Malta – Blockchain Island and the next AML Directive

June 2018 – the text of the Fifth Money Laundering Directive (EU/2018/843) (“5AMLD”) was published in the Official Journal of the EU and Malta approved three distributed ledger technology (DLT) and crypto-related acts.

How will the Fifth Money Laundering Directive and the three DLT and Crypto acts co-exist?

With great foresight and a commitment to living up to the name “Blockchain Island”, the Maltese Parliament approved three crypto-friendly pieces of legislation, namely: the Innovative Technology Arrangements and Services Act, the Virtual Financial Assets Act, and the Malta Digital Innovation Authority Act.

The first two acts provide for the regulation of digital ledger technologies (of which blockchain is one type), and also other virtual financial assets, under the supervision of the Malta Digital Innovation Authority.

The Malta Digital Innovation Authority, once set up, will have, as its mandate, the promotion of consistent principles for the “development of visions, skills, and other qualities relating to technology innovation”.

In anticipation of the advantages of benefitting from this regulatory environment, several large cryptocurrency exchanges have moved their operations to Malta, including OKEx, BitBay and Binance, to name but a few.

But how will 5AMLD impact large Cryptocurrency Exchanges positively, exactly…?

5AMLD provides for the inclusion of exchange platforms for virtual currencies and digital wallet providers in the group of obliged entities under anti-money laundering law.

This will naturally result in higher standards being applied, which, while coming at a cost, both in terms of infrastructure, human resources and loss of business, is virtually guaranteed to place those businesses which embrace this new regulatory environment as a cut above the rest, cementing them as serious businesses in an industry which is still wildly mistrusted and wary of scams.

Obligations will be imposed on exchange platforms for virtual currencies (such as Bitcoin) and the providers of digital wallets for virtual currencies, as well as electronic exchange offices where virtual currencies can be changed into fiat money, or vice versa.

Whether or not these provisions are sufficient to put an end to money laundering using virtual currencies is highly doubtful due to the fact that virtual currencies can still be exchanged between private persons without any monitoring, in peer-to-peer transactions, which are, after all, at the heart of the crypto currency revolution currently being experienced.

However, it is undoubtedly a step in the right direction, and as happened in the past with the regulation of remote gaming in Malta, the industry flourished under the stability and goodwill the companies licensed in Malta gained, for merely being regulated by a Maltese regulatory authority.

When it comes to high-risk countries, it will then be up to the individual Member States to ensure stricter requirements are put in place. Prior consent by management of any customer coming from a high-risk country would need to be sought. In this respect, Member States should therefore impose harsher statutory regulations which prohibit the establishment of branches and/or subsidiaries in high-risk countries by obliged entities or, at the very least, impose an increased monitoring. To this day, it is not clear which route Member States lawmakers will take. Without question, this will create a standardised approach to business relationships involving high risk countries.

Moreover, the Member States are set to introduce a new central electronic system that allows for the identification of every natural or legal person holding or controlling a bank account or a safe deposit box. Supervisory authorities should obtain unrestricted access to this register in order to perform their duties.

5AMLD is drafted as a minimum-harmonizing directive, which means EU Member States can apply more rigorous requirements should they consider it necessary.

The Directive (EU) 2018/843 is available here.