ARTICLE IN PRESS

computer law & security review (2017)

Available online at www.sciencedirect.com

ScienceDirect

w w w. c o m p s e c o n l i n e . c o m / p u b l i c a t i o n s / p r o d c l a w. h t m

Virtual currencies under EU anti-money

laundering law

Niels Vandezande *
KU Leuven Centre for IT & IP Law imec, Leuven, Belgium

A B S T R A C T

Keywords: The goal of this paper is to analyze the extent to which virtual currencies are regulated under
Virtual currencies EU financial and economic law, with particular attention to cryptocurrencies. The focus of
EU law this paper is put on recent developments regarding anti-money laundering legislation. In
E-money the last decade, the EU has adopted several legal frameworks governing different aspects
Payment services of the payments landscape, most notably regarding payment services and electronic money.
Anti-money laundering However, it remains unclear how virtual currencies and more in particular cryptocurrencies
AML fit under those legal frameworks. This paper will first briefly analyze whether core legis-
lation in the fields of payment services and e-money can apply to virtual currencies. Next,
and more importantly, the focus will be put on recent developments at the EU level, which
aim to bring certain virtual currency service providers under the scope of anti-money laun-
dering rules. While at the moment only such inclusion under anti-money laundering rules
appears to be viable, it remains to be seen what the consequences of this evolution are for
developments in virtual currencies. This paper provides an analysis of a regulatory issue
currently debated by legislators worldwide. In doing so, it aims to provide insights valu-
able to service providers active in this nascent market.
2017 Niels Vandezande. Published by Elsevier Ltd. All rights reserved.

as a virtual world. These virtual currencies can generally not

1. Virtual currencies
1.1. Types of virtual currencies
The last few years have brought significant changes to the land-
scape of commercial transactions. Not only e-commerce and
its mobile offshoot m-commerce continues to thrive, new
forms of payment services and service providers have been in-
troduced. One notable development is the rise of virtual
currencies. There are different types of virtual currencies.1 Some
virtual currencies are deployed within a closed system such
be obtained with legal tender, nor can they be exchanged for
legal tender. A second type is the unidirectional virtual cur-
rencies, such as Amazon Coins or the now abolished Facebook
Credits and Microsoft Points. These virtual currencies can be
purchased against legal tender, but they cannot be converted
back into legal tender. The last type of virtual currencies is bi-
directional virtual currencies. These virtual currencies can be
obtained against legal tender, and can be exchanged back into
legal tender. The prime examples are so-called cryptocurrencies,
such as bitcoin, which are distinct in not being issued by a
central authority.

* KU Leuven Centre for IT & IP Law imec, Sint-Michielsstraat 6 box 3443, 3000 Leuven, Belgium.
E-mail address: niels.vandezande@kuleuven.be, https://www.law.kuleuven.be/citip/en/about https://www.iminds.be/en#.
1
The typology used here follows that proposed by the European Central Bank. ECB, Virtual Currency Schemes (ECB 2012) 1316.
http://dx.doi.org/10.1016/j.clsr.2017.03.011
0267-3649/ 2017 Niels Vandezande. Published by Elsevier Ltd. All rights reserved.

Please cite this article in press as: Niels Vandezande, Virtual currencies under EU anti-money laundering law, Computer Law & Security Review: The International Journal
of Technology Law and Practice (2017), doi: 10.1016/j.clsr.2017.03.011
 ARTICLE IN PRESS
2 computer law & security review (2017)
In terms of usability, closed scheme virtual currencies prin-
cipally only serve the single purpose for which they are created.
An example here is World of Warcrafts Gold, which is ob-
tained through playing this game and can only be spent within
the game. Unidirectional scheme virtual currencies generally
serve a single purpose, or are limited purpose at most. However,
it is possible for such virtual currency to gain a broader use.
This is, for instance, the case when a classic loyalty scheme
is combined with the issuing of a virtual currency. While origi-
nally loyalty schemes were often limited to a particular
merchant, broader schemes have developed that allow for much
wider redemption.2 Bidirectional scheme virtual currencies can
have a very broad use and could theoretically develop into
general-purpose payment instruments. In the case of
cryptocurrencies, for instance, their adoption has grown ex-
ponentially over the last few years, despite their often volatile
exchange rates.
1.2. Risk analysis
While the ECBs basic typology is useful to differentiate between
types of virtual currencies, it does not take into account their
specific risks. Therefore, this section will provide a brief risk
analysis, with focus on risks posed to: (1) users; (2) the market;
(3) investors; and (4) service providers.
First, users of virtual currencies could be exposed to risks as-
sociated with the growth of a virtual currency. For instance,
if a closed scheme virtual currency would develop into a uni-
directional or even a bidirectional virtual currency, the user of
such virtual currency would be exposed to risks that would not
have been present initially.3 A second important risk to users
relates to losses due to fraudulent or non-genuine exchanges,
wallet or exchange theft or hacking, or identity theft. The Eu-
ropean Banking Authority (EBA) has conducted a risk
assessment exercise, in which it highly ranked these types of
risks, meaning they have a high probability to materialize and
a high potential impact.4 In addition, a risk assessment con-
ducted for the Bitcoin Foundation addressed these issues5, as
did a similar exercise by the Financial Action Task Force (FATF)6.
Third, virtual currencies like legal tender can experience
value fluctuations, which can result in the user incurring losses.
The EBA ranks this risk as high, since virtual currency markets
are relatively opaque, and prices can be more easily manipu-
lated than on regulated legal tender markets7, as does the
2
An example are frequent flyer programs. Originally, the col-
lected points were to be used solely to book flights. Nowadays, they
can be used to attain a wide range of services, such as hotel book-
ings or car rentals.
3
Christopher Thorpe, Jessica Hammer, Jean Camp, Jon Callas and
Michael Bond, Virtual Economies: Threats and Risks [2007] Pro-
ceedings of Financial Cryptography and Data Security 1, 23.
4
European Banking Authority, Opinion on virtual currencies (EBA/
Op/2014/08 2014) 2122 and 31.
5 14
Jim Harper, Removing Impediments to Bitcoins Success: A Risk
Management Study [2014] Bitcoin Foundation Research Brief 1, 25.
6
Financial Action Task Force, Virtual Currencies: Key Defini-
tions and Potential AML/CFT Risks (FATF 2014) 9.
7 17
European Banking Authority, op. cit., 23.
Please cite this article in press as: Niels Vandezande, Virtual currencies under EU anti-money laundering law, Computer Law & Security Review: The International Journal
of Technology Law and Practice (2017), doi: 10.1016/j.clsr.2017.03.011
ECB.8 Last, also other behavior could pose risks to users. These
can include intermediaries or counterparties failing to meet
contractual settlement obligations, lack of acceptance or con-
vertibility of virtual currencies, incorrect debiting, inability to
access wallet or exchange services, and price manipulation.9
The ECB in this regard also points: lack of transparency, lack
of continuity, potential illiquidity, and high IT and network
dependence.10 An important element of this risk is that virtual
currencies often allow anonymous, or at least pseudony-
mous, transactions.11
A first risk posed to the market concerns the money laun-
dering and terrorist financing risk posed by virtual currencies
due to anonymous and rapid transfers.12 Second, the ECB has
warned that virtual currencies could have an effect on price
stability and monetary policy, if virtual currencies would sub-
stantially modify the quantity of money, have an impact on
velocity of money, and interact with the physical world
economy.13 In the 2015 update to its opinion, the ECB con-
firms that this risk has, however, not yet materialized given
the low transaction volume of virtual currencies.14 Third, there
is a risk to payment systems stability, where it is remarked
that virtual currency payment systems could face the same
risks as classic payment systems, yet are not subjected to the
same regulatory oversight.15 Last, the ECB warns that the repu-
tation of central banks could be damaged through negative
evolutions in virtual currencies, if their use would grow
considerably.16
For investors, the risks for users of virtual currencies apply
as well. Second, investors are particularly exposed to the vola-
tility of cryptocurrencies.17 While risk is inherent to investments,
the European legislator has established protection mecha-
nisms at least to ensure that the non-institutional investor is
properly informed about such risk. However, such protection
is absent when using virtual currencies. Third, legislators have
taken steps to prohibit trade in financial products dependent
8
European Central Bank, Virtual Currency Schemes a further analy-
sis (ECB 2015) 23. See also: Mariam Kiran and Mike Stannett, Bitcoin
Risk Analysis (nemode 2014) < nemode.ac.uk> 13. Note that the
Bitcoin Foundation expects this matter to resolve itself once
cryptocurrency adoption increases. Harper, op. cit., 23.
9
European Banking Authority, op. cit., 22 and 32; Kiran, op. cit., 13
14.
10
European Central Bank 2015, op. cit., 2022.
11
European Central Bank 2015, op. cit., 22; Financial Action Task
Force, op. cit., 9.
