Photo: Finance Magnates

Finance Magnates

Is 5AMLD Causing Crypto Companies to Shut Down & Relocate?

The EU's 5th anti-money laundering directive has already caused some crypto firms to relocate or shut down.


The debate over whether regulation is a positive or negative thing for the cryptocurrency industry has evolved over the past two years as regulation has shift from theory into practice. All over the world, the regulatory tide is rising–though more quickly in some places than in others.

One of the most recent examples of this shift from theory into practice came in the European Union, the 5th Anti-Money Laundering Directive, or 5AMLD, which was signed on January 10th in an attempt to prevent financial systems from being exploited for the purposes of money laundering or terrorist financing.

City Banquet 2030 – The perfect vessel to grow your business this year

Enforcement of the European Union’s 5th Anti-Money Laundering Directive, or 5AMLD, has been on the horizon for some time--and while the directive could be potentially disruptive to the cryptocurrency industry in the EU, the directive could lend more legitimacy to the crypto space.

What have the concrete effects of the directive been so far? And, more broadly, are regulations having a positive or negative effect on the crypto industry?

Regulatory standardization for the EU’s crypto indsutry

For one thing, as one of the first EU-wide pieces of legislation with particular relevance to the cryptocurrency industry, the 5AMLD could bring a bit of regulatory standardization to the EU for the first time–something that is still lacking from the space.

Indeed, Denis Rusinovich, Director at DDH Digital Data Hub and co-founder of Cryptocurrency Mining Group Berlin, told Finance Magnates that “at the moment there is no harmonization of the regulatory landscape for digital assets.”
Denis Rusinovich, Director at DDH Digital Data Hub and co-founder of Cryptocurrency Mining Group Berlin.

“Hence, we still see jurisdictional arbitrage used by some players,” he continued. “But recent recommendations and changes brought forward by AMLD5, FinCEN, and FATF with regards to the crypto space is the first step towards harmonization of regulatory processes in crypto space.”

Burdens on crypto companies

On a practical level, the 5AMLD may require companies to do a bit of restructuring. David Carlisle, Head of Community at blockchain analytics provider Elliptic, told Finance Magnates that essentially, the directive means that “crypto companies operating in the EU need to get serious about including know-your-customer (KYC) procedures and the monitoring of suspicious transactions.”
David Carlisle, Head of Community at blockchain analytics provider Elliptic.

This could mean that crypto firms may need to beef up their compliance personnel or seek new technological tools.

Denis Rusinovich told Finance Magnates that “the biggest challenge is that many players are not aware of what AMLD5 actually means for their business,” and therefore may not be prepared for the “modifications [that] are needed in terms of processes and personnel.”

Rusinovich said that at minimum, crypto firms must determine if it is possible to manage compliance with AMLD5 with existing compliance teams. If the answer is no, and if individuals with experience in digital assets and compliance are unavailable, “anther option [is] turning to providers like Chainanalysis, Blockchain Intelligence Group, or Coinfirm that have … technology solutions for the digital assets space.”

Shutdowns and relocations

While the process of becoming compliant may be burdensome–particularly to companies who were rather lax with compliance measures in the past–David Carlisle doesn’t see the directive as so disruptive as to drive businesses out of the EU.

“Many EU crypto businesses are prepared for the challenges of implementation that lie ahead and have taken proactive steps to ensure their companies can secure necessary regulatory approvals and comply on an ongoing basis,” he said.

However, there have been instances of companies deciding that the burdens imposed by compliance with 5AMLD are too much to bear–and therefore, that relocation or shutting down operations completely is a better option.

For example, Bitcoin trading platform Deribit announced in January of this year that it would be moving its headquarters from the Netherlands to Panama: “the Netherlands will most likely adopt a very strict implementation of new EU regulations that also apply to crypto companies (5AMLD).”

“If Deribit falls under these new regulations, this would mean that we have to demand an extensive amount of information from our current and future customers,” an official announcement said.

“The implementation of these changes would greatly affect the exchange and its customers. Therefore, we have decided to operate the Platform from Panama,” the company explained, adding that “the team and leadership will remain the same, with John Jansen as the CEO.”

Similarly, Bottle Pay, a UK-based Bitcoin payments provider that made the decision to shut down in December of 2019, wrote in a blog post that “the amount and type of extra personal information we would be required to collect from our users would alter the current user experience so radically, and so negatively, that we are not willing to force this onto our community.”

“Therefore to maintain our integrity as service providers, and to protect the interests of our team, investors and users,” the company said, “we have taken the painful decision to shut Bottle Pay down completely rather than become subject to these new regulations.”

KyberSwap, currently the second-largest non-custodial cryptocurrency exchange by market share, also moved from Malta to the British Virgin Islands (BVI) as a result of the 5AMLD.

Philosophical differences: has KYC created a “global surveillance apparatus”?

However, David Carlisle believes that the requirements imposed by 5AMLD are not burdensome enough to warrant such drastic action. “In reality, compliance with 5AMLD is achievable for any crypto company that wants to deliver trusted services in the EU,” he said.

