The 5th Money Laundering Directive echoes this definition, describing crypto assets as “digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically”.
The 5th Money Laundering Directive defines crypto asset exchanges as “providers engaged in exchange services between crypto currencies and fiat currencies”.
Fiat currencies are simply legal tender, the value of which is governed by the relevant government bank, for example sterling, dollar, euro etc.
Custodian wallet providers are defined as “entities that provide services to safeguard private cryptographic keys on behalf of its customers, to hold, store and transfer virtual currencies.”
The impact of crypto exchanges and wallet providers becoming ‘Obliged Entities’ under the Money Laundering rules is significant, and the writer believes it will be a milestone in the historical development of such assets with the potential to make them significantly more mainstream.
Those providers who fall within the rules will be obliged to undertake the same approach to procedures that we all see when we enter a new business relationship with a financial institution, do business with a lawyer or accountant or even buy a house, or in some cases an expensive car.
They will be required to undertake Know Your Client (KYC) procedures including obtaining details on identity, beneficial ownership, and proof of the source of funds, and where they suspect Money Laundering or Terrorist Financing is involved, reporting this to the relevant authorities.
The concept of full transparency on the ownership of crypto assets will be anathema to those who developed “crypto” and those early adopters.
But there is no doubt that the lack of transparency around ownership has provided fertile ground for those with less honourable intent to hide funds from the wider authorities, often without paying tax on gains made and transactions undertaken.
We have also started to see guidance from governments on the taxation of such assets and also guidance from the FCA on those matters that fall into the UK financial regulatory space.
This is helpful, as there was a time when crypto seemed to be becoming “the in thing” with a whole new population of investors and entrepreneurs blindly seeking to raise funds for all sorts of projects, without a real understanding of the risks and that some of those activities were in fact regulated.