A significant advantage of virtual currencies is that they are decentralised. No bank or authority poses as the intermediary for virtual currency transactions, which means payments can be transferred directly from one account to another. This creates both advantages and risks to security. On the one hand, transactions do not contain personal information and cannot be erased from the blockchain; however, on the other hand, authorities cannot trace transactions back to an individual user and cannot stop a transaction from being concluded.
Bitcoin, for better or worse, was used to sponsor WikiLeaks after government authorities had frozen its accounts.(1) On similar grounds, there is the continued threat that cryptocurrencies are used to sponsor terrorism, with Europol estimating that such transactions are discovered in 40% of high-profile investigations.(2) Moreover, virtual currencies can be used for money laundering.
These risks have inevitably drawn the attention of EU and domestic regulators.
In a European Parliament report of 2018, it was noted that the most pertinent issues regarding cryptocurrencies are:
- the anonymity of its users;
- the cross-border nature of transactions; and
- the lack of a central authority.
EU regulation with regard to virtual currencies centres on various anti-money laundering directives.(3)
In response to the limited scope of EU Fourth Anti-money Laundering Directive (2015/849 EU) (AMLD4), which did not extend onto virtual currencies, the European Union adopted EU Fifth Anti-money Laundering Directive (2018/843/EU) (AMLD5), which entered into force in 2018 and must be transposed domestically by 10 January 2020. This directive was the first to introduce cryptocurrencies into its definition and also covers cryptocurrency services (ie, custodial wallet providers and virtual currency exchange providers). These entities are regulated similarly to banks and financial institutions and must perform customer due diligence (ie,…