The European Commission has revealed it wants to prevent the abuse of virtual currencies for money laundering and terrorist financing purposes by bringing virtual currency exchanges into the scope of the Anti-Money Laundering Directive.

Announcing its Action Plan to combat terrorist financing, Vice-President Valdis Dombrovskis, in charge of the Euro and Social Dialogue, said:

“We want to improve the oversight of the many financial means used by terrorists, from cash and cultural artefacts to virtual currencies and anonymous pre-paid cards, while avoiding unnecessary obstacles to the functioning of payments and financial markets for ordinary, law-abiding citizens.”

Although virtual currencies are included in a list of largely unregulated value transfer methods, virtual currencies and pre-paid cards are singled out for more immediate and specific measures. The Commission’s proposals include requiring Bitcoin and virtual currency exchanges to apply customer due diligence controls when exchanging virtual for real currencies.

Acknowledging the innovation of virtual currencies and that they are ‘considered a useful tool for rapid international payment transfers and low cost money remittances’, the Commission indicated it resisted an outright ban on the grounds they represent a ‘small market’.

As members will already be aware, EDCAB can now reveal the Commission’s plans to go beyond bringing exchanges under the 4th Anti-Money Laundering Directive. Official documents, seen by EDCAB, confirm the Commission’s intention of:

… applying the licensing and supervision rules of the Payment Services Directive … to virtual currency [exchanges and …] “wallet providers”.

The Commission’s virtual currency proposals are in response to last November’s call by the European Council to take action on virtual currencies and follow last week’s public hearing on virtual currencies in the European Parliament.

EU policy-makers and legislators, the European Commission and supporting institutions, and EU regulators all have virtual currencies on their current agenda. EDCAB, the only Brussels-based independent public policy platform focused on virtual currencies and distributed ledger technology, is actively engaged in dialogue with MEPs and all European Commission directorates.

A week after I drew MEPs’ attention to the large number of €500 notes in circulation, despite not being a common means of payment, the European Commission is to launch an investigation into high-denomination Euro notes, according to the FT.

Representing EDCAB, the European Digital Currency and Blockchain Technology Forum, at a public hearing into virtual currencies held by the European Parliament’s Committee on Economic and Monetary Affairs, I explained that “€500 notes account for 30% of the €1 trillion banknotes in circulation, despite not being a common means of payment.”

MEPs were surprised to learn that detailed analysis of the Bitcoin blockchain “…made possible by its inherent transparency, allows us to deduce that virtual currencies account for something considerably less than 1/100,000th of 1% of global money laundering.”

It is gratifying to hear European policy-makers are at last paying attention to totally anonymous high-denomination banknotes.

The influential Committee on Economic and Monetary Affairs Committee of the European Parliament (ECON) will hold a public hearing into virtual currencies on Monday 25 January 2016. The Committee is preparing its upcoming own-initiative report on virtual currencies. Panellists will include representatives from the European Commission and the OECD, academia and stakeholders from the private sector including EDCAB – the European Digital Currency and Blockchain Technology Forum – an independent, non-profit, educational, public policy platform based in Brussels.

The hearing is expected to consider new opportunities and benefits for consumers resulting from virtual currencies and their underlying technologies, their challenges and risks, and the role to be played by legislators and public institutions.

The ECON Committee is responsible for Economic and Monetary Union, the regulation of financial services, the free movement of capital and payments, taxation and competition policies, and the international financial system.

The European Parliament is the directly-elected parliamentary institution of the European Union (EU). Together with the European Council and the European Commission, it exercises the legislative function of the EU, a political and economic union comprising 28 member states and a population of 508 million — the world’s third largest population after China and India. Much of Europe’s legislation and regulation of financial services and markets, banking and payments emanates from laws made by EU legislative institutions.

The hearing will be web-streamed live from 15:00 Central European Time (CET) / 14:00 GMT [EuroParlTV](http://www.europarl.europa.eu/ep-live/en/schedule)

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Bitcoin-friendly Isle of Man delivered on its promise to apply anti-money laundering (AML) legislation to digital currency businesses. On 17 March 2015, amendments were passed to its Proceeds of Crime Act so that Bitcoin businesses will have the same AML responsibilities as lawyers, acountants and real estate agents. The scope of activites covered is broad. From 1 April 2015, anyone on the Isle of Man engaged in the “business of issuing, transmitting, transferring, providing safe custody or storage of, administering, managing, lending, buying, selling, exchanging or otherwise trading or intermediating convertible virtual currencies” must comply with the Island’s AML framework. Also, from this Summer, digital currency businesses will be subject to registration and oversight by the Isle of Man Financial Services Commission (FSC) when the Designated Businesses Bill, which completed its passage through the Island’s legislature on 24 March, receives Royal Assent and the FSC becomes the supervisory authority for AML. Taken together, these measures can only be positive for Bitcoin businesses struggling to gain credibility and legitimacy with banks and consumers. With other changes currently taking place in the sterling clearing systems, the prospect of bank accounts for digital currencies takes a step closer. For more information about doing business on the Isle of Man, contact iom@coinsult.eu.

