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17 August 2018
The European Parliament and the European Council recently expanded the scope of the EU anti-money laundering (AML) and combating the financing of terrorism (CFT) regulations to cover cryptocurrencies and virtual currencies. The Fifth AML Directive (2015/849/EC) entered into force on 9 July 2018 and EU member states must implement the new rules into national law by 10 January 2020.
While the directive will not apply directly to Switzerland – being neither a member of the European Union nor the European Economic Area – Swiss financial regulators remain ahead of the curve. Since 1 January 2016, the Financial Market Supervisory Authority (FINMA) has widened the scope of certain banking regulations relating to money transmitting and remitting services to cover virtual currencies.
The Swiss Anti-money Laundering Act states that not only banks and securities dealers, but also anyone that provides payment services or issues or manages a payment method are considered financial intermediaries subject to the act. In this context, on 16 February 2018 FINMA published its guidelines regarding the regulatory framework for initial coin offerings, which confirmed the standard market practice that issuing payment tokens constitutes issuing a payment method subject to Swiss AML regulations, as long as the tokens can be transferred on a blockchain platform.
According to the guidelines, 'payment tokens' (synonymous with cryptocurrencies) are tokens which are intended to be used, now or in future, as a payment method for acquiring goods or services or as a means of transferring money or value. Cryptocurrencies do not raise claims on their issuer.
Similarly, the Fifth AML Directive defines 'virtual currencies' as a digital representation of value that:
Under current FINMA practice, the exchange of cryptocurrency for fiat money or another cryptocurrency and offers of services to transfer payment tokens where the service provider maintains the private key (custody wallet provider) fall within the scope of Swiss AML regulations. However, at present, the latter are often subject to Swiss banking regulations, according to the Federal Council report of 25 June 2014 regarding virtual currencies and the explanatory report on the draft of the amendment of the Banking Act and the Banking Ordinance (FinTech) on 1 February 2017.
Payment tokens or cryptocurrencies of token holders in a wallet held with a wallet provider or operator may qualify as deposits which are similar to fiat currency and therefore be subject to banking regulations if:
Therefore, providing custody wallet provider services requires a thorough analysis in each individual case regarding the potential applicability of Swiss banking regulations.
In general, Swiss AML regulations give rise to a range of due diligence requirements, including:
Presently, in the European Union, providers engaged in exchange services between virtual currencies and fiat currencies (ie, coins and banknotes that are designated as legal tender and electronic money and accepted as a medium of exchange in the issuing country) and custodian wallet providers (ie, entities that provide services to safeguard private cryptographic keys on behalf of their customers and hold, store and transfer virtual currencies) are under no obligation to identify suspicious activity.
Compared to the Swiss system, to prevent terrorist groups from transferring money into the EU financial system or within virtual currency networks by concealing transfers or by benefiting from a certain degree of anonymity on those platforms, the European Parliament and the European Council amended the scope of the Fifth AML Directive to cover providers engaged in exchange services between virtual currencies and fiat currencies, as well as custodian wallet providers.
With this inclusion, competent authorities should be able to monitor the use of virtual currencies for AML and CFT purposes. Such monitoring would provide a balanced and proportional approach, safeguarding technical advances and the high degree of transparency already attained in the field of alternative finance and social entrepreneurship in Switzerland.
For further information on this topic please contact Alexander Vogel or Reto Luthiger at Meyerlustenberger Lachenal by telephone (+41 44 396 91 91) or email (email@example.com or firstname.lastname@example.org). The Meyerlustenberger Lachenal website can be accessed at www.mll-legal.com.
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