Impending European Regulation: Who’s Affected and What To Do

Karen Hsu
Karen Hsu
Jun 12 · 3 min read

“We see that crypto-assets are here to stay. Despite the recent turbulence, this market continues to grow.”

Valdis Dombrovskis, Vice President of the European Commission, 2018

As evidence of the E.U.’s confidence in crypto-assets or digital assets, the E.U. has continued to improve classification of crypto assets and determine if existing financial regulation can be applied or if new rules need to be developed.

On the other hand, according to Interpol, criminals used cryptocurrency to launder as much as $5.5B in 2017 in Europe.

“Money launderers have evolved to use cryptocurrencies in their operations and are increasingly facilitated by new developments…”

- Europol, 2018

The E.U.’s recognition that crypto-assets are here to stay and concerns over illicit transactions involving crypto-assets have paved the way to EU’s 5th Anti-Money Laundering Directive (5AMLD). The deadline for all EU member states to implement its provisions into their national law is January 10, 2020. Under this directive, fiat-to-cryptocurrency exchanges and custodian wallet providers, will, for the first time, need to comply with EU anti-money laundering rules. The U.S. and other parts of the world are likely to follow as governments continue to recognize that digital assets are here to stay. These are ways crypto exchanges and wallet providers will be affected by 5AMLD:

  • They will need to carry out identity checks on their customers, as well as their customers’ beneficial owners (where applicable).
  • They will need to report suspicious transactions, perform customer due diligence (CDD) and submit suspicious activity reports (SAR).
  • They will need to register with the authorities in their respective countries, e.g. Financial Conduct Authority for the UK.

The goal of the directive is to help reduce the anonymity associated with cryptocurrency transactions. As cryptocurrency transactions are easier to track than cash transactions, the reality is cryptocurrency exchanges and wallet providers have a number of ways to comply with new regulation, including some special cases:

  • Tracking cash through a currency exchange is virtually impossible. Tracking digital assets through a currency exchange can be done with the right product.

In this example, BlockchainIntel tracked stolen Dash that was then exchanged into bitcoin. BlockchainIntel was then able to trace the exchanged bitcoin to a series of bitcoin transactions that appeared to take place in locations around the world. Some of these locations were highly unusual given the origin of the funds (e.g. Republic of Moldova and Russia).

Using a risk score, companies can immediately flag addresses with transaction histories associated with fraud and stop transactions with criminal entities. The reasons for a high risk score (e.g. known scam and transaction locations) provide further detail for immediate action, evaluation and/or reporting.

  • Some coins have privacy features that are thought to make it harder to identify transactions and therefore comply with laws resulting from 5AMLD. Dash offers a PrivateSend feature to obscure the origin of funds. This feature is actually used in a small percentage of Dash transactions. In addition, PrivateSend transactions can be identified using the same product described above. In the example below, you can automatically detect when a Dash address has PrivateSend transactions associated with it. If it is your company’s policy to stop transactions with these addresses, then transactions can be stopped when an address’s risk score is 8 with an indicator code of C2 — PrivateSend transaction.

Putting in place transaction monitoring solutions can help automate the effort of stopping unwanted transactions, identifying and reporting on suspicious activity, and performing customer due diligence. Using a solution that can trace funds through currency exchanges and privacy features can provide organizations with an edge in compliance as more nations publicly acknowledge digital assets are here to stay.

For more on how your organization can increase wallet security and comply with new regulation, email or see BlockchainIntel’s website.

Karen Hsu

Written by

Karen Hsu

Blockchain; Machine Learning and analytics