Digital currencies featured significantly in the [2015 Budget](https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/413949/47881_Budget_2015_Web_Accessible.pdf) published by HM Treasury (the UK’s Finance Ministry) on 18 March 2015. Affirming its determination to drive increased competition in banking, the UK government details its plans to establish a supportive framework for digital currency businesses. It hopes to achieve this by a judicious mix of carrot and stick – in fact, a rather big bag of carrots and a pretty short stick. In August 2014, the Chancellor of the Exchequer (UK Finance Minister), George Osborne, expressed broad support for UK FinTech (financial technology) companies and announced that the government was looking into the benefits and risks associated with digital currencies and their underlying technology. A call for information followed in November 2014 which attracted over 120 written submissions. A summary of the responses and government’s plans based on them are detailed in a [paper](https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/414040/digital_currencies_response_to_call_for_information_final_changes.pdf) published with the 2015 Budget. Central to government’s thinking is its belief that distributed ledger technology ‘has significant future promise’. Even though the paper focuses on payments innovation, other parts of government are already considering wider use cases, as revealed in a recent Bank of England research paper. Government’s key proposal is to apply anti-money laundering (AML) regulation to digital currency exchanges in the UK. While regulation – any regulation – is anathema to some, AML regulation is actually something the UK industry has been asking for, for some time, founded on the belief that it will plant credibility in the minds of consumers and banks alike. Opening a UK bank account has been nigh impossible for any business even vaguely associated with digital currency. The most frequently cited reason for being denied an account, or having one closed, is banks’ inability to ensure AML compliance. Without a regulatory regime for AML, countering terrorist financing and handling funds belonging to politically exposed persons, banks and payment institutions are exposed to a higher risk of infingement and fines. Not a good situation when banks are de-risking generally. That all changes with the introduction of AML regulation. For exchanges, at least. It remains to be seen whether banks – particularly the Big Four who, for now, control the sterling clearing system – become more amenable any time soon. The government also wants to ensure law enforcement has effective skills, tools and the legislation to identify and prosecute criminal activity relating to digital currencies, including the ability to seize and confiscate digital currency funds where transactions are for criminal purposes. This is hardly surprising. Infinitely more realistic an approach than it took with earlier pronouncements on controlling the use of cryptography. Regulatory certainty and the ability to be regulated in the UK will likely attract more digital currency startups and venture capital to London. CoinJar, recently re-headquartered in the UK, are cited as an example in Budget documents. AML regulation is a win-win for government and the industry. In one go, George Osborne has succeeded in stimulating a nascent industry, attracting entrepreneurs and venture capital, meeting recommendations from the European Banking Authority (EBA) and placating Home Office (Interior Ministry) concerns about criminal and terrorist use of virtual currency. A deft piece of work and an inspiration to other jurisdictions. To bolster its support for digital currency businesses in the UK, the government intends to put money where its mouth is by providing an extra £10 million to address research opportunities and challenges for digital currency technology – a clear indication the government wants the UK to lead in blockchain and similar technologies. The idea is to bring together industry with several of the UK’s seven research councils, the Alan Turing Institute which focuses on Big Data and algorithm research and is headed by some of Britain’s leading universities including Oxford, Cambridge, Edinburgh and University College London, and Digital Catapult – a rapid business accelerator focusing on the collection, transport and analysis of data. The government also announced that it is to work with the British Standards Institution (BSI) and the industry to develop voluntary standards for consumer protection, a proposal being championed by the UK Digital Currency Association. In an accompanying publication [*Banking for the 21st Century: driving competition and choice*](https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/413885/Banking_for_the_21st_Century_17.03_19_40_FINAL.pdf), HM Treasury proudly boasts that all these measures together will increase competition ‘… by supporting the growth of technology that can be adopted by banks and non-bank providers’ promoting new products and allowing existing products to be delivered more cheaply and efficiently. This may not have been what early Satoshinistas had in mind but it certainly will be good for business. *Money* has already taken over Bitcoin and it will continue doing so and at an ever-increasing rate. The government is in no doubt these measures, taken together, ‘place the UK at the forefront of the development of digital currencies’ and will make the UK the go-to place for digital currency and related technology firms. None of the proposed measures will happen overnight. Formal consultations will only start in the next parliament, to be formed after May’s general election. Public policy and legislation take time. Of course, this government may not be returned to power then but I suspect there is will not be too much disagreement across the political parties on this issue. In marked contrast to other jurisdictions where individual regulators have formulated narrower policy agendas, the UK has shown that joined-up government really works. The result is a comprehensive policy that takes into account all the risks and benefits and all sections of government. For once, a government has tackled it the right way, striking a thoroughly pragmatic balance between the interests of the state, the consumer and the industry. The UK is not the first jurisdiction to take this approach – the Isle of Man got there first – but it leads the way in the EU and across most of the the great nations. I would not be surprised if the UK sets the European agenda on digital currencies.