12
European Banking Authority, op. cit., 3235; HM Treasury, UK na-
tional risk assessment of money laundering and terrorist financing (HM
Treasury 2015) 8283; Kiran, op. cit., 7; Angela Irwin, Jill Slay, Kim-
Kwang Choo and Lin Liu, Are the financial transactions conducted
inside virtual environments truly anonymous? An experimental re-
search from an Australian perspective [2013] 16 Journal of Money
Laundering Control 6, 7; Financial Action Task Force, op. cit., 9. Though
Europol reported not to have concrete indications regarding the
actual use of virtual currencies with regard to terrorist financing.
Europol, Changes in modus operandi of Islamic State terrorist
attacks (Europol 2016) 7.
13
ECB, op. cit., 34.
European Central Bank 2015, op. cit., 17 and 2627.
15
European Central Bank 2012, op. cit., 4042. Though also this risk
has yet to materialize. European Central Bank 2015, op. cit., 2627.
16
European Central Bank 2012, op. cit., 45.
Kiran, op. cit., 17.
 ARTICLE IN PRESS
computer law & security review (2017)
on virtual currencies.18 The legality of virtual currencies as
means for investment could then become jeopardized.
Last, cryptocurrencies may be subject to deflation if a built-
in cap on the number of units in circulation is present. Such
cap encourages hoarding, driving up the value, and resulting
in a deflationary spiral.19
For service providers, one risk is that new regulation may
impede their business model or impose requirements unat-
tainable for smaller service providers. This could push smaller
service providers out of the market or limit market access.
Second, service providers who are not the issuer of a virtual
currency may become dependent on that issuer. The issuer may
implement substantial changes, or may even end the scheme.
In the case of cryptocurrencies, where there is no central issuer,
there is a clear dependency on miners to validate transac-
tions. These miners could collude to raise transaction fees, thus
impeding the development of other service providers.
When applying these risks to the ECBs basic typology, the
following conclusions can be made.
Regarding closed scheme virtual currencies, it can be held that,
from a regulatory perspective, there is little incentive to regu-
late this type of virtual currency due to its limited impact on
either the market or the three stakeholders identified here.
Unidirectional scheme virtual currencies can be considered to
pose an intermediate risk, mainly to users and other market
participants. While the possible exchange of legal tender into
virtual currency does raise the risk level, the overall risk can
still be considered as moderate since unidirectional schemes
are generally controlled by a central entity. In terms of regu-
lation, this type of virtual currency would therefore mainly
warrant regulation from the perspective of user protection.
Bidirectional scheme virtual currencies have the highest risk po-
tential, precisely due to their convertible nature. As a result,
bidirectional virtual currencies can pose added risks to users
and other market participants, for instance in the forms of vola-
tility, anonymity, and fraudulent market participants. If their
adoption and transaction volume would grow, they could
threaten overall market and price stability, thus posing a risk
to markets and their regulators. Incentive for regulation of this
type of virtual currency can be found in both stakeholder pro-
tection and market protection.
1.3. Regulatory attention and aim of this paper
Precisely due to their larger risk potential, especially
cryptocurrencies have attracted the attention of regulators
worldwide. However, as technology always develops more
quickly than legislation, comprehensive regulatory action has
yet to catch up with the current state of practice. At the same
time, new types of service providers such as cryptocurrency
exchanges are on the rise, and a highly divergent range of
businesses is looking at how to employ the underlying
blockchain technology for a variety of purposes. Examples of
the latter include the use of this technology for smart con-
18
In Belgium: Royal Decree of 24 April 2014 approving the regu-
lation of the Financial Services and Markets Authority concerning
the commercialization prohibition of certain financial products to
non-professional clients, Belgian State Gazette 20 May 2014.
19
Kiran, op. cit., 16.
Please cite this article in press as: Niels Vandezande, Virtual currencies under EU anti-money laundering law, Computer Law & Security Review: The International Journal
of Technology Law and Practice (2017), doi: 10.1016/j.clsr.2017.03.011
3
tracts, trading platforms, and data and identity management
systems.
However, in being decentralized and utilizing unique pseud-
onymous transaction identifiers, cryptocurrencies have shown
their use as a payment alternative for those engaged in drug
trafficking and money laundering, as evidenced in the Silk Road
case. This has resulted in calls from legislators and law en-
forcement agencies to impose strict regulation on the use of
this form of virtual currencies. To this moment, however, it
remains unclear how these virtual currencies could be em-
bedded within the European Unions (EU) legal frameworks in
the financial and economic field.
From a methodological viewpoint, this paper will there-
fore utilize a legal theoretical study of primary sources to assess
whether and if so, to what extent virtual currencies, par-
ticularly cryptocurrencies, could be embedded in the relevant
legal frameworks at the level of the EU. Three specific legal
frameworks have been selected for analysis. First, the legal
framework on payment services is relevant due to the obvious
use of cryptocurrencies as means of payment. Second, the legal
framework on e-money was selected given the close relation-
ship between the notions of e-money and cryptocurrencies.
Third, the legal framework on money laundering was se-
lected given the European Commissions recent proposal to
revise this legal framework in order to include virtual curren-
cies under its scope. Here, a preliminary assessment will be
made of what such revision would mean for virtual curren-
cies and their service providers.
2. Payment services
In 2007, the EU adopted a legal framework on payment ser-
vices, known as the (First) Payment Services Directive.20 Its annex
defines seven distinct forms of payment services, the provid-
ers of which become subject to this directives scope. One form
of such payment service providers, payment institutions, must
be authorized prior to being allowed to carry out their ser-
vices; they must comply with capital and own funds
requirements, recordkeeping duties, as well as transparency
and information duties.21 While the directive therefore does
restrict access to the market of payment services, the goal of
the European legislator was to avoid unnecessary burdens or
access restrictions on new players entering this burgeoning
market. To this end, provisions are included that waive or limit
certain requirements for small market players.22
As the First Payment Services Directive primarily regu-
lates service providers and not their actual services, it cannot
apply to virtual currencies as such.23 Moreover, the consen-
sus in literature is that the directive does not leave room for
the inclusion of virtual currencies at large, and cryptocurrencies
20
Directive 2007/64/EC of the European Parliament and of the
Council of 13 November 2007 on payment services in the internal
market amending Directives 97/7/EC, 2002/65/EC, 2005/60/EC and
2006/48/EC and repealing Directive 97/5/EC [2007] OJ L319/1 (here-
inafter: First Payment Services Directive or PSD1).
21
PSD1, art. 49, 1625 and 3050. PSD1, art. 2(2).
22
For instance: PSD1, art. 26 and 53.
23
ECB 2012, op. cit., 43.
 ARTICLE IN PRESS
4 computer law & security review (2017)
in particular, under the services listed in its annex.24 Applica-
tion of the directive to virtual currency service providers, in
turn, would only be possible to the extent that virtual cur-
rency services can be qualified as payment services under the
directives scope. This has proven problematic, as the notion
of payment services as understood within the directive re-
volves around the notion of funds, which is defined as
banknotes and coins, scriptural money and electronic money as defined
in Article 1(3)(b) of Directive 2000/46/EC.25 While it can be argued
that privately issued currencies can also fall under the scope
of that definition, it must also be noted that virtual curren-
cies are mostly not denominated in euro or another currency
recognized as legal tender, and that in such event Titles III and
IV of the directive would not apply.26,27 Thus, even if virtual cur-
rency services could be considered as payment services under
the scope of the First Payment Services Directive, only a limited
set of provisions of the directive would apply on their service
providers.
Despite this, the French banking supervisor Autorit de
contrle prudentiel et de resolution (ACPR) has argued that in
the case of cryptocurrency exchanges, there is a receipt of funds
in the strict sense of banknotes, coins, scriptural money or
e-money in exchange for cryptocurrency, which could then
be argued to constitute a payment service.28 This reasoning,
however, flows from an interpretation of this legal frame-
work by mainly French authorities and courts, and does not
appear to have gained widespread following.29 What is clear
24
Robert Stokes, Virtual money laundering: the case of Bitcoin
and the Linden dollar [2012] Information & Communications Tech-
nology Law 221, 228229; Sergii Shcherbak, How should Bitcoin be
regulated? [2014] European Journal of Legal Studies 41, 5661.
25
PSD1, art. 4(15).
26
ec.europa.eu/internal_market/payments/docs/framework/transposition/
faq_en.pdf, question 164. However, it must be noted that this broad
interpretation not embedded within the directives themselves
may have gone lost in the national transposition. Tom Boedts,
Kunnen crowdfunding en virtuele munten innoveren zonder
bijkomende regulering? in IBJ (ed), Linnovation, source de droit. Le
droit, source dinnovation / Innovatie, bron van recht. Recht, bron van
innovatie (Bruylant 2014) 162.
27
As follows from PSD1, art. 2(2).
28
ACPR, Position de lACPR relative aux oprations sur Bitcoins
en France Position 2014-P-01. This position was earlier hinted at
by the French national bank: Banque de France, Les dangers lis
au dveloppement des monnaies virtuelles: lexemple du bitcoin
[2013] Focus 1, 56; Hubert De Vauplane, La fascination autour du
Bitcoin et des monnaies virtuelles : comment les dfinir ? (Al-
ternatives Economiques, 7 November 2015).
