European Central Bank (ECB) strongly supports new EU Anti-Money Laundering Directive (20 October 2016)

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Virtual currencies: while it is appropriate for the Union legislative bodies to regulate virtual currencies from the anti-money laundering and counter-terrorist financing perspectives, they should not seek in this particular context to promote a wider use of virtual currencies

On 19 August 2016 and 23 September 2016, the European Central Bank (ECB) received requests from the Council and the European Parliament respectively for an opinion on a proposal for a directive amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and amending Directive 2009/101/EC (note 1), hereinafter the “proposed directive”.

Regulation of virtual currency exchange platforms and custodian wallet providers

The proposed directive expands the list of obliged entities to which Directive (EU) 2015/849 of the European Parliament and of the Council (note 2) applies in order to include providers engaged primarily and professionally in exchange services between `virtual currencies' and 'fiat currencies' (understood in the proposed directive to be currencies declared to be legai tender [note 3]) and wallet providers offering custodial services of credentials necessary to access virtual currencies (hereinafter 'custodia' wallet providers') (note 4).
The proposed directive also requires Member States to ensure that providers of exchanging services between virtual currencies and fiat currencies and custodian wallet providers are licensed or registered (note 5).
The ECB strongly supports these provisions, which are in line with the Financial Action Task Force (FATF) Recommendations (note 6), given that terrorists and other criminal groups are currently able to transfer money within virtual currency networks by concealing the transfers or by benefiting from a certain degree of anonymity on such exchange platforms.
The use of virtual currencies also poses greater risks than traditional means of payment in the sense that the transferability of virtual currency relies on the internet and is limited only by the capacity of the particular virtual currency's underlying network of computers and IT infrastructure.

Digital currencies do not necessarily have to be exchanged into legally established currencies

In this context, the ECB also mentions that digital currencies do not necessarily have to be exchanged into legally established currencies.
They could also be used to purchase goods and services, without requiring an exchange into a legal currency or the use of a custodial wallet provider.
Such transactions would not be covered by any of the control measures provided for in the proposal and could provide a means of financing illegal activities.

The Union legislative bodies should take care not to appear to promote the use of privately established digital currencies

The ECB recognises that the technological advances relating to the distributed ledger technology underlying alternative means of payment, such as virtual currencies, may have the potential to increase the efficiency, reach and choice of payment and transfer methods.
The Union legislative bodies should, however, take care not to appear to promote the use of privately established digital currencies, as such alternative means of payment are neither legally established as currencies, nor do they constitute legal tender issued by central banks and other public authorities (note 7)

The ECB has several concerns

The ECB has several concerns as regards the differences that exist between what the proposal refers to as 'fiat currencies' and `virtual currencies', one of which is the volatility associated with virtual currencies, which is typically higher than with currencies issued by central banks or whose issue is otherwise authorised by central banks, as this volatility does not always appear to be related to economic or financial factors.
Other concerns are that:
(a) unlike the holders of legally established currencies, the holders of virtual currency units typically have no guarantee that they will be able to exchange their units for goods and services or legal currency in the future;
(b) the reliance of economic actors on virtual currency units, if substantially increased in the future, could in principle affect the central banks' control over the supply of money with potential risks to price stability, although under current practice this risk is limited.

Thus, while it is appropriate for the Union legislative bodies consistent with the FATF’s recommendations, to regulate virtual currencies from the anti-money laundering and counter-terrorist financing perspectives, they should not seek in this particular context to promote a wider use of virtual currencies.

Notes

1) COM (2016) 450 final.
2) Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC (OJ L 141, 5.6.2015, p. 73).
3) See recital 6 of the proposed directive.
4) See recital 6 and point (1) of Article 1 of the proposed directive.
5) See point (16) of Article 1 of the proposed directive.
6) See the ATF's 'International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation: The FATF Recommendations' (February 2012). See also the `FATF Report Virtual Currencies Key Definitions and Potential AML/CFT Risks' (June 2014) and the FATF `Guidance for a risk-based approach - Virtual Currencies' (June 2015). All documents are available on the FATF's website at: www.fatf-gafi.org.
7) See page 13 of the Explanatory Memorandum accompanying the proposed directive and recitals 6 and 7 of the proposed directive. See also the European Parliament Committee on Economic and Monetary Affairs' Draft report on virtual currencies (2016/2007 (INI)) of 23 February 2016.

Annex

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  • Opinion of the European Central Bank of 12 October 2016 on a proposal for a directive of the European Parliament and of the Council amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and amending Directive 2009/101/EC - CON/2016/49 (pdf, 68 K, 8 pp.),

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