New York’s Superintendent of Financial Services, Ben Lawsky, chose yesterday’s (18 December 2014) meeting of the Bipartisan Policy Center, a Washington-based think tank, to announce revised proposals for virtual currency licensing in the State of New York and a new round of public comment.

The original draft BitLicense regulations, published in July 2014, placed a weighty regulatory burden on all but digital currency consumers and merchants almost everywhere in the World. An initial 45-day comment period, subsequently extended, drew over 3,700 public comments. The feedback has not seemingly fallen on deaf ears. On the contrary, the NYDFS appears to have significantly eased some of original requirements, including:

• limiting the scope
• transitional licenses, providing an ‘on-ramp’ for fledging businesses
• relaxing counterparty KYC requirements
• making non-controlling investment easier
• counting virtual currency holdings within capital requirements.

Watch and listen to Lawsky’s announcement, starting at 01:12:15 –

Ben Lawsky announcing revised BitLicence regulations

Details of the revised draft regulations and further comment period are due to be published soon and my analysis will be plublished here.

I am indebted to Jerry Brito*, research fellow at the Mercatus Center at George Mason University, for pointing out Luke Westaway’s CNET interview with Garrick Hileman about Chancellor of the Exchequer, George Osborne’s recent Bitcoin announcement. Garrick is Economic Historian at the London School of Economics and a regular Coindesk contributor. He observes:

The Chancellor is no doubt aware that very little of the $250 million of venture capital which has been invested in Bitcoin startups to date has gone to British-based companies. The bottom line […] is that Osborne thinks he’s spotted an opportunity for the City and Silicon Roundabout to siphon investment and jobs away from the US and other markets which are taking a more aggressive Bitcoin regulatory posture.

So, will supporters of FinTech innovation succeed over the Bitcoin naysayers when the Downing Street Policy Unit and Treasury mandarins sit down to battle it out over the coming months? I’m becoming cautiously optimistic the UK may just end up with only light-touch regulation as Garrick thinks. The UK Digital Currency Association certainly hopes so as it gets ready to lobby Whitehall and Westminster.

This is a golden opportunity for London to win one over the US, especially following New York’s publication of its over-reaching BitLicense proposals. There may be some stern words to come when the UK Government eventually announces regulation – perhaps as early as this Autumn – but the reality may actually be a pleasant surprise.

I was fortunate to have interviewed Jerry Brito at Bitcoin 2014 for EpicenterBitcoin. Worth a listen.

At Innovate Finance held in London’s Canary Wharf, Chancellor of the Exchequer (the UK’s finance minister), George Osborne, announced today a series of measures to support the FinTech sector and encourage innovation in finance including supporting alternative finance providers and virtual currencies and digital money. To make the point, he even bought some bitcoin.

Chancellor Osborne said the UK government will look at the potential virtual and digital currencies have for achieving positive change and for encouraging innovation in Britain’s world leading financial sector, as well as the potential risks.

recognising that the world of finance as we know it is changing in front of our eyes, I can today announce that the Government will start a major programme of work exploring the potential of virtual currencies and digital money.

He also announced one of the steps the government will take is to start a programme of work looking into how virtual and digital currencies could or should be regulated in Britain.

… will look into whether regulation of the sector is required, so that virtual currency business can continue to set up in the UK, and for people and businesses to use them safely

Time will tell whether UK’s virtual currency industry receives support or suffers regulation.

This morning’s press makes much of a speech to be given later today by Chancellor of the Exchequer, George Osborne, (the UK’s finance minister) announcing support for “alternative finance providers”, recognising them as an important part of the FinTech sector.

BBC News reports ‘he will announce the government is to investigate the potential for virtual and digital currencies such as Bitcoin to encourage innovation in the UK’s financial sector’. Contrast this with the FT’s coverage:

An ‘investigation into potential’ is a long way off actually doing something to support digital currency innovation. It remains to be seen whether the outcome will be encouragement or regulation.

With regulation now a reality for virtual currency businesses, help is at hand to understand the rules, choose the best jurisdiction and establish and operate compliant anti money laundering processes.

COINSULT is a full service virtual currency consultancy with an emphasis on regulatory compliance, jurisdictional strategy, public affairs, taxation and accounting.

Based in London and Brussels, COINSULT provides advice to European bitcoin, digital asset and payment innovation businesses with global regulatory obligations.