29
Court of Appeals Paris 26 August 2011, nr. 11/15269; Court of
Appeals Paris 26 September 2013, nr. 12/00161; Commercial Court
Crteil 6 December 2011, nr. RG 2011F00771; Hubert De Vauplane,
Bitcoin et monnaies virtuelles: entre rglementation et essai de
dfinition juridique in Hilde Daems, Inez De Meuleneere, Cath-
erine Houssa, Nathalie Ragheno (eds), Digital Finance/La finance
numrique (Intersentia 2015) 37; Mohamed Chaaben, Le Financement
participatif (Connaissances et Savoirs 2016) 166; Caroline Laverdet,
Bitcoin: par ici la cryptomonnaie! [2014] Revue Lamy Droit de
lImmatriel 90, 9192; Thierry Bonneau, Une socit qui utilise un
compte bancaire sur lequel transitent des bitcoins est-elle un
prestataire de service de paiement ? [2014] La Semaine Juridique
Entreprise et Affaires, 1091; Francis Crdot, Thierry Samin, Clture
du compte en raison des activits exerces par le titulaire [2012]
Revue de Droit bancaire et financier 12012, comm. 2.
Please cite this article in press as: Niels Vandezande, Virtual currencies under EU anti-money laundering law, Computer Law & Security Review: The International Journal
of Technology Law and Practice (2017), doi: 10.1016/j.clsr.2017.03.011
is that the First Payment Services Directive does not provide
a definitive answer as to whether third party services devel-
oped around cryptocurrencies can be considered as one of the
payment services covered in its annex.
The Second Payment Services Directive30 does not provide
any substantial changes in this regard, which would therefore
ostensibly leave the final answer dependent on how Member
States interpret the relevant provisions of the directive and their
national implementation thereof. However, in its proposal for
amendments to the Fourth Anti-Money Laundering Directive31,
the European Commission explicitly states that it did not want
to bring virtual currency exchange platforms under the scope
of the Second Payment Services Directive, as such would submit
them to broader consumer protection rules, licensing requirements
and safeguarding requirements.32 It was mainly feared that this
would legitimize virtual currencies and drive consumers to believe
VCs are safe and sound products.33 The result of this is that third
party cryptocurrency service providers are, as of yet and ac-
cording to the European legislator, not covered by the EU legal
framework on payment services. This was first confirmed in
the ECBs 2012 opinion on virtual currencies.34 Moreover, the
EBA has noted that the Second Payment Services Directive, in
its current form, is not suitable to address the specific risks
posed by virtual currencies at large, and the technical risks posed
by cryptocurrencies in particular.35
Moreover, it should also be noted that both Payment Ser-
vices Directives include large sets of scope exemptions, meaning
that there are several cases where services are excluded from
their scope. Some of those scope exemptions are relevant for
virtual currency service providers. First, since cryptocurrencies
30
Directive 2015/2366 of the European Parliament and of the
Council of 25 November 2015 on payment services in the internal
market, amending Directives 2002/65/EC, 2009/110/EC and 2013/
36/EU and Regulation (EU) No. 1093/2010, and repealing Directive
2007/64/EC [2015] OJ L337/35 (hereinafter: Second Payment Ser-
vices Directive or PSD2).
31
Directive (EU) 2015/849 of the European Parliament and of the
Council of 20 May 2015 on the prevention of the use of the finan-
cial system for the purposes of money laundering or terrorist
financing, amending Regulation (EU) No. 648/2012 of the Euro-
pean Parliament and of the Council, and repealing Directive 2005/
60/EC of the European Parliament and of the Council and
Commission Directive 2006/70/EC [2015] OJ L141/73 (hereinafter:
Fourth Anti-Money Laundering Directive or AMLD4).
32
Commission, Impact assessment accompanying the docu-
ment Proposal for a Directive of the European Parliament and the
Council amending Directive (EU) 2015/849 on the prevention of the
use of the financial system for the purposes of money laundering
or terrorist financing and amending Directive 2009/101/EC
SWD(2016) 223 final, 3031.
33
Ibid., 31.
34
ECB 2012, op. cit., 43. Though the ECBs reasoning leaves some-
thing to be desired. Essentially, it is argued that payment institutions
cannot issue e-money, and that therefore this legal framework
cannot apply to cryptocurrencies. This is odd, since the ECB con-
firms in the same opinion that cryptocurrencies are also not
e-money.
35
European Banking Authority, Opinion of the European Banking
Authority on the EU Commissions proposal to bring Virtual Cur-
rencies into the scope of Directive (EU) 2015/849 (4AMLD) (EBA-
Op-2016-07 2016) 45.
 ARTICLE IN PRESS
computer law & security review (2017)
are not yet very broadly accepted, certain authors have sug-
gested that they could for the time being benefit from the
limited networks scope exemption.36 However, the applica-
tion of this scope exemption as more narrowly redefined under
the Second Payment Services Directive to cryptocurrencies
would appear impossible. Second, the money exchange ex-
emption would be difficult to apply given that this exemption
targets physical exchanges and cryptocurrency exchanges by
nature operate online, thus requiring the use of an account.37
Finally, the added value exemption would due to the Second
Payment Services Directives narrowing down its scope to elec-
tronic communications providers not be applicable to these
service providers.
In addition, it must be added that the analysis conducted
here assumes the presence of all the typical elements of a
virtual currency exchange service such as the use of a
payment account where funds are held. Given the variety of
service providers active in this field, it is possible that differ-
ent conclusions would be reached for a particular service
provider that organizes its business differently. A case-by-
case approach must therefore be prescribed.
3. E-money
Back in the 1990s, multi-purpose stored-value cards were being
developed. The ECBs predecessor the European Monetary In-
stitute (EMI) feared that this technology would disrupt the
stability of the financial system, which resulted in the EU adopt-
ing the First E-Money Directive in 2000.38 Several years later,
when the previously discussed legal framework on payment
services was being developed, the EU replaced that 2000 di-
rective with a revised Second E-Money Directive.39 In terms of
scope, this legal framework is focused solely on the issuers of
e-money. The Second E-Money Directive also relies on the First
Payment Services Directive for a number of its provisions, in-
cluding its scope exemptions. This means that if certain
exemptions could prevent virtual currency service providers
from being put under the scope of the Payment Services
36
Robby Houben, Bitcoin: there are two sides to every coin [2015]
Tijdschrift voor Belgisch Handelsrecht 139, 156; Edwin Jacobs,
Bitcoin: A Bit Too Far? [2011] Journal of Internet Banking and Com-
merce 1, 3.
37
One example where this exemption could prove useful is the
bitcoin ATMs. Essentially, these operate much like a physical ex-
change bureau rather than like a traditional ATM thus not
requiring the use of a payment account in the sense of this legal
framework.
38
Directive 2000/46/EC of the European Parliament and of the
Council of 18 September 2000 on the taking up, pursuit of and pru-
dential supervision of the business of electronic money institutions
[2000] OJ L275/39 (hereinafter: First E-money Directive or EMD1).
39
Directive 2009/110/EC of the European Parliament and of the
Council of 16 September 2009 on the taking up, pursuit and pru-
dential supervision of the business of electronic money institutions
amending Directives 2005/60/EC and 2006/48/EC and repealing Di-
rective 2000/46/EC [2009], OJ L267/7 (hereinafter: Second E-money
Directive or EMD2).
Please cite this article in press as: Niels Vandezande, Virtual currencies under EU anti-money laundering law, Computer Law & Security Review: The International Journal
of Technology Law and Practice (2017), doi: 10.1016/j.clsr.2017.03.011
5
Directives, they would also prevent those service providers from
being put under the scope of the Second E-Money Directive.
Moreover, on top of the shared scope exemptions between
the Second E-Money Directive and the First Payment Services
Directive, the legal framework on e-money has a limited scope
itself. Its primary notion is e-money, which is defined as:
electronically, including magnetically, stored monetary value as
represented by a claim on the issuer which is issued on receipt
of funds for the purpose of making payment transactions as defined
in point 5 of Article 4 of Directive 2007/64/EC, and which is ac-
cepted by a natural or legal person other than the electronic money
issuer.40
The element of this definition requiring that e-money is
issued on receipt of funds essentially established e-money as
a prepaid good.41 While some forms of virtual currencies could
be established as prepaid tokens, there is a consensus amongst
authors following the opinion of the ECB that others such
as cryptocurrencies cannot.42 Thus, such forms of virtual cur-
rencies cannot be put under the scope of application of the
Second E-Money Directive. In addition, other elements of the
e-money definition could prove problematic for virtual cur-
rencies. Several virtual currency schemes, for instance, revolve
around a central issuer and redeemer. If this is the only entity
accepting the virtual currency as payment method, the final
element of the e-money definition is not fulfilled.
Initially, the Second E-Money Directive was to be reviewed
by late 2012.43 This was intended to coincide with the review
of the First Payment Services Directive, which was under-
stood as a strong hint that both legal frameworks may be
merged. However, the Second E-Money Directive has thus far
not been reviewed, while as noted before the Second
Payment Services Directive was adopted late 2015. A merger
between both legal frameworks therefore seems unlikely, at least
within the foreseeable future.
