The UK government has been urged to close a loophole that could see some "well-established" virtual currencies like bitcoin, as well other cryptoassets whose prices are pegged to fiat currencies, fall outside the scope of forthcoming new anti-money laundering (AML) laws.
Under the EU's Fifth Money Laundering Directive (5MLD), platforms through which cryptoassets and fiat currencies can be exchanged, as well as custodian wallet providers, would be subject to AML rules requiring them to, among other things, carry out customer due diligence checks and to report suspicious activity.
However, the Financial Markets Law Committee (FMLC), a charity focused on identifying, considering and addressing issues pertinent to the sound administration of financial law, has written to the UK Treasury to warn that some cryptoassets could fall outside the scope of regulation because of the way 'virtual currencies' is defined in 5MLD.
"The definition of virtual currencies in 5MLD seems inadvertently to have excluded those cryptoassets which may be used as, and therefore share the characteristics of, money," the FMLC said. "Media reports suggest that market participants often and increasingly use cryptoassets as a form of money in commercial practice. The regulation of such activities in cryptoassets seems therefore necessary to prevent market disruption."
Earlier this year, the Treasury held a consultation on the UK's transposition of 5MLD, which must be completed by 10 January 2020. In that paper, the Treasury asked for feedback on the potential adoption of the 5MLD definition of virtual currencies into UK law.
In its letter, the FMLC suggested the UK government amend the definition to state that 'virtual currencies' are "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 sovereign flat currency, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically".
The FMLC acknowledged, however, that there would be "a great deal of overlap and redundancy between the three exceptions in this definition" and that it may also be argued that its proposed changes would not subject "virtual currencies which are pegged to a sovereign fiat currency or to a basket of such currencies", including the proposed new Libra coin, to AML oversight.
David Heffron of Pinsent Masons, the law firm behind Out-Law, an expert in the regulation of cryptoassets, said: "It appears that EU law makers deliberately drafted the definition of ‘virtual currencies’ to exclude electronic money from its scope, probably as e-money is addressed separately in 5MLD. This, though, has created an apparent disparity between that definition and the spirit of the directive's non-binding recitals which appear to suggest some of the most common cryptoassets, like bitcoin, do fall within the scope of the new EU rules."
"Whilst the FMLC’s proposed amendment addresses that issue, it does not address the point it has raised concerning fiat currency-pegged stablecoins – this is because there would remain ambiguity on whether virtual currencies 'attached' to legally established currency would fall outside the scope of the UK's AML regime," he said.
The Treasury's consultation closed on 10 June. It has still to publish its response to the feedback it has received.
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