The European Parliament is set to quiz several nominees for European Commission posts this week, including Britain’s Lord Jonathan Hill, who is scheduled to appear before parliament today. Notably, Lord Hill is expected to discuss digital currencies during his appearance.
Lord Hill, the commissioner-designate for the Financial Stability, Financial Services and Capital Markets Union portfolio, has already attended one hearing, which took place last week. At that hearing, Hill and another designate were posed a number of questions from lawmakers and committees, submitted by Martin Schulz, the President of the European Parliament.
Lord Hill was asked a further set of supplementary questions to elaborate his position on the matter and to outline his recommendations for digital currencies like bitcoin.
Finding a balance
In his response, which leaked to media ahead of his second hearing, Lord Hill points out that bitcoin is just one of more than 200 virtual currencies and indicates his belief that there is a need to find a balance between safety and innovation.
Cryptocurrencies can often bring “faster and cheaper” means of payments than traditional bank transfers, he says, but they suffer from a lack of regulation, security and capital requirements that currently apply to other payment services providers, thus creating prudential risks.
The issue falls within the responsibilities of the new Director General for Economic and Financial Affairs, Lord Hill adds, pledging that he would ensure the development of digital currency markets is kept “under close scrutiny” with a view to early identification of potential emerging risks.
“If such risks are identified,” he continues, “I am ready to discuss quickly with this House what needs to be done in terms of better protecting users – as, in fact, was done for payment services.”
Lord Hill further outlines his first proposal for digital currency regulation:
“One possibility would be to propose to include Virtual Currency Exchange Platforms as ‘obliged entities’, and thereby subject to the customer due diligence requirements in the Directive. This would send a clear signal to Member States and encourage common solutions at EU level.”
Commission role
The European Commission has played an active role in discussions of the EU’s task force on virtual currencies, led by the European Banking Authority (EBA). That effort, Lord Hill says, helped identify the main risks associated with cryptocurrencies and put forth a number of recommendations, explaining:
“This resulted in an Opinion of the EBA that recommended that EU legislators consider declaring market participants at the direct interface between conventional and VCs, such as virtual currency exchange platforms, to become ‘obliged entities’ under the EU Anti Money Laundering Directive and thus subject to its anti-money laundering (AML) and counter terrorist financing (CFT) requirements.”
According to existing EU legislation and the 3rd AML directive, financial institutions are deemed obliged entities, which means they must comply with AML and CFT requirements. The directive itself offers a certain level of flexibility, since it enables a tailored risk-based approach, proportionate to the size and nature of the obliged entity.
The EBA recommended that EU legislators consider declaring digital currency exchanges as obliged entities earlier this year.
Further discussions on the subject are expected later this month, during a new round of negotiations on the commission’s 4th AML directive. Lord Hill indicates that commissioner designate Věra Jourová would be in charge of the issue.
European Parliament image via Shutterstock