However, it may be questioned what the future holds for
the legal framework on e-money. As noted, its original regu-
latory subject was multi-purpose stored-value cards44, most
of which have already been phased out or will soon be. With
its original subject of regulation turned obsolete, what becomes
the purpose of this legal framework? The EU legislator did
already extend the scope of this legal framework, by also
including network-based e-money rather than only card-
based products. However, it has never been fully clarified
40
EMD2, art. 2(2).
41
Rolf Weber, Aline Darbellay, Legal issues in mobile banking [2010]
Journal of Banking Regulation 129, 135.
42
Stokes, op. cit., 227228; Max Kubt, Virtual currency bitcoin in
the scope of money definition and store of value [2015] Procedia
Economics and Finance 409, 411412, Noah Vardi, Bit by Bit: As-
sessing the Legal Nature of Virtual Currencies in Gabriella
Gimigliano (ed), Bitcoin and Mobile Payments: Constructing a Euro-
pean Union Framework (Macmillan Publishers 2016) 61; Jan
Trzaskowski, Andrej Savin, Bjorn Lundqvist, Patrick Lindskoug, In-
troduction to EU Internet Law (Ex Tuto 2015) 303, ECB 2012, op. cit., 43.
43
EMD2, art. 17.
44
Such as Proton in Belgium, Chipknip in the Netherlands, and
Geldkarte in Germany.
 ARTICLE IN PRESS
6 computer law & security review (2017)
what is considered as such network-based e-money.45 For
instance, Guadamuz has argued that account-based trans-
fers as under PayPal do not fall under the scope of
e-money, even though PayPal does consider itself an issuer of
e-money and was originally registered as such.46 The Finan-
cial Services Authority, however, considers deposits as involving
the creation of a debtorcreditor relationship, whereas e-money
involves the purchase of a means of payment.47 The Euro-
pean Commission, on the other hand, does not agree with
this reasoning.48 What is clear is that the differences between
e-money and payment services are disappearing.49 This un-
certainty over what precisely constitutes e-money could be
interesting for virtual currencies. After all, if the original
regulatory subject of the legal framework on e-money has
been rendered obsolete, an expansion of this framework
toward virtual currencies could be the way forward.
Concluding this analysis of the legal frameworks on payment
services and e-money, reference must be made to a particu-
lar development in practice: the voluntary registration of virtual
currency service providers. In France, cryptocurrency ex-
change Paymium, for instance, relies on HiPay (registered as
HPME), an e-money institution authorized in Belgium. In Lux-
embourg, SnapSwap, which operates a mobile messenger
allowing instant cross-currency transactions via blockchain
technology, is licensed as of August 2016 as an e-money
institution. Bitcoin exchange Bitstamp, on the other hand, is
licensed as a payment service provider, allowing it to provide
payment account transactions, money remittances, and op-
erating as intermediary. In the UK, Circle a payments
application provider that also utilizes cryptocurrencies has
been registered as an e-money institution. The result is the sub-
jection of service providers to legal frameworks that are at
least for the part of their business concerning cryptocurrencies
not applicable to them. There are certainly reasons for service
providers wanting to voluntarily commit to such licensing. For
instance, these service providers are likely to want to protect
their business against potential new regulation. By having sub-
mitted to a current legal framework, they could possibly benefit
from a transitional regime if new regulation would be adopted.
Second, service providers could use their voluntary licensing
to foster user trust through the regulatory oversight to which
they will be submitted. Last, such license could also serve as
a competitive advantage over unregulated market players. Also
for users, this voluntary licensing could have certain ben-
efits. The licensees are subjected to strict rules controlling their
45
Henny Van der Wielen, Electronic Money: a European Perspec-
tive (Seminar on Electronic Money, London, February 1997)
<www.simonl.org/docs/readeremdnb.pdf> 16.
46
Andrs Guadamuz Gonzlez, PayPal: The legal status of C2C
payment systems [2004] Computer Law & Security Review 293, 297
298.
47
Financial Services Authority, Implementation of the second Elec-
tronic Money Directive: supplement to HM Treasurys consultation
Feedback on CP10/25 and part of CP10/24, and final rules (Policy
Statement PS11/2) 73.
48
Gonzlez, op. cit., 297298.
49
Peggy Valcke, Niels Vandezande, Nathan Van de Velde, The Evo-
lution of Third Party Payment Providers and Cryptocurrencies Under
the EUs Upcoming PSD2 and AMLD4 (SWIFT Institute Working
Paper 2015-001) 5659.
Please cite this article in press as: Niels Vandezande, Virtual currencies under EU anti-money laundering law, Computer Law & Security Review: The International Journal
of Technology Law and Practice (2017), doi: 10.1016/j.clsr.2017.03.011
assets and behavior. As a result, they are less likely to exhibit
the kind of behavior that under the risk analysis of Section 1.2
of this paper was identified as posing a risk to users. This kind
of asset and behavior control would also help ensuring that
the market risks identified are less likely to materialize.
However, at the same time this voluntary licensing could also
have undesirable effects. First, it is clear that the divergent opin-
ions and practices of Member States on this matter are not
helping the EUs goal of maximum harmonization in this field.
Second, it may raise the perception of trustworthiness of virtual
currency service providers in general, even though most of those
service providers are still unregulated, and where not all of them
have good intentions. Such could negate the efforts made by
regulators in Member States to warn consumers and busi-
nesses of the risks involved with certain virtual currency
schemes. Third, the fact that licensed service providers could
use their license as competitive advantage over unlicensed rival
could also prove to be negative for the development of this
nascent market. Such could impose a particular burden on po-
tential market entrants, for whom the licensing requirements
could be prohibitive. Last, it could be questioned what the con-
sequences will be of the broad interpretations provided by
certain national supervisors as in France and Luxembourg
for the passporting system set up by the legal frameworks
on e-money and payment services. After all, such passporting
can only be effective if all participants apply the rules in the
same manner. Concluding, it can be held that relying on self-
regulation here would effectively create two groups of virtual
currency service providers: a regulated one and an unregu-
lated one. If the cost of compliance is high, and if there is little
to no punishment for non-compliance, there will always be
market participants choosing the easier option. It must then
be questioned whether users will be able to distinguish between
both groups, or whether the higher legitimacy of the regu-
lated group will lead to a higher perception of legitimacy for
all virtual currency service providers. Here, this situation of vol-
untary licensing could end up adding to the legal uncertainty
and confusion over the applicability of the legal frameworks
on e-money and payment services to virtual currencies. More-
over, the potential positive benefits enumerated earlier cannot
be fully realized unless this entire market follows the same
rules. It must also be stressed in this regard that some service
providers provide mixed services, some of which clearly falling
under the scope of the legal frameworks on e-money or
payment services, and other services concerning virtual cur-
rencies. Here, being licensed for the activities concerning
e-money or payment services can create the impression that
the virtual currency activities are licensed as well, which is not
necessarily the case.50
4. Fourth Anti-Money Laundering Directive
4.1. Evolution before 2015
Money laundering and financial crime came to the public aware-
ness in the late 1970s and early 1980s. It was the boom in
50
European Banking Authority 2016, op. cit., 5.
 ARTICLE IN PRESS
computer law & security review (2017)
narco-trafficking in the 1980s that resulted in the first inter-
national efforts against this crime.51 More so, it was in fact a
1988 UN convention on narco-trafficking that first called for
the global consideration of money laundering in narco-
trafficking as a crime.52 A year later, the G-7 established the
Financial Action Task Force on Money Laundering (FATF) in Paris.
The main responsibilities of this task force are examining money
laundering techniques and trends, reviewing the action which had
already been taken at a national or international level, and setting
out the measures that still needed to be taken to combat money
laundering.53 The most well-known output of this body is a set
of regularly updated recommendations, aimed at providing a
plan for its members in the fight against money laundering.54
Also in Europe initiative was taken toward a more unified
approach against money laundering. In 1990, a Council of Europe
convention was signed to this end.55 Within the EU, it became
clear that effective combating of money laundering and fi-
nancial crime could only be achieved through a coordinated
response at the level of the EU, thus avoiding that local loop-
holes in the Member States could be exploited.56 As a result,
the First Anti-Money Laundering Directive was adopted in 1991.57
This legal framework was further expanded and clarified
through additional texts.58
In 2001, this legal framework was substantially amended
by the Second Anti-Money Laundering Directive.59 Whereas the
First directive focused mostly on obligations of credit institu-
tions regarding money laundering in drug-related crimes, the
Second directive addressed the threat of money laundering in
51
Julien Ernoult, Walburga Hemetsberger, Henning Schoppmann,
Christoph Wengler, European Banking and Financial Services Law (3rd
edition) (Larcier 2008) 205.
52
United Nations Convention against Illicit Traffic in Narcotic Drugs
and Psychotropic Substances, Vienna, 20 December 1988.
53
www.fatf-gafi.org/about/historyofthefatf.
54
The most recent version of these recommendations was adopted
in 2012: FATF, Recommendations International Standards on Combat-
ting Money Laundering and the Financing of Terrorism & Proliferation (FATF
2012).
