The European Union (EU) is years away from implementing a consistent framework for cryptocurrency regulation, according to a new report by the SWIFT Institute.
The report notes the lack of convincing arguments to include virtual currencies under the EU's current legal frameworks, set by the revised Directive on Payment Services (PSD2) and the fourth European anti-money laundering directive (AMLD4).
The PSD2, adopted in the EU in October this year, consists of a new set of consumer payment protection rules, which seek to promote the development and use of innovative online and mobile payments.
Meanwhile, the AMLD4 has been produced in line with recommendations issued by Financial Action Task Force (FAFT) in 2012 to enhance the EU's AML (Anti Money Laundering) and CTF (Counter-Terrorist Financing) laws.
The report reads:
" ... recent legislative procedures – such as those for the AMLD4 and PSD2 – have not paid sufficient attention to this development, thus leaving virtual currencies largely untouched. While the AMLD4 could be construed to extend to virtual currencies, the precise degree to which will succeed in deterring their abuse for money laundering and terrorist financing purposes remains to be seen."
"Third, future legislation – such as the potential EMD3 – remains a development to be watched closely," notes the report, adding:
"However, in order for a potential new legislative framework regarding e-money to extend to virtual currencies, a more fundamental reconfiguration of the very notion of e-money is needed."
With multipurpose prepaid cards having lost the field and network-based money services coming closer and closer to being payment services, the original purposes of the e-money framework are quickly losing their relevance, it argues.
"A reorientation toward virtual currencies could then bring new life to this notion, and extend the legal framework to include recent developments such as cryptocurrencies," says the report.
The SWIFT Institute, which was set up by SWIFT to fund independent research, has separately embarked on research campaigns aimed at bitcoin and blockchain technology, launching a grant in July of last year.
The new working paper aims to offer recommendations for financial practitioners and regulators, according to the organization.
The report then looks at the way in which virtual currency regulation has been approached by stakeholders in the US.
"[In the US], financial regulators have already undertaken efforts at bringing certain virtual currency service providers – mainly the virtual currency exchanges – under the existing legal frameworks regarding money services business," explains the report.
Although these attempts first started at the federal level, the report notes, they are now finding their way to the state-level in New York – which introduced the BitLicense – and California.
Further, the report notes that there is an opportunity for international cooperation to regulate cryptocurrencies:
"The regulatory approach followed in the US shows a number of clear similarities to the EU's own legal framework on payment services. It could therefore be envisioned that an overhaul of the e-money framework would eventually lead to a similar legal regime for virtual currencies as what is currently proposed in the US."
"This approach could also hold potential for other countries that are still struggling to grasp this matter, as can be seen in the Asian markets. Moreover, given then inherent international scope of virtual currencies, a more unified stance on this matter would serve to support international cooperation," it continues, concluding:
"Stronger international cooperation can be held to be imperative in order to successfully impose and enforce AML and CFT [Counter Terrorism Financing] rules for virtual currencies."
For more information, read the full report below:
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