Why the European Banking Authority Will Set a Precedent for Bitcoin Startups

Rage Review : It usually takes 6-12 months for Bitcoin startups to obtain authorization or licenses, because venture capital exchanges and wallet providers need to break through language barriers, administrative management and bureaucratic issues in the member states where they want to do business. Last week, the European Banking Authority (EBA) wrote an opinion article on the application of the Fourth Anti-Money Laundering Directive (4AMLD) on digital currency transactions, arguing that member state-level registration has brought unnecessary burdens to venture capital exchanges and wallet providers. As the total cost of venture capital exchanges and wallet providers will grow at an exponential rate, it means that it is very likely that the EU venture capital exchange and wallet provider market will be witnessed in January 2017. Complete merger.

Translation: Nicole

Last week, the European Banking Authority (EBA) wrote an opinion paper on the application of the Fourth Anti-Money Laundering Directive (4AMLD) to digital currency transactions.

The European Commission’s response recommendations, the EBA report specifically mentioned that venture capital exchanges and wallet providers in EU countries may be required to register or obtain licenses in each member state if they want to provide venture capital-related services between these member states.

On the surface, such nuances are striking in the nine-page report because the measures are similar to the registration process of various venture capital exchanges in the United States.

This is due to the fact that there are no passporting powers granted to 4AMLD – which is understandable, as the regulatory regime is not used to facilitate the movement of goods, services or capital, but is simply driven by national policy to protect the EU from terrorist attacks and crime.

At Diacle, we believe that registration at the member state level places an unnecessary burden on venture capital exchanges and wallet providers.

Small VC exchanges and wallet operators that want to operate in the EU need to register as a ‘legal entity’ not only in their home country, but also in other EU member states, which is a very arduous task. Compared with other EU regulators, this duplication of registration will put disproportionate pressure on VC operators.

Prepaid cards issued by Electronic Money Institutions (EMIs) have been licensed under the Electronic Money Directive. EMIs can provide seamless services to other member states through their own regulators.

Yes, it is true that EMIs will still need to adapt their customer due diligence (CDD) to the additional requirements of any sovereign state’s AML or counter-terrorist financing (CTF) laws. However, EMIs do not need to apply directly to state AML/CTF registrations.

Financial impact

If a standard authorisation or license takes 6-12 months to obtain, how long does AML/CTF registration take?

Typically this process takes 3-6 months, but VC exchanges and wallet providers need to overcome language barriers, administrative and bureaucratic issues in each member country where they want to do business.

Ironically, it is much easier to register in all 50 states in the US, as at least the entire process is in one language. The same requirement in the EU means that VC deal operators have to deal with 24 official languages.

Paradoxically, the registration process between states will be more cumbersome than for venture capital exchanges and wallet providers to become EMIs or, as a last resort, challenger banks.

This was an unplanned outcome.

The EBA interprets this effect as fact, but our view is that, given the subsequent preamble to the European Commission’s statement, this ridiculous outcome was not intended, at least.

The statement mentioned:

“The right to freedom must be respected when conducting transactions, and this will have an impact on market participants being legal entities. Currently, no customer due diligence (CDD) is performed on their customers. The ability of platforms to operate virtual currency exchanges will not be affected by the amendment bill.”

'Fit and proper person'

According to the EBA, the above situation is exacerbated when you consider that “the amendments proposed by the Commission introduce requirements that those holding management functions or beneficial owners of VC exchanges and wallets are the most appropriate persons to do so.”

Although the European Commission has apparently not specified what the 'fit and proper person' test will be, it is reasonable to expect that the assessment of the applicant's background and documentary provisions (passport, proof of address) will be notarised.

Imagine a venture capital exchange or wallet provider having to do this across 28 member states.

The average cost to produce an official translated, verified document is at least $1000-2000 USD per owner or manager.

Next steps

If the European Commission accepts the EBA’s translation, all venture capital exchanges and wallet providers will need to register across member states, which could be the biggest regulatory misstep.

Likewise, it would be ridiculous to think that the Commission’s intention is to make it cheaper for licensed payment institutions or electronic money institutions or even challenger banks to set up under 4AMLD, whether a venture exchange or wallet provider.

As of today, the combined spending of VC exchanges and wallet providers is set to grow at an exponential rate, meaning that January 2017 is likely to witness a complete consolidation of the EU VC exchange and wallet provider market.