The EU Parliament Passes AML Laws That Regulate Bitcoin Based on Assumptions That Aren’t Entirely Clear

The European Parliament approved a new AML package that increases crypto asset service providers’ (CASPs) reporting obligations for ‘anonymous’ transactions between privately hosted wallets and custodial providers. The new law also restricts cash transactions and creates a ‘central watchdog’ agency to develop regulatory technical standards.

The latest regulations require EU CASPs to perform thorough customer due diligence for self-custodial wallet transactions under 1000 EUR and add KYC for transactions over 1000 EUR. The regulations also regulate custodial program suppliers without KYC verification and privacy-focused cryptocurrencies, which prevents CASPs from offering privacy-focused assets. Self-custodial software and hardware are unregulated.

The Wednesday European Parliament resolution suggests that certain electronic money products are vulnerable to money laundering and terrorism due to their lack of transparency. It shows how anonymity can lead to criminal use of crypto-assets.

In the initial proposal, lawmakers easily estimated money laundering at 2-5% of global GDP. They acknowledged their mistakes, with nearly 99% of illicit earnings escaping confiscation.

Everyone Knows That Crypto Is Used by People Who Launder Money. But Can Someone Show It?

The EU AML/CFT frameworks have been updated to follow the Financial Action Task Force’s latest recommendations. The G7 created the organization in 1989 to combat money laundering and terrorist financing.

FATF regional bodies (FSRBs), the IMF, and the World Bank conduct AML and CFT assessments. These assessments aim to produce high-quality, timely reports. To ensure fairness, mutual evaluation reports (MERs) should be consistent in findings, recommendations, and ratings. Transparency and equal treatment for all assessment countries are also priorities.

The chair introduces the EU FSRB’s 2021 annual report, published in April 2023 by the EU Commission’s MONEYVAL. Since cryptocurrencies were invented ten years ago, money launderers have used them to transfer and hide drug trafficking proceeds. Today, their methods are more advanced and widespread.

However, MONEYVAL’s report only mentions advances in virtual asset regulation enforcement, providing little evidence. The report notes that a 2022 cryptocurrency money laundering study will be dedicated to this topic. No previous research has been done on this topic.

The MONEYVAL typologies report examines virtual asset money laundering and terrorism financing risks. However, it does not conclude that cryptocurrencies are essential in anti-money laundering and counter-terrorism financing. Instead, it uses collaborative working groups to assess anti-money laundering regulations’ effectiveness.

The typologies report shows that the supervisor rarely verifies private sector information when assessing sector risk at the national level. It also notes incomplete risk assessments.

The latest IMF report on crypto asset policies suggests a lack of reliable information about cryptocurrencies’ potential risks to terror financing, anti-money laundering, and financial abuse. The report notes that these impacts on crypto-assets have yet to be thoroughly examined. This week’s IMF report examines Bitcoin’s cross-border movement. According to the report, measuring cross-border flows accurately requires many assumptions.

In contrast, the IMF’s 2024 global financial stability report estimates that ransomware hackers stole $1,100 million in crypto assets, which amounts to 0.061% of the crypto industry’s $1.8 trillion market cap.

World Bank publications on crypto asset adoption do not provide additional insight into how cryptocurrencies affect anti-money laundering and combating the financing of terrorism (AML/CFT) initiatives. The papers “Crypto-Asset Activity Around the World” and “What Does Digital Money Mean for Emerging Markets and Developing Economies?” cite FATF recommendations.

In “Decrypting New Age International Capital Flows,” the World Bank references one academic study on cryptocurrencies and money laundering. The paper claims that 25% of Bitcoin users engage in illegal activities.

Numerous scientific papers examine cryptocurrencies’ role in illicit transactions. Many academics doubt the reliability of the methods, citing error rates of over 92% in common heuristics. Some argue that user behavior techniques could be more reliable and should not be used to justify extensive investigations.

Analysis of Proportionality: Comparing Human Rights and National Security Considerations

Illicit transactions’ share of on-chain transaction volume has been estimated differently. These estimates range from 0.34% in 2023 to 46% in 2019, highlighting the ongoing debate over cryptocurrencies’ role in facilitating illegal activities.

A 2024 National Risk Assessment by the Swiss federal police highlights the lack of data and statistics as a significant risk. The evaluation notes that Switzerland is not alone in lacking cryptocurrency financial transaction data.

The evaluation notes the ECB’s comments about a lack of reliable cryptocurrency financial data. It highlights the IMF’s comments that data gaps make it difficult to assess financial system virtual asset (VA) usage. This information gap hinders financial authorities’ risk analysis. Starting in 2019, the IMF suggested the global sharing of cryptocurrency transaction statistics to address data shortages.

MONEYVAL’s concerns about suspicious transaction report evaluation appear in the assessment. The review found that a survey of national police and prosecutors to collect quantitative data on criminal proceedings in cryptocurrency transactions and qualitative evaluations of law enforcement’s cryptocurrency challenges were incomplete and unhelpful.

Cryptocurrency deanonymization methods worry cybersecurity experts. They found that future regulatory ideas may violate freedom of association, privacy, informational self-determination, expression, and information access. The EU Charter of Fundamental Rights and the European Convention on Human Rights protect these rights.

Article 5 of the Maastricht Treaty requires the EU to limit its actions to what is necessary to achieve its goals. Given the lack of data on cryptocurrency’s role in money laundering and terrorist financing, MEPs’ proportionality decision may have been ill-informed.