55
Convention Nr. 141 on Laundering, Search, Seizure and Con-
fiscation of the Proceeds from Crime, Strasbourg, 08 November 1990.
56
Ernoult, op. cit., 205.
57
Council Directive 91/308/EEC of 10 June 1991 on prevention of
the use of the financial system for the purpose of money laun-
dering [1991] OJ L166/77.
58
Council Regulation No. 2185/96 of 11 November 1996 concern-
ing on-the-spot checks and inspections carried out by the
Commission in order to protect the European Communities fi-
nancial interests against fraud and other irregularities [1996] OJ L292/
2; Commission Decision of 28 April 1999 establishing the European
Anti-fraud Office (OLAF) [1999] OJ L136/20; Council Decision of 17
October 2000 concerning arrangements for cooperation between
financial intelligence units of the Member States in respect of ex-
changing information (2000/642/JHA) [2000] OJ L271/4; Council
Framework Decision of 26 June 2001 on money laundering, the iden-
tification, tracing, freezing, seizing and confiscation of
instrumentalities and the proceeds of crime (2001/500/JHA) [2001]
OJ L182/1.
59
Directive 2001/97/EC of the European Parliament and of the
Council of 4 December 2001 amending Council Directive 91/308/
EEC on prevention of the use of the financial system for the purpose
of money laundering [2001] OJ L344/76.
Please cite this article in press as: Niels Vandezande, Virtual currencies under EU anti-money laundering law, Computer Law & Security Review: The International Journal
of Technology Law and Practice (2017), doi: 10.1016/j.clsr.2017.03.011
7
other crimes and other professions.60 In addition, here a number
of additional texts were adopted.61
In 2005, the Third Anti-Money Laundering Directive was
adopted, which fully repealed the framework set by the First
directive, as amended by the Second directive.62 This direc-
tive saw the introduction of stricter customer identification
rules, and the introduction of a more risk-based approach.63
Moreover, it implements a newer version of the FATF recom-
mendations. Again, a number of additional texts were adopted.64
4.2. Proposal for Fourth Anti-Money Laundering Directive
In 2012, the European Commission found that a periodic re-
vision of the legal framework would be required in order to be
able to respond to newfound threats.65 Even though no fun-
damental shortcomings were identified under the existing legal
framework, the Commission did find a number of minor modi-
fications required to bringing this legal framework in line with
revised recommendations by the FATF. A formal proposal for
what would become the Fourth Anti-Money Laundering Di-
rective was published in 2013.66 The most notable changes
proposed here concern the deeper implementation of a con-
solidated risk-based approach as proposed in the newer FATF
recommendations a revision of customer due diligence re-
quirements, the introduction of a central beneficial ownership
register, as well as modifications to the provisions regarding
politically exposed persons.67
60
Ernoult, op. cit., 206.
61
Council Decision of 28 February 2002 setting up Eurojust with
a view to reinforcing the fight against serious crime (2002/187/
JHA) [2002] OJ L63/1; Council Framework Decision 2005/212/JHA of
24 February 2005 on Confiscation of Crime-Related Proceeds, In-
strumentalities and Property [2005] OJ L68/49; Council Decision 2005/
511/JHA of 12 July 2005 on protecting the euro against counterfeiting,
by designating Europol as the Central Office for combating euro
counterfeiting [2005] OJ L185/35.
62
Directive 2005/60/EC of the European Parliament and of the
Council of 26 October 2005 on the prevention of the use of the fi-
nancial system for the purpose of money laundering and terrorist
financing [2005] OJ L309/15.
63
Ernoult, op. cit., 206.
64
Interinstitutional Agreement between the European Parlia-
ment, the Council and the Commission on budgetary discipline and
sound financial management [2006] OJ C139/1; Commission Di-
rective 2006/70/EC of 1 August 2006 laying down implementing
measures for Directive 2005/60/EC of the European Parliament and
of the Council as regards the definition of politically exposed person
and the technical criteria for simplified customer due diligence pro-
cedures and for exemption on grounds of a financial activity
conducted on an occasional or very limited basis [2006] OJ L214/
29; Directive 2008/20/EC of the European Parliament and of the
Council of 11 March 2008 amending Directive 2005/60/EC on the
prevention of the use of the financial system for the purpose of
money laundering and terrorist financing, as regards the imple-
menting powers conferred on the Commission [2008] OJ L76/46.
65
Commission, Frequently Asked Questions: Anti-Money Laun-
dering (MEMO 13/64).
66
Commission, Proposal for a Directive of the European Parlia-
ment and of the Council on the prevention of the use of the financial
system for the purpose of money laundering and terrorist financ-
ing (COM (2013) 45 final).
67
Valcke, op. cit., 2428.
 ARTICLE IN PRESS
8 computer law & security review (2017)
The proposal for a Fourth Anti-Money Laundering Direc-
tive did not mention virtual currencies, or cryptocurrencies in
particular. During the legislative procedure leading up to the
directive, none of the opinions that were issued by the Euro-
pean Central Bank, the European Economic and Social
Committee, or of the European Data Protection Supervisor ref-
erence developments in virtual currencies, which by then had
already attracted the attention of regulators and law
enforcement.68 Only the report tabled by the Committee as-
signed by the European Parliament included an amendment
that refers to anonymous e-money products.69 However, this
amendment should not be understood as referring to virtual
currencies, since as found in Section 3 of this paper most
forms of virtual currencies cannot be considered as e-money
under the EUs Second E-money Directive.
In 2014, as this legislative procedure was ongoing, the EBA
published its opinion on virtual currencies.70 In this opinion,
the EBA urges regulators to bring virtual currencies includ-
ing cryptocurrencies under an existing legal framework. More
particularly, it was proposed that virtual currencies could be
included under the scope of the EUs legal framework regard-
ing anti-money laundering.71 Though more comprehensive
action would be favored in the long run, the inclusion of virtual
currencies under an existing legal framework such as that re-
garding anti-money laundering could provide a short-term
solution to shield regulated financial services from
V[irtual]C[urrency] schemes.72 The EBAs call to action was well-
received by the European Commission, where it was said that
the possibility to include virtual currencies under the scope
of the Fourth Anti-Money Laundering Directive would be in-
cluded in the Trilogue discussions.73
68
European Central Bank, Opinion of 17 May 2013 on a proposal
for a directive on the prevention of the use of the financial system
for the purpose of money laundering and terrorist financing and
on a proposal for a regulation on information accompanying trans-
fers of funds (CON/2013/32); European Economic and Social
Committee, Opinion of 23 May 2013 on the Proposal for a Regu-
lation of the European Parliament and of the Council on information
accompanying transfers of funds COM(2013) 44 final 2013/0024
(COD) and the Proposal for a Directive of the European Parlia-
ment and of the Council on the prevention of the use of the financial
system for the purpose of money laundering and terrorist financ-
ing COM(2013) 45 final 2013/0025 (COD) (ECO/344); European Data
Protection Supervisor, Executive summary of the Opinion on a pro-
posal for a Directive of the European Parliament and of the Council
on the prevention of the use of the financial system for the purpose
of money laundering and terrorist financing, and a proposal for a
Regulation of the European Parliament and of the Council on in-
formation on the payer accompanying transfers of funds [2014]
OJ C32/9.
69
European Parliament, Committee on Economic and Monetary
Affairs and Committee on Civil Liberties, Justice and Home Affairs:
Report on the proposal for a directive of the European Parliament
and of the Council on the prevention of the use of the financial
system for the purpose of money laundering and terrorist financ-
ing (COM(2013)0045) C7-0032/2013 2013/0025(COD)) (A7-0150/
2014) amendment 10.
70
European Banking Authority 2014, op. cit.
71
Ibid., 6.
72
Id.
73
Payment Systems Market Expert Group, Minutes of the meeting
of 22 October 2014, Brussels (PSMEG 008/14) 23.
Please cite this article in press as: Niels Vandezande, Virtual currencies under EU anti-money laundering law, Computer Law & Security Review: The International Journal
of Technology Law and Practice (2017), doi: 10.1016/j.clsr.2017.03.011
Those discussions were held in February 2015, shortly after
the January 2015 terrorist attack on the magazine Charlie Hebdo.
In response to this terrorist attack, France voiced its clear
support to strengthen the efficiency of the legal framework re-
garding anti-money laundering in the fight against terrorist
financing. More specifically, the need to assess the risks posed
by virtual currencies was addressed.74 Despite this state-
ment, the Councils common position adopted in April 2015
did not explicitly include virtual currencies, though it did take
up the aforementioned amendment regarding anonymous
e-money instruments.75 The Councils text did include a new
recital, nr. 19, that referred to new technologies and held that
competent authorities and obliged entities should be proactive in com-
bating new and innovative ways of money laundering.
