RegWatch: Austria — The Gateway to Europe
By Bryan Hollmann, Stadler Völkel Attorneys at Law
Merkle Science’s RegWatch provides expert commentary on the impact of recent regulatory developments from our partners. This article has been contributed by Bryan Hollmann, Counsel at Stadler Völkel Attorneys at Law, based in Vienna, Austria.
Austria is an attractive jurisdiction for virtual currency companies looking to enter the European market. As a member of the European Union, Austria offers access to all 27 member states via the freedom of establishment and the freedom to provide services enshrined under EU law. Austria has a competent and accessible financial regulator, the Financial Market Authority (FMA), which is familiar with business models involving virtual currencies. For these reasons, many virtual currency companies are choosing Austria as their entry point into the European market.
This article discusses two key regulatory considerations for virtual currency companies doing business in Austria: the implementation of the EU 5th Anti-Money Laundering Directive into Austrian law and the introduction of a regulatory sandbox in Austria.
Obligations of Virtual Currency Service Providers
The implementation of the EU 5th Anti-Money Laundering Directive into Austrian law went into force on 10 January 2020 and imposed new KYC/AML obligations on companies providing virtual currency services. In Austria, virtual currency services consist of the following:
- services to safeguard private cryptographic keys, to hold, store and transfer virtual currencies on behalf of a customer (custodian wallet providers);
- exchanging of virtual currencies into fiat currencies and vice versa;
- exchanging or one or more virtual currencies between one another;
- transferring of virtual currencies;
- the provision of financial services for the issuance and selling of virtual currencies.
Virtual currency service providers are “obliged entities” under the Austrian Financial Market Anti-Money Laundering Act (FM-GwG) and are subject to the same KYC/AML obligations as credit and financial institutions. Among other things, virtual currency service providers must verify the identities of their customers and monitor business relationships on an ongoing basis.
For most virtual currency service providers, customer identification takes place either via video conference or reference transaction, where the customer makes the first payment from an account opened in the customer’s name with a credit institution within the EU.
Virtual currency service providers are also obliged to obtain and check information about the source of funds used within the scope of the business relationship. This can be particularly difficult for companies transacting in virtual currencies. The risk profile of the customer generally determines the extent of the inquiry; however, when the circumstances mandate a more thorough examination, most virtual currency companies outsource a forensic blockchain analysis to a third party.
Virtual currency service providers who intend to provide their services in Austria or to offer their services from Austria are required to register with the FMA. An application for registration must include, inter alia, a description of the company’s business model and the company’s internal control system for preventing money laundering and terrorist financing. Registered virtual currency service providers are listed in the FMA’s company database; currently there are thirteen companies registered in the database.[1]
Although not required, it is usually helpful to engage legal counsel to prepare the application for registration as a virtual currency service provider and to handle any subsequent information requests by the FMA. The registration process typically takes a few weeks after the initial application has been submitted.
Establishment of a Regulatory Sandbox
Although Austrian supervisory laws are meant to be technology neutral, virtual currencies and blockchain technology in particular raise complex questions concerning the intersection of technology and the law.
To foster innovation in this uncertain regulatory area, Austria plans to establish a “regulatory sandbox” for fintech companies starting 1 September 2020. The regulatory sandbox is designed to give companies the opportunity to test and develop their business models under the supervision of the FMA.
To be considered for inclusion in the sandbox, a company generally must have an innovative business model that is ready to be tested in the market. Sandbox participants must also have open regulatory issues that can be clarified via participation in the sandbox. The FMA is also authorized to grant companies participating in the sandbox limited licenses. Participation in the sandbox is limited to two years.
The regulatory sandbox presents a unique opportunity for virtual currency companies to develop new business models in cooperation with the FMA and to gain legal certainty in a fast paced and quickly changing field. The legitimacy gained from participation in the sandbox is bound to set participants apart from their competitors and put participants on track for successful entry to the European market.
How Merkle Science Can Help
Merkle Science provides blockchain transaction monitoring tools to assist virtual currency businesses and financial institutions address their risk exposure to virtual currency related crime in accordance with Austria’s FMA AML compliance requirements.
Using the firm’s flagship product, Block Monitor, compliance teams can create and configure custom risk rules to identify and detect transactions:
- From/to specific virtual currency entities, such as the list of FMA registered virtual currency businesses (for automatic approval)
- Above specific transaction amounts to comply with FATF Travel Rule and EU AMLD5 requirements
- Beyond a certain “taint” percentage, which provides an indication of a transaction history linked to potentially risky activities
Within Block Monitor, users can test and optimize these risk rules within a “sandbox” environment before implementation to avoid false positives and too many/few relevant risk alerts.
For more information about how Merkle Science could help your firm comply with Austrian and EU virtual currency requirements contact sales@merklescience.com.
For any questions regarding the FMA sandbox and other Austria/EU specific compliance requirements please contact Stadler Völkel Attorneys at Law.
About Stadler Völkel Attorneys at Law
Stadler Völkel Attorneys at Law offer qualified advice in selected key areas of business law. Our approach is characterized by the focus on solving and avoiding legal risks. We take the time to get to know your business. This enables us to offer tailor-made solutions at the highest professional level. Stadler Völkel Attorneys at Law stand for the best quality, trust and professionalism.
Disclaimers:
This publication is general in nature and is not intended to constitute legal or investment advice. You should seek independent professional advice before taking any action in relation to the matters dealt with in this publication.
This article is not endorsed by any regulatory authority.
