15 January 2019

Virtual currency services providers to undergo authorisation process under new AML law

In 2019, the Netherlands will feel the impact of the revised Fourth Anti-Money Laundering Directive, where the rules against money laundering and terrorist financing will extend to virtual currency services providers. These are: (i) providers engaged in exchange services between virtual currencies and fiat currencies, and (ii) custodian wallet providers.

Implementation in the Netherlands

The revised directive entered into force on 9 July 2018 and must be implemented by EU member states by 10 January 2020. In the Netherlands, a public consultation on the proposed implementation was launched on 11 December 2018.

In addition to extending the scope of current Dutch anti-money laundering (AML) legislation to include virtual currency services providers, the proposed implementation also requires these providers to obtain authorisation from the Dutch Central Bank before being allowed to provide their services. The revised directive stipulates that providers of these virtual currency-related services should at least be subject to registration, which is less stringent. The Dutch legislature has instead opted for an authorisation requirement due to the high risks of money laundering and terrorism financing inherent to those services. In that context, the authorisation requirement aims to ensure that virtual currency services providers comply with the stringent (enhanced) AML requirements stemming from the Dutch AML legislation. Authorisation will be granted when a provider demonstrates it is able to comply with specific provisions of that legislation. As part of the authorisation process, a provider will also have to demonstrate that its day-to-day policymakers are fit for their position and that their integrity is beyond doubt.

The requirement to obtain authorisation applies to any business providing virtual currency exchange or custodian wallet services within or from the Netherlands. This means that virtual currency services providers located in other countries will also be subject to the required authorisation if they provide their services on a cross-border basis to clients located in the Netherlands. The consultation proposal includes an exemption for providers that have obtained a similar authorisation in another EU member state. However, if the relevant member state has no such authorisation procedure in place – for example, if it has implemented the registration requirement stipulated by the revised directive – the relevant provider cannot make use of the exemption.

 

Potential impact

At first glance, this new approach towards virtual currency services providers seems to restrict market access for those businesses. However, this piece of legislation could instead boost virtual currency related business activity in the Netherlands.

Due to the high risk associated with virtual currencies, banks have often chosen the prudent route and – as a matter of policy – have shied away from doing business with virtual currency services providers, rather than risk non-compliance with any AML requirement. As a result, virtual currency services providers have faced difficulties establishing business relationships for basic business facilities, such as a banking account.

The implementing legislation is expected to remedy this stalemate. First, the required authorisation will result in a network of virtual currency services providers with a more robust AML framework, bringing more legitimacy to these providers and the virtual currency market as a whole. Second, in terms of the cautious approach banks take toward virtual currency services providers, the required authorisation may act as a de facto stamp of approval by the Dutch Central Bank. After all, if the Dutch Central Bank has assessed and approved the AML measures that a provider has in place, a bank should be able to act on that approval – in other words, the bank will be able to enter into a business relationship with that provider without risking repercussions for onboarding a provider that might be operating in uncharted legislative AML territory. Of course, the bank would still be required to monitor its relation with the provider on an ongoing basis.

As such, the implementing legislation is expected both to provide more legitimacy to the virtual currency market and to assist other parties in onboarding virtual currency services providers.

 

What can be done to prepare?

Virtual currency services providers already active in the Netherlands should keep a close eye on developing legislation and should start adopting its provisions. Although the implementation date is set for 10 January 2020, the legislation as published for consultation contains no transition period as of yet. This would mean that as soon as the legislation enters into force, virtual currency services providers may only operate in the Netherlands if they have obtained the required authorisation from the Dutch Central Bank. At the same time, formal applications for the required authorisation can only be filed once the legislation enters into force. Virtual currency services providers may therefore find themselves between a rock and a hard place. We do, however, expect the Dutch Central Bank to facilitate informal application procedures before the legislation’s effective date. This would allow the Dutch Central Bank to grant formal authorisation to compliant providers directly from that effective date.

Banks and other financial institutions should prepare for the upcoming legislation by discussing this topic with any established business relationships with virtual currency services providers. This will ensure that these providers comply with the amended AML legislation after the implementation of the revised directive. Institutions that have been reluctant to onboard virtual currency services providers due to money laundering or terrorism financing risks would do well to prepare to accept these providers once they have obtained the necessary approval from the Dutch Central Bank.

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