Anti-money laundering provisions must be implemented in the area of digital assets in basically the same way as for fiat money, both at EU/EEA level and in Switzerland. This article will therefore look at the various implementations of these provisions in the countries of the DACH region.
In principle, digital assets are divided into three token categories: payment tokens, asset tokens, and utility tokens. The Swiss Money Laundering Act (Geldwäschereigesetz — GwG) applies to payment tokens, which mainly include cryptocurrencies, such as Bitcoin. Asset tokens and utility tokens, on the other hand, are generally not covered by the scope of the GwG.
Anyone who carries out financial intermediary activities in Switzerland is subject to the GwG. A service provider that keeps payment tokens for their customers is generally regarded as a financial intermediary, and the money laundering regulations thus apply to their activities. The same applies to the trader of payment tokens, who exchanges digital assets into fiat and vice versa for their customers, and to the issuer of payment tokens. The applicability of the GwG in relation to digital assets includes compliance with due diligence obligations such as the identification of the contracting party and the clarification of the asset origin (KYC).
Germany has taken the revision of the 5th EU Anti-Money Laundering Directive as an opportunity to take the EU rules a step further and to fully regulate the “crypto custody business” as a financial service subject to authorization. Since January 1, 2020, “cryptovalues” and the “crypto custody business” are being regulated by the German Banking Act (Kreditwesengesetz — KWG) and are subject to authorization. The crypto custody business entails the custody, management and security of cryptovalues or private keys that serve to hold, store and transfer cryptovalues for others.
For the purposes of this act, cryptovalues are digital representations of a value that has not been issued or guaranteed by any central bank or public body. It does not hold the legal status of a currency or money but is accepted by natural or legal persons as a means of exchange or payment on the basis of an agreement or an actual practice. Furthermore, it serves investment purposes and can be transmitted, stored and traded electronically. In addition to tokens with an exchange and payment function, cryptovalues also include tokens with an investment purpose, e.g., security tokens and asset tokens.
An extension of the number of obligated parties in relation to money laundering regulations applies in particular when it comes to “virtual currencies”. Service providers offering the exchange of virtual currencies into legal tender or other digital assets are subject to money laundering regulations. Also subject to the authorization by the Federal Financial Supervisory Authority (BaFin) are service providers who direct offers from abroad to individuals who are domiciled or habitually resident in Germany using means of distance communication (without physical presence or an intermediary).
BaFin also examines whether a token is a financial instrument in accordance with the Securities Trading Act (Wertpapierhandelsgesetz — WpHG) or the Markets in Financial Instruments Directive (Richtlinie über Märkte für Finanzinstrumente — MiFID II) or a security within the meaning of the Securities Prospectus Act (Wertpapierprospektgesetz — WpPG) or an investment under the Capital Investment Act (Vermögensanlagengesetz — VermAnlG). If this is the case, there are other obligations, such as the prospectus obligation, in addition to the money laundering obligations.
As part of the implementation of the 5th Anti-Money Laundering Directive, the Financial Markets Money Laundering Act (Finanzmarkt-Geldwäschegesetz —FM-GwG) has been adapted amongst other things. The Financial Market Authority Austria (FMA) is the competent authority for the registration and ongoing supervision of service providers in the field of money laundering and terrorist financing in relation to virtual currencies. Unlike Germany, where the definition of cryptovalues also covers asset tokens, the FM-GwG defines the virtual currency as follows: a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically. The following services are covered by the registration obligation:
- Securing of private keys to keep, store and transfer virtual currencies on behalf of a customer (electronic wallet providers);
- Exchange of virtual currencies into fiat money and vice versa; the exchange of one or more virtual currencies among themselves;
- Transfer of virtual currencies;
- Provision of financial services for the issuance and sale of virtual currencies.
The registration obliges the service provider to comply with the FM-GwG. Compliance with the FM-GwG provisions is verified by the FMA as part of its ongoing supervisory activities.
As an EEA member, Liechtenstein has also implemented the EU Anti-Money Laundering Directive. The Token and TT Service Providers Act (Token- und VT-Dienstleister-Gesetz — TVTG) has been in force since January 1, 2020 and aims to increase legal certainty in regard to blockchains and counter the abuse of digital assets for money laundering or other criminal purposes. The implementing provisions for the 5th EU Anti-Money Laundering Directive are statutory in the Due Diligence Act (SPG) and the Due Diligence Ordinance (SPV). Service providers who, for example, offer the exchange of fiat into virtual assets or vice versa as well as operators of trading platforms for virtual currencies or tokens, and trustees fall within the scope of the provisions. According to article 2(1)(c) TVTG, tokens are considered to be “an information on a TT system that can represent claims or membership rights towards a person, rights in property or other absolute or relative rights or that can be assigned to one or more TT identifiers.” This definition goes further than the term “virtual currency” and covers a large part of the tokens. The registration obligation as well as the due diligence obligations to prevent money laundering and terrorist financing are linked to the service provided in connection to the token and not to the classification of digital assets as payment, asset or utility tokens as such.
ML/TF Risks have to be identified, analysed and ultimately mitigated by service providers or financial institutions. In next week’s article, we will look at how this is done in concrete terms.
This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, Bitmain, Blocksize Capital, and Nexo.