Peter Oakes is a business strategist and non-executive director with particular interest in FinTech and digital currencies. He advises bitcoin firms and financial institutions. He was the first Director of Enforcement and Anti-Money Laundering at the newly formed Central Bank of Ireland, and he previously worked as an enforcement lawyer for the former UK Financial Services Authority and a senior officer of the Australian Securities & Investments Commission. In this essay he argues that innovations like digital currencies deserve better than regulation under existing anti-money laundering and counter-terrorist financing (AML/CTF) rules.
These rulings look likely to capture additional bitcoin exchanges and now bitcoin payment processors as money service businesses (MSBs) under US regulations. Although bitcoin exchanges have, by and large, always been under contention for regulation as MSBs, the same was not thought to be the case for bitcoin payment processors.
The rulings will have quite an impact on these industries, the wider digital currency movement and of course a rush to embed AML/CTF programs (at least to the US FinCEN standards) at a new range of virtual currency firms. Simply put, this will lead to more confusion for their boards, more work for the consultants/lawyers [disclaimer – I am one], more confusion at regulators (not just in the US) [disclaimer – I was one] when bombarded with requests for rulings/guidance on applicability and leaving consumers [disclaimer – I am one], the end users, totally bamboozled about what the wave of disparate international regulation means for them when/if transacting.
Application of US thinking to EU Payment Services Directive
Having read through the rulings, my personal view is that if the US regulator's interpretative thinking was transposed to the (as drafted) EU Payment Services Directive (PSD), it is arguable that the same outcome would be arrived at in Europe; thereby seeing the PSD become the sector specific regulatory regime for bitcoin service providers. Yet many of us have experienced divergence amongst EU state regulators as to whether, or not, item 6 of the PSD Schedule (ie: money transmission) applies to bitcoin and other digital currency service providers.
Separately, it seems that some EU state regulators might be attempting to deliberately narrow down (without sound logic) interpreting these bitcoin firms falling under the EU Directive. The driving rationale appears to be one of fear: not wanting to be amongst a group of first movers. Instead waiting (perhaps praying) for the European Commission to promote a bitcoin specific law so they don't have to make a fair and reasoned decision.
This brings up another issue – the EU financial services regime was established to do a number of things, including: (i) promote harmonisation, (ii) greater integration within the EU, (iii) fairer treatment of its people and users of its markets, and (iii) advance the economic well-being of its democratic people. The regime was never intended to shield EU state regulators from making judgement calls based on sound consideration of the facts before it vis-a-vis the Directives they administer.
This method of thinking just "kicks the can down the road" – a saying popular during the financial crisis to describe inaction by banks and central bankers to grasp the real financial stability issues at play. Here regulators are doing the same thing. They are treating EU law like it is a product owned and controlled by a master franchisor in Brussels, under which they (the EU state regulators) are mere franchisees entitling them to abdicate their mandated and democratic right to make decisions based on the evidence and facts before it. Yet whenever they are nervous about an outcome, reached by informed analysis, they seek to defer to the master franchisor as a higher authority. A little bit of regulatory leadership – not just on digital currencies but across the board – would not go astray here!
Time for specific digital currency law in the EU
Isn't it time then for a specific digital currency regulatory regime? Other financial service industries have sector specific EU law. Yet it seems that regulators around the world agree on one thing at the moment – if we are to regulate digital currencies let's do it through the prism of AML/CFT regulation. If regulators don't act quickly to decide upon a cohesive and joined up strategic approach to the regulation of digital currency firms using specific subject matter regulation then AML/CTF laws will continue to be used to regulate the digital currency industry leading to inequitable treatment of consumers and firms alike. As I note above, I think that in Europe there already exists a specific industry law for many digital currency service providers – ie: the PSD.
Leading the regulation of digital regulations by AML/CTF laws has certainly been a feature of some credible 'offshore' regulators which have expanded their existing AML/CTF laws to capture digital currency service providers. It also sounds like the EU AML/CTF Directive is heading for the same treatment. This can, and should only be, a stop gap measure. You would not regulate a stockbroker, for example, only by way of AML/CFT law because it doesn't capture the essence of their business model or the services they provide to consumers – thus they are specifically regulated in the EU under the MIFID (Markets in Financial Instruments Directive) and subject to AML/CTF laws for financial crime purposes. The same applies in the case of insurance companies, banks and mutual funds – all of which are subject to specific subject matter EU regulation (not regulatory led by AML/CFT laws).
Not having a digital/virtual currency specific regime on the EU drawing books shows just how slow regulators, as a whole, are to responding to innovation generally in the consumer financial services markets. They could perhaps be forgiven if bitcoin etc were just OTC instruments traded between wholesale institutional banks. But they are not – consumers are treating them as a medium of exchange and as a currency. Consumers deserve better treatment by these important regulatory players, especially after so many of them dropped the ball when it came to mainstream oversight of banks in recent years.
Another concern I have about AML/CTF laws being used to lead the regulation of digital currencies is that consumers will be lulled into a false sense of security that these AML/CTF driven regulations somehow equate to greater consumer protection. Consumers will not differentiate between the policy objectives of the AML/CTF law and consumer protection regime. When they hear that ABC Inc, Ltd etc is regulated (without appreciating why it is regulated), they will slip into the 'moral hazard' zone thinking that 'That's great, so my client assets are protected and I get the usual consumer protection safeguards as with anyone else regulated'. Sadly, consumers could not be further from the truth of course.
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