EU Parliament Adopts AML Law Regulating Bitcoin Based on Questionable Assumptions

The European Parliament has adopted a new AML legal package that strengthens reporting requirements for Cryptocurrency Service Providers (CASPs) when sending and receiving ‘anonymous’ payments between self-hosted wallets and custodial service providers, in addition to restrictions on cash transactions and establishments. I did. This is what a ‘central watchdog’ body would look like to develop regulatory technical standards.

The new law requires EU CASPs to perform customer due diligence on transactions originating from self-managed wallets for transactions below 1000 EUR and to implement additional KYC measures for transactions above 1000 EUR. The law further regulates the operations of KYC-free management software service providers and the use of privacy coins, effectively prohibiting CASPs from providing privacy assets. Self-managed software and hardware providers are exempt from the regulation.

The resolution adopted by the European Parliament on Wednesday assumes that “the anonymity associated with certain electronic currency products exposes them to risks of money laundering and terrorist financing,” and that “the anonymity of cryptocurrency assets exposes such products to the following risks:” Assume: “There is a risk of it being misused for criminal purposes.”

Lawmakers seemed to have no problem crunching the numbers on overall money laundering activity and their own inefficiencies, which in the original proposal amounted to 2 to 5 percent of global GDP, but nearly 99 percent of criminal proceeds escaped confiscation. Supporting the fact that “the use of cryptocurrency assets (such as Bitcoin) for money laundering purposes is on the rise,” there is a link to Investopedia that explains what Bitcoin is.

Everyone knows: cryptocurrencies are for money launderers. But can anyone prove it?

The new legal package brings the EU AML/CFT framework in line with updated recommendations issued by the Financial Action Task Force, an intergovernmental body established by the G7 in 1989 to combat money laundering and terrorist financing. Updated accordingly.

According to FATF procedures, FATF recommendations are informed by AML and CFT assessments conducted by FATF regional bodies (FSRBs), the IMF and the World Bank to “produce objective and accurate reports of high standards in a timely manner.” ) Ensure a level playing field where Peer Review Reports (MERs), including summaries, are consistent, especially with regard to findings, recommendations and ratings. “Equality of treatment for all countries assessed in terms of the assessment process.”

The latest EU FSRB 2021 Annual Report published by the European Commission’s MONEYVAL in April 2023 begins with an introduction by the Chairman. “It is well known that money launderers have been abusing cryptocurrencies since their inception 10 years ago. Transferring and concealing proceeds from drug trafficking. “Nowadays, the methods are becoming increasingly sophisticated and on a larger scale.”

However, MONEYVAL’s report does not appear to support its claims with sufficient data points, only mentioning the progress of virtual asset regulation enforcement. “The 2022 type study will be dedicated solely to cryptocurrency money laundering trends,” the report emphasizes, suggesting that no such study exists at the time the report was written.

MONEYVAL type reports on money laundering and terrorist financing risks in the world of virtual assets do not seem to provide a definitive answer on the importance of cryptocurrencies in AML/CFT efforts. Instead, it will analyze the application and effectiveness of existing AML regulations through working groups.

In particular, the typology report states: “At national level, sector risk analysis relies heavily on the responses authorities receive from the private sector itself, with regulators taking little steps to verify the facts.” It also notes that the risk assessment “lacks depth.”

The latest IMF report on policy on cryptocurrency assets makes similar statements, suggesting a lack of verifiable data on the risks of cryptocurrencies in terrorist financing, counter-currency, and financial abuse. asset”. A new IMF report released this week that attempted to analyze the cross-border flows of Bitcoin found that “measuring the cross-border flows of Bitcoin is difficult and currently only possible through a series of non-trivial assumptions.” .

In contrast, the IMF’s 2024 Global Financial Stability Report cites specific data, but puts the overall amount of cryptocurrency received by ransomware hackers at around $11 million. This is only 0.061% of the cryptocurrency market capitalization of $1.8 trillion.

The World Bank’s 2023 report on lessons learned from first-generation money laundering and terrorist financing risk assessments found that “some emerging issues, such as VA (virtual assets) (…), were not addressed by the last NRA.” It must ensure that “authorities and private parties have more data to input” and “assess more risks, such as VASP.”

The World Bank’s 2022 publication on assessing countries for money laundering risks makes no mention of cryptocurrencies at all and notes that “further research” is needed on cryptocurrencies. The paper “Illicit Trade Flows: Concepts, Measurements and Evidence,” published in the World Bank Research Observer in 2020, does not even mention virtual assets, Bitcoin or cryptocurrencies.

The paper published by the World Bank on the adoption of crypto assets does not provide further insight into the impact of cryptocurrencies on AML/CFT efforts. Economic development?” Simply refer readers back to the existing FATF recommendations.

The World Bank paper “Decrypting New Age International Capital Flows” cites a single academic paper on the impact of cryptocurrencies on money laundering, stating that “approximately a quarter of Bitcoin users are involved in illicit activities.” claimed to have discovered this fact. There are many scientific papers attempting to assess the importance of cryptocurrencies in illicit trade flows, but the accuracy of the applied methodologies is widely questioned by academics, who claim to have found error rates exceeding 92% in commonly applied empirical methods. In particular, it asserts that methods based on user behavior are “the least reliable” and concludes that such applications should not be used to warrant intensive investigative action.

Proportionality Assessment: National Security and Human Rights

Estimates of illicit trading volume range from 0.34% of total on-chain trading volume in 2023 to 46% of total Bitcoin trading volume in 2019, highlighting the lack of a clear understanding of the importance of cryptocurrencies in facilitating illicit trading.

The Swiss Federal Police classified this “enormous lack of data” as an “intrinsic risk” in its 2024 National Risk Assessment, citing a “lack of numbers and statistics.” The assessment highlights that the lack of data on cryptocurrency financial flows is “not limited to Switzerland.”

The assessment highlights the ECB’s statement that it “points out the lack of reliable statistics” on financial flows related to cryptocurrencies. This further highlights the IMF’s statement, which said: “Significant data gaps are making it difficult to assess the true extent of VA (virtual asset) use in the financial system, which also impedes risk analysis by financial authorities.” The IMF recommended starting the international exchange of statistical data on cryptocurrency trading as early as 2019 to “address the data shortage.”

This assessment, which appears to reflect MONEYVAL’s concerns about evaluating suspicious transaction reports, examines investigations conducted by police and prosecutors to gather quantitative information about criminal proceedings in cryptocurrency trading and the challenges of cryptocurrencies for law enforcement operations. Qualitative assessments are “piecemeal” and “of limited relevance.”

Cybersecurity experts warn of the risks of cryptocurrency de-anonymization tactics in relation to established fundamental rights, finding that future regulatory concepts may conflict with fundamental rights such as the right to freedom of association, the right to privacy, and the right to information self-determination. The right to freedom of expression and the right to freedom of information set out in the Charter of Fundamental Rights of the European Union and the European Convention on Human Rights.

Under Article 5 of the Maastricht Treaty, measures applied by the European Union “shall not exceed the level necessary to achieve the objectives of the Treaty.” In the absence of conclusive data on the importance of cryptocurrencies in anti-money laundering and counter-terrorist financing efforts, it is questionable how MEPs voted on the proportionality of the EU’s new AML laws.

This is a guest post by L0la L33tz. The opinions expressed are solely personal and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.