliance burden that invariably comes with it.
On another note, European financial authorities are increasingly vocal about their intentions to create a new regulatory framework for digital assets that would balance robust security measures with allowing smooth expansion of the financial technology sector.
In the regulators’ crosshairs
In the opening weeks of 2020, signals abounded that various European regulatory bodies have digital assets high on their agendas for the year. The potentially disruptive enforcement of the EU’s 5th Anti-Money Laundering Directive, or 5AMLD, has been some time in the making and, as such, came as no surprise to stakeholders in the European crypto industry.
Although not crypto-specific, the law holds the potential to massively increase the amount of personal information in the form of Know Your Customer details that user-facing providers of digital asset services would have to request from their customers. As Cointelegraph reported, the anticipated compliance burden has already driven some services to fold and others to relocate operations elsewhere.
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The European Securities and Markets Authority, the EU’s financial watchdog, has earlier announced its determination to ensure that the European financial system profits from the sector’s digitization while erecting appropriate safeguards against attendant security threats.
In the ESMA’s Strategic Orientation 2020–22, which outlines the agency’s priorities over the next two years, it admitted that “the dangers of cyberthreats to the financial system as a whole and a sound legal framework for crypto-assets are increasingly becoming areas of focus for ESMA.”
Within the EU’s executive branch — i.e., the European Commission — work is apparently underway to develop a new digital finance strategy for the bloc. In December 2019, the commission announced a public consultation process, seeking input in order to inform the prospective regulatory framework for crypto assets. Interested parties are encouraged to submit their responses to the questionnaire by mid-March.
The costs of certainty
Deribit, a crypto derivatives exchange platform that was previously based in the Netherlands, has arguably been the most conspicuous case of the fallout from the 5AMLD implementation. Anticipating unreasonable compliance costs in the wake of the new legislation, the company announced that it would be moving its operations to Panama. John Jansen, Deribit’s CEO, explained to Cointelegraph:
“The focus of the new regulatory framework is to improve transparency. However, this is done by almost fully sacrificing any privacy of cryptocurrency holders. Imposing such severe KYC procedures to crypto-to-crypto service providers would cause increased service costs and redundant, time-consuming regulatory burden to users.”
Jansen added that he expects more crypto firms to follow Deribit’s suit, either ceasing operations or leaving the EU for other jurisdictions.
Some industry professionals noted that the enforcement of the 5AMLD has been somewhat rushed and that the lawmakers’ particular focus on digital assets could be due to certain extraneous circumstances. Elsa Madrolle, international general manager for blockchain solutions provider CoolBitX, told Cointelegraph:
“The regulatory climate in Europe, which for years was relatively benign compared to developments in the U.S., was derailed by news headlines in 2015–2016 that Hamas-claimed terrorist attacks were being financed through cryptocurrency campaigns. This prompted the EU to accelerate its plans for the Fifth Money Laundering Directive which was published before all member states even had a chance to fully implement 4AMLD.”
Other observers argue that the new Anti-Money Laundering legislation could also be viewed as a benign development, as it introduces at least some regulatory clarity without disrupting most operations of crypto enterprises. Nathan Catania, a partner at global digital asset policy and regulatory adviser XReg Consulting, told Cointelegraph:
“5AMLD has been coming for some time and the industry was well aware of this. However, I do think a few will have been caught out and have failed to appreciate just what is involved in complying. We have seen businesses seeking to over comply with requirements to avoid the perceived threat of regulatory action being taken against them for non-compliance.”
EU’s systemic issues
At face value, it may seem that the EU regulatory landscape presents a coherent whole, with directives dispatched from Brussels binding the governments of all member states to act in uniform ways.
However, a closer look at the EU’s policy structures reveals a much more fluid picture, where oftentimes broad EU-level regulatory frameworks leave national governments enough wiggle room to introduce ground rules that can vary significantly from one country to another. This situation can be suboptimal for crypto firms seeking compliance in several EU member states. According to CoolBitX’s Madrolle:
“The complexity of accessing Europe for any industry is exacerbated by the lack of a common regulatory regime. EU directives and regulations often have enough room for interpretation for national governments to apply their own political agenda. As a result, regulation of the cryptocurrency sector across Europe ranges from the more permissive, often in offshore locations, to the highly restrictive.”
Stepan Uherik, the chief financial officer of SatoshiLabs, the company behind the hardware wallet Trezor, described the existing European laws surrounding cryptocurrencies as often “unclear and fragmented” — which, in his opinion, could drive blockchain businesses away from the EU and toward less demanding jurisdictions. Uherík told Cointelegraph:
“Generally speaking, the EU certainly ranks first among the regions with the strictest cryptocurrency regulation. However, the main reason is often even harsher transposition of the EU directives by the individual states. An example is the Czech Republic, which came up with the term ‘person providing virtual currency-related services’ under the new regulation. This concept has an infinite degree of interpretations, and it could theoretically range from restaurants or shops accepting payments in cryptocurrencies to consultants, developers and contractors who work for cryptocurrency companies.”
Catania from XReg Consulting added that uncertainty in regard to the legal classification of digital assets in European law remains a major concern, although policymakers are aware of the problem and are taking steps to alleviate it:
“One of the challenges for some crypto firms in the EU is the lack of clarity around the classification of crypto assets and whether they fall within an existing EU financial services regime (e.g., they could be a financial instrument under MiFID). However, this presents issues at a global level and there is work being done by the EU to clarify this.”
The impact of Brexit
The United Kingdom’s departure from the ranks of the EU could seem like a tremendous headache for crypto firms operating on both sides of the English Channel. However, the experts surveyed by Cointelegraph are quite unanimous in considering Brexit a particularly nonconsequential event in this context.
Catania observed that “Brexit is not currently a concern, as most crypto-related activities are either unregulated or only regulated for AML purposes.” Likewise, Uherik sees little impact of Brexit beyond short-term market volatility:
“Brexit and the uncertainty associated with it will, in the short term, affect the mood in the crypto markets and Bitcoin’s volatility. We do not think that any of the possible scenarios could cause a significant disruption in the cryptocurrency market. Bitcoin and the connected companies have already demonstrated long-term resistance to local crises.”
Madrolle thinks that the U.K. will remain a preferred destination for expanding United States-based digital asset companies, as evidenced by Fidelity Digital Assets’ move to establish its presence in Great Britain in December, adding:
“On one hand, political uncertainty is never attractive to a business looking for a foreign base — on the other, the U.K. remains one of the most familiar and attractive locations for U.S. firms to establish an outpost.”
Overall, the drive to bring crypto services providers under the scope of global AML regulation is not unique to the EU, as Catania noted. Similar processes occur in many other jurisdictions, and it is just a matter of time before digital assets attain a near-universally regulated status. While it is possible that more companies will follow Deribit’s path and exit the EU due to the increased regulatory burden, the majority will remain and eventually reap the benefits of their compliant status.