After the adoption of the Councils position, a number of
Committees within the European Parliament issued a draft
report in which they supported the Councils position and rec-
ommended the plenary meeting to adopt that text without
further amendment.76 In addition, the European Commission
expressed its agreement with the Councils position, thus paving
the way for the adoption of the final text.77 The Fourth Anti-
Money Laundering Directive was adopted on 20 May 2015.78
4.3. Fourth Anti-Money Laundering Directive
From the legislative procedure leading up to the Fourth Anti-
Money Laundering Directive, it becomes clear that it was never
the intention to explicitly include virtual currencies under the
scope of this legal framework. Neither does the final text take
up this matter, and, as noted before, nor can the reference to
74
Council of the European Union, Proposal for a Directive of the
European Parliament and of the Council on the prevention of the
use of the financial system for the purpose of money laundering
and terrorist financing (first reading) Adoption (a) of the Coun-
cils position (b) of the statement of the Councils reasons
Statements (7768/15 ADD 1) 23.
75
Council of the European Union, Position of the Council at first
reading with a view to the adoption of a Directive of the Euro-
pean Parliament and of the Council on the prevention of the use
of the financial system for the purposes of money laundering or
terrorist financing, amending Regulation (EU) No. 648/2012 of the
European Parliament and of the Council, and repealing Directive
2005/60/EC of the European Parliament and of the Council and Com-
mission Directive 2006/70/EC Adopted by the Council on 20 April
2015 (5933/4/15 REV 4).
76
European Parliament, Committee on Economic and Monetary
Affairs and Committee on Civil Liberties, Justice and Home Affairs:
Draft Recommendation for second reading on the Council posi-
tion at first reading with a view to the adoption of a directive of
the European Parliament and of the Council on the prevention of
the use of the financial system for the purposes of money laun-
dering or terrorist financing, amending Regulation (EU) No. 648/
2012 of the European Parliament and of the Council, and repealing
Directive 2005/60/EC of the European Parliament and of the Council
and Commission Directive 2006/70/EC (05933/3/2015 C8-0109/
2015 2013/0025(COD)) (PE554.948).
77
Commission, Communication pursuant to Article 294(6) of the
Treaty on the Functioning of the European Union concerning the
position of the Council on the adoption of a Directive of the Eu-
ropean Parliament and of the Council on the prevention of the use
of the financial system for the purpose of money laundering and
terrorist financing (COM(2015) 188 final).
78
See footnote 13.
 ARTICLE IN PRESS
computer law & security review (2017)
anonymous e-money instruments be understood as referring
to virtual currencies.
However, neither does such necessarily exclude virtual cur-
rencies from the scope of this legal framework. Member States
could still decide to bring virtual currencies under the scope
of their national implementations of the anti-money launder-
ing framework, something the UK, for instance, has already
proposed to do.79 At the same time, however, the UK govern-
ment seems to have adopted a cautious regulatory path in order
to not deter investments in the growing FinTech industry.80 In
addition, the UKs financial regulator, the Financial Conduct
Authority (FCA), has expressed the need to not disturb the de-
velopment of the technologies underlying virtual currencies,
and the markets that are being developed out of those
technologies.81 Therefore, given the lack of a clear formula-
tion concerning the inclusion of virtual currencies under the
scope of this legal framework, the matter could become subject
to the Member States interpretation of the text in their na-
tional transposition.82
The main focus of the legal framework regarding anti-
money laundering is on property derived from criminal activity.83
Such property is defined as assets of any kind, whether corpo-
real or incorporeal, movable or immovable, tangible or intangible, and
legal documents or instruments in any form including electronic or
digital, evidencing title to or an interest in such assets.84 This broad
definition makes it clear that this legal framework does not
focus solely on money in the strictest sense of the word, being
the traditional banknotes and coins. Virtual currencies could,
then, be considered as incorporeal assets.85 If such interpre-
tation is followed, this legal framework could be held to apply
to virtual currencies gained from criminal activity.
The bigger question is then whether the entities provid-
ing virtual currency services such as bitcoin exchanges could
be considered as obliged entities under the scope of this legal
framework. Obliged entities under the Fourth Anti-Money Laun-
79
HM Treasury, Digital currencies: response to the call for infor-
mation (HM Treasury 2015) < gov.uk/government/uploads/system/
uploads/attachment_data/file/414040/digital_currencies
_response_to_call_for_information_final_changes.pdf> 19.
80
HM Treasury, Harriet Baldwin, UK to lead on big data re-
search, says Harriett Baldwin (Alan Turing Institute for Data Science,
London, October 2015) <www.gov.uk/government/speeches/uk-to-
lead-on-big-data-research-says-harriett-baldwin>.
81
Christopher Woolard, UK FinTech: Regulating for innovation
(FinTech: Regulating for innovation event, London, February 2016)
<www.fca.org.uk/news/uk-fintech-regulating-for-innovation>.
82
While the European Commission did acknowledge that virtual
currency exchange platforms were not included under the direc-
tive, it did propose to look again into virtual currencies. Payment
Systems Market Expert Group, Minutes of the meeting of 28 April
2015 (PSMEG/005/15) 3.
83
AMLD4, art. 1(3).
84
AMLD4, art. 3(3).
85
Boehm and Pesch argue that the spirit of this legal framework
is to cover anything that holds economic value. In that sense, an
extension of this legal framework to virtual currencies could be ac-
ceptable. Franziska Boehm, Paulina Pesch, Bitcoin: A First Legal
Analysis With Reference to German and US-American Law in Rainer
Bhme, Michael Brenner, Tyler Moore, Matthew Smith (eds), Finan-
cial Cryptography and Data Security, FC 2014 Workshops, LNCS 8438
(Springer 2014) 4748.
Please cite this article in press as: Niels Vandezande, Virtual currencies under EU anti-money laundering law, Computer Law & Security Review: The International Journal
of Technology Law and Practice (2017), doi: 10.1016/j.clsr.2017.03.011
9
dering Directive are firstly credit institutions and financial
institutions.86 In second order are legal and natural persons
acting in the exercise of their professional activities, particu-
larly auditors, external accountants and tax advisors; notaries
and other independent legal professionals; other trust or
company service providers; estate agents; other persons trading
in goods to the extent that payments are made or received in
cash in an amount of EUR10,000 or more; and providers of gam-
bling services. 87 Financial institutions are defined as
undertakings other than a credit institution performing one
or more of the activities listed Annex I to Directive 2013/36/
EU; insurance undertakings; investment firms; collective
investment undertakings; insurance intermediaries; and
branches.88 Interestingly, one of the services under Directive
2013/36/EU referenced here concerns issuing and administer-
ing other means of payment (e.g. travellers cheques and bankers
drafts) insofar such is not a payment service.89 Here, an Esto-
nian court found that the virtual currency services provided
in the case at hand constituted alternative means of payment,
under Estonias implementation of this legal framework.90 This
demonstrates the aforementioned possibility of Member States
deviating from the intentions of the European legislator in their
national interpretations and implementations. Such could even
be considered as mandatory, as the directive requires Member
States to extend the scope of their legal frameworks to pro-
fessions and categories of undertakings, other than the obliged
entities covered under the directive, that engage in activities
that are likely to be used for money laundering purposes.91
5. The commissions new proposal
Though the text of the Fourth Anti-Money Laundering Direc-
tive may not provide a clear answer regarding its applicability
to virtual currencies and their service providers, the Euro-
pean legislator has made its position on the subject clear. In
February 2016, the European Commission presented its Action
Plan to strengthen the fight against terrorist financing.92 In this
document, the Commission explicitly acknowledged that virtual
currencies were not regulated at the level of the EU, which in-
cludes the legal framework regarding anti-money laundering.
However, the Commission also expressed its clear intent to bring
certain virtual currency service providers under the scope of
that legal framework.93
86
AMLD4, art. 2(1) (1) and (2).
87
AMLD4, art. 2(1) (3).
88
AMLD4, art. 3(2).
89
Point 5 Annex I Directive 2013/36/EC.
90
Kaido Knnapas, From Bitcoin to Smart Contracts: Legal Revo-
lution or Evolution from the Perspective of de lege ferenda? in Tanel
Kerikme, Addi Rull (eds), The Future of Law and eTechnologies (Springer
2016) 119120.
91
AMLD4, art. 4.
92
Commission Commission presents Action Plan to strengthen
the fight against terrorist financing (IP/16/202).
93
Commission Communication from the Commission to the Eu-
ropean Parliament and the Council on an Action Plan for
strengthening the fight against terrorist financing (COM(2016) 50
final) 5.
 ARTICLE IN PRESS
10 computer law & security review (2017)
The European Commissions proposal to amend the Fourth
Anti-Money Laundering Directive was published in July 2016.94
With this proposal, the Commission clearly aims to address
anonymous transactions, explicitly calling out the lack of over-
sight on cash or virtual currency transactions and anonymous
prepaid cards.95 In addition, in response to the controversy sur-
rounding the Panama Papers, the Commission addresses the
lack of transparency regarding offshore-constructions allow-
ing for concealment of funds and ownership.96 The Commission
aims to subject trusts and companies such as those men-
tioned in the Panama Papers to greater scrutiny and tighter
rules.
