The EU parliament has been quite progressive in defining crypto legally compared to the global pace. This body adopted the current 5AMLD crypto governing infrastructure back in 2018. At the time, they were moving to enforce stricter KYC/AML laws to curb illegal activities within the crypto markets.

Crypto exchanges and custodial providers were ultimately required to comply with the set-out KYC rules through compliance and collaboration with the mandated regulators. Following the recent developments in crypto, a new report now suggests the region ought to much-advanced standards such as the FATF. The report reads,

“To bring the European AML/CFT framework up to speed with the current reality in the crypto-space, the EU could consider a number of regulatory actions,”

Cryptocurrencies are known to be highly volatile given the history of price shifts in this market. Notably, the digital assets are also not compatible with traditional finance laws despite close proximity to existing financial markets. The researchers from EU’s parliament have since suggested a more transparent approach by the financial institutions operating crypto portfolios,

“Crypto-assets that do not qualify as MiFID II financial instruments, nor EMD2 electronic money, and hence, escape all EU financial regulation, the EU should, at the very least, put appropriate risk disclosure requirements in place, so that investors and/or consumers can be made aware of the potential risks prior to committing funds to these crypto-assets,”

The report goes on to further highlight that a conservative prudential approach would eliminate digital assets from the funds of financial intermediaries. This is mainly because of the risk exposure attributed to crypto. According to the report, incorporating digital assets into EU banks’ balance sheets could cause enormous losses should the market plummet significantly.

The report also recommends an update of the AML/CFT framework in a bid to cover more areas within crypto innovation. Given the rise in private tokens, crypto-to-crypto exchanges and financial institutions launching ICOs, the researchers have suggested a focus on entities in this niche for better AML practices.

On the issue of crypto mining, the report says that malicious actors can comfortably leverage the ease of joining this industry for illegal activities,

“Nowadays, coins have emerged that do not always require big energy-consuming server farms to mine, but that can be mined running a few hardware rigs at home,”

This presents an opportunity for the criminal actors to clean their money since all newly mined crypto coins are by definition ‘clean’. However, the EU’s parliament could eliminate this shortcoming based on the report,

“A first regulatory step could be to try to map the use of this technique and subsequently, if it effectively proves an important blind spot, to consider appropriate counter measures.”

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