Jacek Czarnecki is an attorney at Warsaw-based law firm Wardynski & Partners, where he specializes in areas including FinTech, digital currencies and blockchain.
In this opinion piece, Czarnecki discusses recent proposals for EU digital currency regulation, arguing suggestions made by the European Banking Authority are more positive than they initially appeared.
The European Commission’s proposal to regulate digital currency exchanges and custodial wallets has a bit of a bad rep.
Announced in July, the executive branch of the European Union is advising that wallet providers be brought under the scope of its anti-money laundering (AML) and countering terrorist financing (CTF) regulations, and doing so has raised many controversies.
Perhaps most notable have been the European Commission’s proposed definition of “virtual currencies” and its alleged proposal to build a database of users. Both have stoked concerns in the industry.
New topics can be expected to emerge in the course of legislative process, but the most recent voice to complicate the discussion is the European Banking Authority (EBA). The regulatory agency recently published its opinion on the proposal, and some its suggestions haven’t been greeted favorably.
In the past, the EBA has issued a warning to consumers on risks related to digital currencies and a formal opinion on how it believes regulation should be approached.
It’s perhaps the latter document that bears revisiting, as it was here that the EBA proposed bringing select digital currency businesses under the AML and CTF rules, an idea now embraced by the Commission.
EBA knows the matter
What is worth noting is that, despite the criticisms for the organization, the EBA has its finger on the pulse.
What’s more, its comments reveal an understanding of the issues related to digital currency. This is evidenced in EBA’s finding that the use of the word “currency” suggests an analogy with existing fiat currencies, which might not be always the case.
It thus seems that EBA is aware that some tokens developed on blockchains do not necessarily have monetary nature. As I argued in a previous piece, this is one of the problems with the definition of “virtual currency” proposed by the European Commission.
I am not going to argue that all EBA proposals are all praiseworthy.
However, in my opinion they can make the European Commission’s proposal a better regulation – for EU member states, affected firms and the whole EU digital currency and blockchain industry.
Longer transposition period
First of all, the EBA advocated more time for member states to implement, and authorities and market players to apply, new regulations.
According to the European Commission’s proposal, new regulations should be implemented by the EU member states by 1st January 2017.
Less than four months is simply not enough to finish the legislative procedures at both the EU and state level, and comply by the firms with the new regulations. This proposal should be much welcomed.
On regulatory frameworks for digital currencies, the EBA also wants digital currency to remain outside the PSD2 (EU’s new payment services regulation), an idea that is absolutely worth supporting.
PSD2 would not be appropriate to govern digital assets based on public blockchains other than those of purely monetary applications.
As I mentioned, the EBA has suggested that it is aware of the emergence of other digital assets based on blockchain technology, and that this makes application of payment services laws inappropriate.
Proposal clarification
In fact, much of the EBA’s opinion is devoted to pointing out unclear parts of the European Commission’ proposal.
For example, the EBA wants the status of digital currency businesses to be clarified, and it is proposing to define in the AMLD the subjective scope of the proposed new regulations (that is, not only what is regulated, but also who). This is good for the industry, because it could bring further clarification as to who is regulated.
Did EBA propose state-by- state registration? Contrary to what has been already written, the EBA is not advocating for this approach.
It is the European Commission who proposed to require member states to ensure that exchange platforms and custodian wallet providers are licensed or registered in the proposed new wording of Article 47(1).
On the contrary, it is EBA that has noted that this might be a problem.
The EBA made it perfectly clear that it is aware that there are no passporting rights under the AMLD, and that such requirement might result in a state-by-state registration regime.
The EBA also suggested that a new sectoral financial directive devoted only to digital currency issues (that might include a passporting regime) would not necessarily be a good idea.
Therefore, it is not clear what regime the Commission does envision in its “licensing or registration” proposal.
The EBA’s statement reads:
“Take a decision whether either a licensing or a registration regime is most suitable and conducive to the aim of deterring terrorist financing across the EU or, should this not be achievable, at least provide clarity about the features that a national registration or authorization regime should have.”
The EBA is thus not advocating registration or licensing in each member state, but simply wants the Commission to clarify its vague proposal to impose mandatory registration or licensing.
In conclusion, the EBA proposal should not be criticized in advance, as it is in many respects better that the Commission’s proposal.
The legislative process in the EU is underway and each sensible voice, including those of EU institutions like EBA, is needed.
Euro image via Shutterstock