“When it comes to the rumors about companies shutting down due to the stringent [nature of] regulations like 5AMLD, that’s just wrong,” he said. “I think this is purely an attempt by the companies in question to mask failing operations or shut down because they’ve been beneficiaries of the lack of regulation to date.”

“I really don’t think there’s anything in 5AMLD on its face that is a major problem for a well-intentioned start-up,” Carlisle added.”Certainly, nothing that would make shutting down a better option than figuring out how to comply and paying for a blockchain monitoring tool.”

Suggested articles

Duda Launches App Store on Heels of $25m Funding RoundGo to article >>

However, it’s possible that the companies that do not wish to comply with the directive may make the decision to fold or relocate based on principle. Indeed, many of the earlier members of the cryptocurrency space were attracted to Bitcoin and the decentralized technology that powers it because of the fact that it does not require its users to provide personal information in order to use it.

Indeed, in an article for CoinDesk, Edan Yago, founder of CementDAO, a decentralized tool built to unite the stablecoin ecosystem, wrote that know-your-customer (KYC) and anti-money-laundering practices “have cost us many more billions than all initial coin offering (ICO) scams put together,” and that “they have created an all-pervasive, global surveillance apparatus. A system that keeps billions in poverty, kills innovation and provides an excuse for the banking system to lock out the competition.”

Additionally, AML and KYC requirements may lock out potential users in regions with limited access to funds that would provide them with the documentation necessary to be able to use cryptocurrency platforms.

Indeed, there have been a number of reports on the growing popularity of DeFi platforms, which do not require KYC, in developing countries. Therefore, if a crypto platform’s user base is primarily located in developing countries, AML and KYC may indeed severely impact usage on that platform.

The FATF’s recommendations have also affected crypto in the EU and beyond

Still, the trend toward regulation in the European Union and in other parts of the world seems, at this point, unstoppable. In addition to the 5AMLD, Carlisle pointed to the Financial Action Task Force’s (FATF) Recommendation 16, which was updated in June 2019.

While the FATF’s new guidelines are not technically enforced, exchanges and jurisdictions that do not comply with the guidelines risk being blacklisted.

These recommendations “affecting countries around the world as crypto companies need to prepare to comply with the ‘travel rule’, meaning all payment data relating to the originator and beneficiary of crypto transactions follows and travels with the payment transaction.”

In other words, the travel rule requires that cryptocurrency exchanges must verify and keep records of users’ identities, and that they must pass customer information to each other when transferring funds. This means that if an account on one cryptocurrency exchange sends cryptocurrency to an account on another cryptocurrency exchange, the identity information associated with the first account must also be sent along with the funds.

However, the FATF has clearly stated that its intention is not to encroach on personal liberty–in a phone call with Finance Magnates last year, FATF Senior Policy Analyst Tom Neylan said that “[Virtual asset service providers] are very concerned about data privacy–which, to be honest, we are as well,” he added.
Tom Neylan, FATF Senior Policy Analyst.

“This isn’t meant to breach everybody’s privacy. This is meant to ensure that criminals and terrorists can be identified once law enforcement are aware that they’re involved.”

Looking ahead: crypto regulations in much of Asia have evolved toward flexibility

Elsewhere in the world, regulatory developments have progressed even further–and, as a result of trial and error, has managed to develop regulatory systems that accommodate for innovation.

Colin Steil, chief operating officer of dapp infrastructure firm Cartesi, told Finance Magnates that in much of Asia, “the [regulatory] environment as a whole is more flexible and open to decentralized network [token] offerings,” apart from countries like China, which have banned them completely.

Indeed, “Asia in recent times has adopted new fintech solutions and technology in a quicker manner which may be a direct result of the flexible landscape,” he said.

Steil believes that generally, “the [regulatory] landscape is more stable and governments have been quicker to react and create frameworks within major start-up hubs.

“For example,” he said, “the Singapore Monetary Authority was quick to draw up a guide to digital token offerings first released in April of 2019, with Hong Kong having followed a similar path. This gave projects headquartered in Singapore a much clearer path when developing decentralized networks and avoiding offerings outside of jurisdictions that were not clear.”
Colin Steil, chief operating officer of dapp infrastructure firm Cartesi.

Daniel Carlisle also pointed to Singapore’s Payment Services Act (PSA), which “aims to ensure the integrity of Singapore’s financial sector by providing a framework for crypto businesses to offer services in a safe and transparent manner.”

“Its overarching objective is to enhance the quality payment services in Singapore, and the key to that is ensuring the integrity of new services, including crypto services, that come to market,” Carlise explained.

And while there hasn’t been official collaboration between regulators in Asia and the EU, “the PSA is broadly aligned with measures rolled out across Europe under 5AMLD early this month, and ensures Singapore’s regulatory alignment with guidance on crypto-assets set out in June 2019 by the Financial Action Task Force (FATF), the global AML standard-setter.”

“The new requirements are aimed at making Singapore’s crypto sector less vulnerable to financial crimes such as money laundering and terrorist financing, but in a way that allows businesses to continue to provide new innovative services.”

What are your thoughts on the effects of 5AMLD and other regulations around the world? Let us know in the comments below.