Financial sector advisors are warning that the European Commission’s plans to crack down on the crypto sector, bringing crypto exchanges and service providers under stricter anti-money laundering (AML) rules, are already prompting some firms to relocate business outside of the EU.
Robert Kopitsch, head of financial services and fintech Europe at Brussels-based consultancy APCO, criticised proposals put forward by the EU’s executive arm in late July – which aim to strengthen the bloc’s AML framework by, among other measures, setting up an EU AML authority and requiring exchanges and crypto services companies to verify users’ identity – as ill fit for purpose and out of tune with the structure of the underlying sector.
“Applying old-school thinking to new types of technology is problematic” and risks forcing “the new ecosystem into old structures” that were proportionate for traditional financial services, Kopitsch said.
“You have to acknowledge that what you’re trying to regulate is different than what you are used to regulating.
“If you do it wrong, you harm your own competitiveness. People and industry players will opt out of the system because they have technological opportunities to do it differently,” he warned.
Michael Juenemann, partner at international law firm Bird & Bird, said that some of the group’s clients believed “the crypto space should remain decentralised and [were] already exploring leaving the jurisdiction to avoid potential regulation.”
“Obviously, there will be the respective movements,” said Juenemann. “We […] see from a lot of discussions with clients that some are asking ‘How can I comply?’, and others are asking ‘How can I leave Europe?’”
At a broader global level, regulatory attempts to scrutinise the widely under-regulated blockchain and crypto sector, whose functioning is inherently linked to a decentralised system, have faced criticism in the recent past from market participants who see a lighter-touch regulatory framework as the key to attracting and retaining crypto business.
The sector’s decentralised nature is “part of [its] selling point,” argued Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, “in that it is not managed by any specific central bank and is out of the control of authorities around the world.”
The challenge with requiring an higher level of user data is that “there are some parts of the crypto world where its pure anonymity is very much valued,” she added.
Kopitsch added that going ahead with the Commission’s proposals would mean missing out on one of the last “big opportunities that are still out there” for the EU to support the financial sector rather than “over-regulating it”.
A more nuanced global reality
Conversely, Juenemann had an overall positive view on the AML crypto plans, arguing that part of the industry has been preparing for upcoming regulations and stricter requirements, with some already voluntarily complying with Know Your Customer (KYC) practices, he said.
Caitlin Barnett, director of regulation and compliance at New York-based Chainalysis, conveyed a similar picture around the market’s expectations for increased regulation, also based on international standards and regulatory initiatives put forward in the past few years.
“The European Commission’s proposals are not surprising,” she said. “They are aligned with global regulatory guidance put out by the Financial Action Taskforce,” the global AML and terrorist financing watchdog.
In areas “where there was lack of regulatory clarity, crypto firms implemented compliance best practices, which will set them up to be successful if these AML regulations are implemented,” she added.
Barnett expected the EU proposals to “most likely” be followed by a number of other agencies and jurisdictions rolling out similar plans, as policymakers around the globe “have been more focused on implementing regulation aligned with FATF guidance for the crypto industry over the past few years, and this trend will continue.”
At a key level, the analyst also pointed out that strengthening the regulatory framework around the sector “will help further legitimise the industry and allow for greater participation.”
Similarly supportive of the EU proposals, Juenemann argued that the EU Commission’s efforts to regulate the crypto sector through the service provider channel represented a stronger option than applying reporting and AML requirements to individual crypto market participants as under existing rules, as the latter would then need to apply for a licence. “That’s impractical and more burdensome for the regulator than just regulating the exchanges.”
“If you want to regulate, you need to have effective means of enforcement,” he said.
Additional reporting by Anna Brunetti