Anti-Money Laundering Europe (AME) hosted a Digital Currencies Roundtable on Thursday 17 March 2022. The event focused on digital currencies, including Central Bank Digital Currencies (CBDCs) and crypto-assets, in the context of the European Commission's ambitious legislative package on AML/CFT rules, the proposed Markets in Crypto-Assets Regulation (MiCA) and the revision of the Regulation on information accompanying transfers of funds.
The event was moderated by Paolo Panico, from Paolo Panico’s Law Chambers and Chairman of the STEP Europe Region, and the speakers included Ashley Lannquist, Digital Finance Expert, Digital Advisory Unit, International Monetary Fund (IMF), Gabriel Hugonnot, Seconded National Expert for Anti-Money Laundering policy, European Commission Directorate General for Financial Stability and Capital Markets (DG FISMA) and Leigh Sagar, Barrister of England and Wales, Member of STEP Europe.
The Roundtable gathered over 50 high-level stakeholders from the European Institutions, banks and other financial institutions, legal and compliance specialists and the private sector.
Three key takeaways
1. A comprehensive regulatory framework to address ML/FT risks for crypto-currencies is already in place. Nevertheless, there are still implementation challenges and market developments which FATF is continuously monitoring and might call for future adjustments.
This framework consists of the 5th Anti-Money Laundering Directive (AMLD5) together with MiCA and the Revision of the Transfer of Funds Regulation which are currently under negotiation. These describe the obliged entities and specific requirements in line with FATF Standards; ban anonymous crypto-asset wallets and extend the obligation to Virtual Asset Service Providers (VASPs) to obtain and hold required and accurate originator and beneficiary information on virtual asset transfers and to make it available on request to competent authorities.
As mentioned above, the main implementation challenges are linked to the ability of private stakeholders to meet the requirements and supervising VASPs; the interoperability between the different systems (since crypto currency trade knows no borders) and different national data protection and privacy rules.
2. Illicit activity continues to be a significant problem in crypto-assets
Crypto-assets pose specific challenges for regulatory and law enforcements authorities because ML/TF risks can materialise in the unregulated sphere through for example un-hosted wallets or peer to peer crypto-exchanges. This is increasingly important in light of the current Ukrainian crisis, given that sanctions also cover the transfer of crypto-assets. Again here, the main challenge is related to the implementation and how weak jurisdictions can allow to circumvent the sanctions regime.
3. Digital currencies and CBDCs are novel products which bring new challenges, and it is difficult to assess yet the full extent of potential risks that might unfold in this area.
The aim is to strike the right balance between the need to leverage the potential of these products and protect the financial markets, by using the lessons learned from other products such as e-money.
The panellists explored different options for digital currencies - crypto vs digital currencies and CBDCs - highlighting that they start off from different legal and technical forms (i.e. crypto offers pseudo anonymity); depending on whether they include the direct involvement of the central bank or not; are token versus account-based systems etc or are based to the intermediated two-tiered model which seems the most preferred by the central banks.
These different options provide for different degrees of privacy, anonymity and innovation, while introducing specific financial integrity risks for regulatory and enforcement authorities. Therefore, preventative measures like customer due diligence, transaction monitoring and reporting should be taken.
The speakers also reflected on the different Application Programming Interfaces (APIs) used namely government sponsored institution bank versus APIs run by the private sector with overlays and protections by Central Banks.
In this respect, the International Monetary Fund (IMF) has done a lot of work in the Central bank digital currencies (CBDCs) area supporting central banks and governments with bilateral missions to countries, regional educational workshops and different publications to evaluate the opportunities of CBDCs in their countries, the risks and policy implications involved. Some early lessons learned from this exercise are the importance of collaboration with participating private intermediaries, the importance of technology neutrality and the value of market research to understand the needs of potential users.
Two important IMF reports were presented:
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