In an opinion released on October 12, 2016, for the European Parliament, the European Central Bank has made some interesting pronouncements about the financial crime risks arising from the use of digital currencies and Blockchain and distributed ledger technology.
The EU is considering a new directive to mitigate against money laundering and terrorist financing by requiring the licensing of those who act as exchangers of digital currencies (whether it be on the Blockchain, Ethereum or Ripple or any closed system) and those who host or control digital currency wallets. Digital currency wallet providers and exchangers would be required to comply with the anti-money laundering and counter-terrorist financing obligations applicable to money services businesses. Those are described here and include reporting suspicious transactions, terrorist transactions, large transactions and electronic funds transfers; ascertaining and verifying the identity of account holders before undertaking any transactions for those clients; preparing a risk assessment for the activity to mitigate against money laundering and terrorist financing; and implementing a competently designed compliance plan.
The ECB supports the imposition of anti-money laundering controls for digital currencies and their operating systems, as suggested by the Financial Action Task Force (described here), because digital currency transactions can be anonymous. It remains possible to send value of any amount (from $10 to $10 million) in digital currency from any two persons across a room or across the planet without law enforcement being aware of the transaction, violating sanctions law, laundering funds or funding terrorists. Despite concerns raised in financial crime circles about digital currencies since as early as 2012, no one in the private sector involved in this sector anywhere in the world has removed the anonymity of digital currency transactions or developed tech to mitigate against financial crimes.
The ECB noted that they pose “greater risks than traditional means of payment” because the transfer is online (they likely meant to say immediate and M2M); and whole payment ecosystems can exist for payments without ever engaging the financial system (meaning that a person can keep obtaining and spending money through a wallet without ever cashing out and being detected at the cash out intersection point).
The ECB cautioned the EU against jumping onboard to promote the Blockchain or distributed ledger technology because, inter alia, they represent illegal currencies.
The ECB also cautioned that digital currencies are a threat to the supply of currency (noted a number of years ago here). The ECB also suggests expanding the definition of digital currencies (or virtual currencies) to includes its non-payment uses that include its use as a means of exchange.
In order to address some of these risks, the ECB recommends that the EU require laws be amended to 100% remove anonymity so that FIUs can know the identity of every digital currency holder globally.