The EU steps up its crypto compliance laws for 2020

5AMLD- what’s in store for the blockchain community and how fintech can stay ahead of global regulation

By Vanessa Malone

The U.S. isn’t the only country cracking down on compliance initiatives surrounding blockchain and digital assets in 2020. Globally, anti-money laundering(AML) and Know Your Customer (KYC) requirements have continued to increase and become more applicable to entities participating in the crypto and overall blockchain ecosystem.

In June 2019 the Financial Action Task Force (FATF), an inter-governmental body established in 1989 to bring about international legislative and regulatory reform to combat money laundering and terrorism financing, amended their global AML Recommendations to require all VASPS (Virtual Asset Service Providers) to be regulated for AML purposes and to monitor and report suspicious activities to relevant bodies. The G20, a group of governments and central bank governors from 19 countries and the European Union, immediately expressed support for these new standards.

On January 10th, the European Union’s 5th AML Directive (5AMLD), was officially signed into law to combat money laundering and terrorist financing in Europe.

According to the European Union’s official site, the law will:

• enhance transparency by setting up publicly available registers for companies, trusts and other legal arrangements;
• enhance the powers of EU Financial Intelligence Units, and provide them with access to broad information for the carrying out of their tasks;
• limit the anonymity related to virtual currencies and wallet providers, but also for pre-paid cards;
• broaden the criteria for the assessment of high-risk third countries and improve the safeguards for financial transactions to and from such countries;
• set up central bank account registries or retrieval systems in all Member States;
• improve the cooperation and enhance of information between anti-money laundering supervisors between them and between them and prudential supervisors and the European Central Bank.

While each of these points will indirectly impact digital asset exchanges, wallet, and other digital asset service providers; the law includes rules specific to these marketplaces. To enhance transparency, exchanges must register with authorities in their domestic locations. Anonymity is also to be limited related to virtual currencies and wallet providers. More power is to be given to European regulators to oversee these new standards and ensure they are being met.

What’s the response?

The community has been torn since the proposed FATF guidelines came out last year and continues today.

All in favor

The cryptocurrency market is still a highly volatile and unregulated space. Pump and dump schemes, wash trades, and other market manipulation tactics are all very prevalent on these exchanges and definitely threaten the validity of cryptocurrency markets as a whole.

Supporters suggest the law will be positive and that the introduction of defined regulations and legal terminology will further legitimize digital assets and entice bigger players such as banks and institutional investors to enter the space.

All opposed

Those opposed are saying it’s ridiculous to regulate digital currencies the same way they do for other financial institutions. Some also say that added regulation will push more people to transact in other, less regulated ways; i.e., a black market crypto exchange.

Exchanges that weren’t proactive in adjusting their compliance programs to match the changing regulations could now see themselves in a huge financial dilemma. They could either close up shop and move to a less stringent jurisdiction or adapt in order to maintain their access to EU-based consumers.

All moving forward

Regardless of whether you agree or not with the new rules, they’re here to stay. So, for those involved with holding, storing, and transacting digital assets that want to stay in the game, it is essential to get up to speed on KYC and AML compliance.

From a competitive standpoint, not only should companies work to implement these new requirements, but they should work to do so in a way that doesn’t scare away users.

Solutions today, for compliance tomorrow

Horizon’s compliance-first methodology has always worked to keep in step with today’s regulatory landscape and make educated guesses as to where it is headed, which we’ve had success in thus far. Our KYC/AML software solutions KYCware and AMLCop already work to keep regulated entities in line with increasing compliance demands, whether it be for their exchanges or general user onboarding processes.

KYCware is an advanced Know Your Customer “KYC” onboarding solution. We supply regulated entities with a white-label app and web solution for onboarding & verifying users, AML screening, & enhanced regulatory compliance. Users download a high-tech, high-touch app and go through advanced ID, document, and identity verification technology including anti-gaming features, a Machine Readable Zone ‘MRZ’ scanner and liveness detection. The forms auto-adjust depending on a users’ jurisdiction and regulatory requirements. We believe this modern onboarding approach reduces friction and maintains an on-brand user experience.

Once submitted, AMLCop automatically screens user details against a proprietary database of global sanctions, Politically Exposed Persons (PEPs), watchlists, and known fraudulent Ethereum wallets. In line with data storage protection regulations, data is stored in memory and never distributed to third-parties. Instead, company representatives securely download and review the streamlined submissions through the hosted web portal. Notably, AMLCop scans wallets during the onboarding process and throughout the entire lifecycle of the digital assets.

All of Horizon’s solutions are integrated with the Ethereum public blockchain. This means that records of all KYC/AML transactions are clearly stored and tamper-proof on the blockchain. This allows for detailed and accountable reporting which is always available for internal checks or any regulatory oversight that may happen.

In conclusion

Although current regulations are focusing on digital currencies, those involved with the emerging digital securities market and overarching blockchain community need to be diligent in maintaining the same level of care when it comes to compliance.

Once you realize there is technology out there to match the growing regulations, the increasing compliance requirements are not so cumbersome.

To see how Horizon’s solutions can seamlessly integrate into your company or offering, please reach the team at horizon@horizonfintex.com. For more information, please visit https://kycware.com/ or https://amlcop.com.