Cryptocurrency began as an anonymous, unregulated means of transferring funds to anyone around the world. It allowed individuals to separate themselves from their financial assets. While not inherently harmful, it did create an opportunity for lots of economic grey areas.
As a result of the lack of oversight, terrorists and other criminals used cryptocurrency to fund illegal activities
Cryptocurrency provided an opportunity for people to move their earnings to untraceable locations. This allowed people to avoid paying taxes. Others, however, used Bitcoin and other digital currencies to fund illegal actions, such as terrorist activity, human trafficking, selling stolen data, drug smuggling, and more.
After seeing the trend of backing illegal activities with cryptocurrency, the European Commission decided it was necessary to begin regulating cryptocurrency to fight crime. These EU regulations were called the Anti-Money Laundering (AML) directives. These oversee everything from prepaid debit cards to cultural artefacts in addition to crypto.
Currently, the fifth iteration of regulations is in place, called 5AMLD
Previous versions of the AMLD were much vaguer. They left options for regulation and oversight without any specific requirements. Parties related to cryptocurrencies and digital trading were required to work with investigators if requested.
However, after the release of the Panama Papers and with increases in terrorist attacks across Europe, lawmakers decided to be more proactive.
5AMLD focuses on who owns and benefits from financial transactions
Previously, the only way for investigators to know the origin of money was to follow an often complicated paper trail of organizations and blockchain entries. This investigation style required a lot of time and effort. As a result, illegal activity remained unfettered while authorities completed the lengthy research process.
Now, it is the responsibility of crypto service providers to know who is responsible for each transaction within their network
Specifically, digital currency exchanges and online wallet providers must now track who is using their services. This knowledge and tracking will, in theory, decrease the effort required for authorities to uncover individuals responsible for terrorist attacks and other illegal activities.
5AMLD takes the regulations one step further and also requires that cryptocurrency service providers also know the stakeholders associated with transactions, including beneficial owners of accounts.
Furthermore, cryptocurrency providers must perform an internal risk analysis to see if their programs or services are involved in money laundering or terrorist activity. Companies not doing their due diligence to check the actions and associations of their customers can be held responsible for illegal transactions that they facilitate.
Cryptocurrency users have expressed mixed feelings on 5AMLD regulations
The European Commission, which drafted the 5AMLD legislation, claims that these changes are beneficial for cryptocurrency users. Commissioners believe that increased knowledge of who people might be transacting with will grow their faith in the system. Without the risk of unknowingly supporting terrorism, more people may begin to invest in and use cryptocurrencies.
However, many long-time users of cryptocurrency became involved because of the lack of governmental oversight. The crypto-anarchist movement is strong and ever-growing. Some cryptocurrency users might begin to transition towards even more innovative banking systems to avoid this new connection to the European Union and state governments.
We still need more time to know for sure if the increased governance of 5AMLD will impact the growth and use of cryptocurrency
There remains no consensus on the future of crypto and EU regulations. Strong opinions from all perspectives remain convinced that their perceived future of cryptocurrency is the correct one. Support of 5AMLD comes from government economists, intelligence agencies, and many users. Calls for lifted regulations come from anarchists, technology lovers, and everyone in between.