Regarding virtual currencies, the Commission proposes to
include virtual currency exchange platforms and custodian
wallet providers under the list of obliged entities under the
Fourth Anti-Money Laundering Directive.97 This would also
include defining the notion of virtual currency. Such would
need to address the main risk emanating from virtual cur-
rency transactions, namely their higher degree of anonymity.98
Such anonymity was found to allow terrorist organizations to
use virtual currencies to conceal financial transfers. By includ-
ing these particular service providers under the scope of the
Fourth Anti-Money Laundering Directive, they would become
obliged to monitor virtual currency transactions, and to prevent
and report suspicious activities.
The Commission does recognize the potential benefits of
virtual currencies, and particularly the possibilities emanating
from the blockchain technology underlying cryptocurrencies.99
Though their subjection to anti-money laundering rules would
indeed impose strict requirements on the virtual currency service
providers addressed here, the Commission does not find that
this proposal would have negative effects to the benefits and
technological advances of virtual currencies. On the contrary,
the Commission argues that the use of virtual currencies for crimi-
nal purposes could diminish their credibility and that their
anonymity will become more a hindrance than an asset for virtual
currencies taking up and their potential benefits to spread.100 In an
attempt to limit the anonymity surrounding virtual currency
transactions, the Commission finds that national Financial
94
Commission Proposal for a Directive of the European Parlia-
ment and of the Council amending Directive (EU) 2015/849 on the
prevention of the use of the financial system for the purposes of
money laundering or terrorist financing and amending Directive
2009/101/EC (COM(2016) 450 final) (hereinafter: Proposal AMLD4
amendments).
95
Ibid., 2.
96
Ibid., 2.
97
Ibid., 12.
98
Ibid., 12.
99
Ibid., 13.
100
Proposal AMLD4 amendments, recital 7. Though it is noted that
this language mainly pertaining to the benefits of virtual cur-
rencies was toned down in later compromise texts, following the
ECBs opinion. Council of the European Union, Proposal for a di-
rective of the European Parliament and of the Council amending
Directive (EU) 2015/849 on the prevention of the use of the finan-
cial system for the purposes of money laundering or terrorist
financing and amending Directive 2009/101/EC = Negotiating
mandate (15605/16) 4.
Please cite this article in press as: Niels Vandezande, Virtual currencies under EU anti-money laundering law, Computer Law & Security Review: The International Journal
of Technology Law and Practice (2017), doi: 10.1016/j.clsr.2017.03.011
Intelligence Units (FIUs) should be able to associate virtual currency
addresses to the identity of the owner of virtual currencies.101
More concretely, the proposal defines virtual currency ex-
change platforms as providers engaged primarily and professionally
in exchange services between virtual currencies and fiat curren-
cies, which excludes those providing such services occasionally
or non-professionally.102 Custodian wallet providers, in turn,
are defined as wallet providers offering custodial services of cre-
dentials necessary to access virtual currencies, which would appear
to exclude wallets that do not hold keys for their customers.103
These service providers would need to be licensed or
registered.104 Moreover, those holding a management func-
tion in these service providers, and those being the beneficial
owners must be fit and proper persons.105 Virtual currencies
themselves are defined as digital representation of value that is
neither issued by a central bank or a public authority, nor necessar-
ily attached to a fiat currency, but is accepted by natural or legal
persons as a means of payment and can be transferred, stored or traded
electronically.106 This is a very broad definition, which could po-
tentially bring a wide range of service providers currently not
regulated by this legal framework under its scope. Recital 8 to
the proposal narrows down the scope of this definition in stating
that local currencies (also known as complementary currencies) that
are used in very limited networks such as a city or a region and among
a small number of users should not be considered as virtual
currencies.107 This wording is very similar to that of the so-
called limited networks exemption found in the legal framework
regarding payment services.108 Moreover, the Commission will
investigate the possibility to set up a central database register-
ing users identities and wallet addresses accessible to FIUs, as well
as self-declaration forms for the use of virtual currency users.109
Somewhat oddly, these definitions are to be inserted under the
scope of the directive, rather than under the definitions.110
101
Id.
102
Proposal AMLD4 amendments, art. 1(1). Though the Councils
compromise texts would, however, drop the primarily and pro-
fessionally. Council of the European Union 2016, op. cit., 19.
103
Proposal AMLD4 amendments, art. 1(1). Though the current
wording does leave uncertainty regarding so-called multisig wallets.
These essentially require several keys, one or more of which may
be held by the wallet service provider. If the provider holds some
but not all keys, will it still fall under the scope of this provision?
At the moment, there is no clear answer to this, even though it
has substantial impact on the precise scope of the proposed
changes. The at the moment of writing latest compromise text
changes this definition into entity that provides services to safe-
guard private cryptographic keys on behalf of their customers, to holding,
store and transfer virtual currencies, which could be taken to suggest
that the custodian wallet provider would be holding all the keys.
Council of the European Union 2016, op. cit., 21.
104
Proposal AMLD4 amendments, art. 1(16).
105
Id.
106
Proposal AMLD4 amendments, art. 1(2)(c).
107
Proposal AMLD4 amendments, recital 8.
108
PSD1 and PSD2, art. 3(k). This exemption also applies to EMD2.
109
Proposal AMLD4 amendments, art. 1(22).
110
The compromise texts move the definition of custodian wallet
providers to article 3. Council of the European Union 2016, op. cit.,
20.
 ARTICLE IN PRESS
computer law & security review (2017)
6. Analysis of the proposed changes and their
consequences
In terms of terminology, the ECB objects to the use of the notion
of currency, fearing that this notion may imply a reference
to legal tender.111 While it is true that the notion of currency
has indeed been used in reference to legal tender112, this seems
to be more the case for the notion of money, whereas cur-
rency is generally understood as referring to a circulating
medium of exchange.113 In that sense, the ECBs desire to see
virtual currencies clearly distinguished from legal tender could
be more easily included in the definition of this notion, as the
ECB also proposed in an amendment.114 This solution can be
preferred over making up entirely new terminology, which
would only deviate from the by now well-established use of
the notion of virtual currencies, thus creating unnecessary
confusion. The compromise texts have taken up this sugges-
tion, clearly setting apart virtual currencies from legal tender,
and referencing its use as medium of exchange. At the moment
of writing latest definition is:
digital representation of value that can be digitally transferred,
stored or traded and is accepted by natural or legal persons as a
medium of exchange, but does not have legal tender status and
which is not funds as defined in point (25) of Article 4 of the Di-
rective 2015/2366/EC nor monetary value stored on instruments
exempted as specified in Article 3(k) and 3(l) of that Directive.115
Furthermore, it must be questioned to what extent the Eu-
ropean Commission aims to regulate virtual currencies with
this proposal. The notion of virtual currencies itself is cer-
tainly defined fairly broadly, less so in the more restricted
version found in the compromise texts and could thus prin-
cipally cover different types of virtual currencies. The obliged
entities included here, however, seem to limit the extent of this
change to cryptocurrency service providers only. After all, the
virtual currency exchanges and wallet providers found in prac-
tice are generally aimed toward cryptocurrencies, and not
111
ECB, Opinion of 12 October 2016 on a proposal for a directive of the
European Parliament and of the Council amending Directive (EU) 2015/
849 on the prevention of the use of the financial system for the purposes
of money laundering or terrorist financing and amending Directive 2009/
101/EC (ECB 2016) 3.
112
For instance in article 2(a) Directive 2014/62/EU of the Euro-
pean Parliament and of the Council of 15 May 2014 on the protection
of the euro and other currencies against counterfeiting by crimi-
nal law, and replacing Council Framework Decision 2000/383/JHA
[2014] OJ L151/1.
113
Regarding currency: currency, Blacks Law Dictionary (9th ed.)
(West 2014); currency, n., OED Online (Oxford University Press 2014);
currency, Merriam-Webster.com (Merriam-Webster 2014); cur-
rency, collinsdictionary.com (HarperCollins Publishers 2014).
Regarding money, Blacks Law Dictionary (9th ed.) considers this
notion as equalizing legal tender in reference to Uniform Com-
mercial Code 1201(b)(24). See: money, Blacks Law Dictionary (9th
ed.) (West 2014); money, n., OED Online (Oxford University Press
2014); money, Merriam-Webster.com (Merriam-Webster 2014);
money, collinsdictionary.com (HarperCollins Publishers 2014).
114
ECB 2016, op. cit., 7.
115
Council of the European Union 2016, op. cit., 21.
