The EU Creates a New Crypto Supervisor

The EU continues its latest trend of regulating crypto activities by creating a new regulatory body focused on preventing money laundering in the crypto industry.

The European Union (EU) to Create a New Watchdog

In July of 2021, the European Commission published its proposal for the sixth AML Directive (AMLD6). Last month, the European Commission published its version of the document. Now, the Parliament will discuss its own version, before the three EU legislative bodies (Commision, Parliament, and Council) engage in a trialogue to reach a final version of the framework.

According to a parliamentary briefing, a crucial element of the new legislation is the creation of an EU-wide authority for AML. Although the legislative bodies still need to discuss it, there doesn’t seem to be much disagreement over the necessity of such a body and its obligation to have direct control over service providers for crypto-assets located in the EU.

This new regulator is said to have direct supervision powers over financial institutions and a coordination role over the non-financial sector:

EU-level supervision consisting of a hub and spoke model – i.e. supervisor at the EU level competent for direct supervision of certain financial institutions (FIs), indirect supervision/coordination of the other FIs, and a coordination role for supervising the non-financial sector as a first step.

After the approval of the final version of the AMLD6, EU member states will still need to transpose the new rules onto their legal systems. Unlike regulations, which are directly applicable in every member state after publication, directives have no legal force until they’re adopted by each country.

The new AML authority represents a shift in the EU past AML directives. While AML directives 4 and 5 primarily focused on imposing data collection obligations to many different entities (and not just companies), each member state was free to determine the regulatory authority responsible for dealing with the reported information. 

Now, by establishing an AML authority at the European level, the EU intends to harmonize the AML supervision instead of leaving this decision to the member states.

Considering the common EU legislation timeframe, even if the trialogue of the AMLD6 takes little to no time, it is highly unlikely that the implementation of this framework will take place soon. Since it will take some time to hire staff for the new AML authority to operate, its supervisory powers will be exercised by each member state AML regulatory body.

Where does the EU stand on crypto?

The EU has been turning its focus to crypto in the last months, with the Markets in Crypto-Assets (MiCA) and the Transfer of Funds (TRF) regulations nearing completion. The new AMLD6 package will continue this trend.

MiCA will be an extensive framework applicable to all crypto-assets (including stablecoins), exchanges, crypto-assets providers, and decentralized finance protocols. TRF will apply to all transfers of funds, both with fiat currency and crypto, and aims to prevent crypto’s use to circumvent AML restrictions.

While the Proof-of-Work ban was defeated in the European Parliament, the European Central Bank is not keen on the advantages of crypto and regularly advises against its use in its financial stability reviews.

According to a new study by the digital asset payments firm TripleA, crypto adoption exceeds 320 million users worldwide, 43 million of them in Europe. With this many people using crypto, the time is ripe for the adoption of legislation aiming to protect investors from crypto-related risks.

Earlier this month, the Federal Reserve of the United States issued guidance for banks engaging or seeking to engage in crypto-related activities in what seems to be a global trend for supervisors.