Please cite this article in press as: Niels Vandezande, Virtual currencies under EU anti-money laundering law, Computer Law & Security Review: The International Journal
of Technology Law and Practice (2017), doi: 10.1016/j.clsr.2017.03.011
11
toward other types of virtual currencies. This would, of course,
limit the extent of the practical application of the Commis-
sions changes. Moreover, as remarked by the ECB in its opinion
on the matter, virtual currencies could be used to attain goods
and services without requiring exchange into legal tender or
the use of a custodian wallet provider.116 Neither makes the
proposal mention of virtual currency to virtual currency ex-
changes. Such activities could still result in money laundering
or terrorist activities, yet are not caught by the scope of this
proposal. Also, the proposal does not address other use cases
of particularly cryptocurrencies, such as in investment
products.117
The result of these seemingly minor modifications for virtual
currency service providers is clear: virtual currency exchange
platforms and custodian wallet providers will have to be reg-
istered or licensed, though the latest compromise text only
leaves the option of registration.118 They will have to adopt mea-
sures to comply with customer due diligence obligations, not
just in relation to new customers but also to existing
customers.119 As a result, their customers identities must be
verified even before establishing a business relationship or car-
rying out a transaction. Such is expected to allow competent
authorities to effectively monitor the use of virtual curren-
cies. It must also be noted that such registration or licensing
if the original proposal is followed will be dependent on na-
tional implementation, and that no passporting rules apply
here.120 The result is that service providers would need to be
registered in every Member State in which they want to provide
their services. Furthermore, since the proposed changes do not
specify how such registration is to occur, the precise rules could
end up being very different across Member States.121 Last, the
behavior of their managers and beneficial owners must be fit
and proper, even though there is at the moment no directive
or guideline that provides for how such assessment must be
conducted for these particular service providers.122
These service providers, up to now operating without regu-
latory oversight, will be subjected to the full scope of anti-
money laundering rules. While the Commission clearly
expressed that it is not its intention to limit access to this
market, it cannot be denied that there will be an impact on
existing service providers and new market entrants. Finan-
cial service providers are well-known to consider the
implementation of these rules as costly, and have ques-
tioned their efficiency in stopping money laundering practices.123
It therefore remains to be seen what will be the precise impact
on the further development of virtual currency services, and
116
ECB 2016, op. cit., 2.
117
Ibid., 34.
118
Council of the European Union 2016, op. cit., 37.
119
Proposal AMLD4 amendments, art. 1(5).
120
European Banking Authority 2016, op. cit., 67.
121
Ibid., 8.
122
Ibid., 78.
123
Though a study conducted at the level of the EU found it im-
possible to assess the real costs and benefits of this policy. ECOLEF
The Economic and Legal Effectiveness of Anti-Money Launder-
ing and Combating Terrorist Financing Policy (European Commission
2013) < www2.econ.uu.nl/users/unger/ecolef_files/
Final%20ECOLEF%20report%20(digital%20version).pdf>.
 ARTICLE IN PRESS
12 computer law & security review (2017)
whether that impact can be justified in light of whether the
objectives of this change can be attained.
This proposal also has clear consequences for the users of
virtual currencies. More precisely, these amendments would
touch upon the core of what is considered by many users to
be one of the main benefits from virtual currencies, espe-
cially cryptocurrencies, namely anonymity. Certain activities
regarding virtual currencies such as cryptocurrency mining
would principally not be affected by this proposal. However,
since many if not most users will acquire their virtual cur-
rencies from exchange platforms, or use the services of
custodian wallet providers in their payments, they will now
be required to verify their identity toward those service pro-
viders. Though such would potentially limit the risk posed to
users by that anonymity, the EBA has remarked that the pro-
posal does little to address other risks to users or other
stakeholders and the market for that matter.124 Moreover, as
noted in the previous section, the Commission wants to in-
vestigate the possibilities of assembling a central database
linking virtual currency wallet addresses to their users iden-
tities. Such would fully abolish whatever anonymity or
pseudonymity virtual currencies can offer their users. Virtual
currency service providers will be obliged to process the per-
sonal data of their clients, and they will have to share that data
with competent authorities. While of course such personal data
processing must comply with the EUs legal framework in this
regard, this move toward full and mandatory identification will
undoubtedly repel many users.
From a regulatory perspective, it was of course only a matter
of time before such action would be taken. Virtual currencies
are currently not regulated under the main legal frameworks
in this field of law, and this oft-perceived lawlessness can only
increase the desirability of virtual currencies for criminal intent.
Examples such as the aforementioned Silk Road case demon-
strate that virtual currencies are indeed used in criminal
schemes. Virtual currencies are not issued by state actors, which
means their usability fully depends on users trust in the virtual
currency schemes themselves. It is therefore hard to argue with
an initiative that aims to contribute to increasing trust of their
good-faith users.125 However, the ECB warns that the proposal
could be perceived as lending legitimacy to virtual curren-
cies, though it does not address all of the associated risks
such as their volatility and potential to disrupt price stability.126
Though regulation of virtual currencies under the anti-
money laundering framework seems appropriate, it is held that
this should not promote wider use of virtual currencies. The
EBA has in this regard remarked that the inclusion of certain
virtual currency service providers under the legal framework
of anti-money laundering does not include the imposition of
consumer protection or prudential safeguards.127 As a result,
the appearance that these service providers are now regu-
lated or authorized may give the false impression that such
safeguards are in place, where in fact they are not. In the
opinion of the EBA, there is therefore a need for more com-
prehensive regulation of virtual currencies, corresponding to
124
European Banking Authority 2016, op. cit., 5.
125
Proposal AMLD4 amendments, 11.
126
ECB 2016, op. cit., 23.
127
European Banking Authority 2016, op. cit., 5.
Please cite this article in press as: Niels Vandezande, Virtual currencies under EU anti-money laundering law, Computer Law & Security Review: The International Journal
of Technology Law and Practice (2017), doi: 10.1016/j.clsr.2017.03.011
the risks not mitigated by the current proposal, as well as for
better communication to stakeholders on the precise legal
status of virtual currencies.128 The later compromise texts would
somewhat address this matter by removing the statements on
the benefits of virtual currencies, only focusing on the fact that
this proposal aims to partially address the risk posed by
anonymity.129
Also from an international perspective, this initiative should
come as no surprise. The US state of New York, for instance,
already adopted a legal framework governing virtual cur-
rency services last year.130 Under this legal framework, virtual
currency service providers would need to be licensed, which
also requires them to adopt an anti-money laundering
program.131 At the federal level, the US Financial Crimes En-
forcement Network (FinCEN), a bureau of the United States
Department of the Treasury, considers virtual currencies as
media of exchange that can operate like a currency, but that
do not possess the attributes of real currency, such as being
legal tender.132 The result is that, according to FinCEN, virtual
currency service providers such as exchange platforms can
operate as money service businesses, which would require them
to register and to maintain an anti-money laundering
program.133 More recently, Japan has amended it Payment Ser-
vices Act134 to consider virtual currencies as a store of value
that is not legal tender, requiring service providers such as ex-
change platforms to register and to comply with a number of
requirements, which includes anti-money laundering rules.135
7. Conclusion
The main EU-wide legislation in this particular area of finan-
cial and economic law is the legal frameworks on e-money and
payment services. It is clear that these legal frameworks can,
in their current form, not apply to the different types of virtual
currencies or virtual currency service providers. In an attempt
to bring some form of oversight into the developing field of
virtual currencies, the European Commission has proposed to
amend the legal framework holding anti-money laundering
rules. This would effectively subject virtual currency ex-
change platforms and custodian wallet providers to anti-
money laundering rules.
The main change to be expected from this initiative for the
affected service providers is of course the requirement to imple-
ment anti-money laundering policies, and to conduct
128
Ibid., 56.
129
Council of the European Union 2016, op. cit., 4.
130
It should also be noted that the definition of virtual currency
business activity used in that legal framework is much broader
than the two forms of service providers captured by the Euro-
pean Commissions proposal. 23 CRR-NY 200.2(q).
131
23 CRR-NY 200.15.
132
FinCEN Guidance Document Application of FinCENs Regu-
lations to Persons Administering, Exchanging, or Using Virtual
Currencies (FIN-2013-G001) 1.
133
Ibid., 35.
134
Act No. 59 of 24 June 2009.
135
Yasutake Okano, Virtual currencies: issues remain after Payment
Services Act amended [2016] 243 Iakyara 1, 23.
 ARTICLE IN PRESS
computer law & security review (2017)
risk-based customer due diligence. For users of these ser-
vices, the direct effect would be the loss of the anonymity or
pseudonymity traditionally associated with virtual curren-
cies. They would need to be clearly identified, and this
information would be shared with competent authorities.
As with any legislative procedure, this proposal is of course
only the first step in the process. However, though changes to
the precise wording can be expected, it seems unlikely that the
European Parliament or the Council will introduce signifi-
cant deviations from the Commissions overall objectives.
Nevertheless, the current proposal leaves a number of ques-
tions unanswered, for instance regarding its precise scope and
Please cite this article in press as: Niels Vandezande, Virtual currencies under EU anti-money laundering law, Computer Law & Security Review: The International Journal
of Technology Law and Practice (2017), doi: 10.1016/j.clsr.2017.03.011
13
the registration or licensing procedure. Moreover, the pro-
posal does not provide a solution to most of the potential risks
arising from virtual currencies. As a result, more clarity is
needed on the precise legal status of virtual currencies, and
more regulatory initiative may be needed to mitigate the other
potential risks. Whatever the final outcome of this proce-
dure, this initiative could provide a solution for the current
situation where certain virtual currency service providers are
being licensed to operate which also requires subjection to
anti-money laundering rules under the legal frameworks of
e-money or payment services, which are principally not ap-
plicable to them.