A PROPOSAL FOR EU REGULATION ON BITCOIN

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A PROPOSAL FOR EU REGULATION ON BITCOIN

Law and Technology

Student Name: Iliana Apostolopoulou

Student ANR: u965950

First Supervisor: Prof.dr. Colette Cuijpers

Second Supervisor: Claudia Quelle, PhD researcher

Department: Technology and Society (TILT), Faculty of Law, Tilburg University

Year: 2017-2018

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Table of Contents List of Abbreviations .................................................................................................................................................. 3

1. Introduction ........................................................................................................................................................... 4

1.1 Background ...................................................................................................................................................... 4

1.2 Problem Statement and Research Question .................................................................................................... 7

1.3 Limitations of the Research ............................................................................................................................. 9

1.4 Research and Methodology ........................................................................................................................... 10

1.5 Literature Review ........................................................................................................................................... 12

2. Bitcoin: Money Laundering and Financing Terrorism .......................................................................................... 14

2.1 Features of Bitcoin that impose risks of money-laundering and financing terrorism activities .................... 14

a. Decentralization of transactions ............................................................................................................. 18

b. Cross-border character ........................................................................................................................... 21

c. “Quasi-Anonymity” ................................................................................................................................. 23

d. Distributed Ledger Technology ............................................................................................................... 25

2.2 Conclusion ...................................................................................................................................................... 29

3. Bitcoin: The current regulatory landscape in the U.S. ..................................................................................... 30

3.1 Bitcoin: Regulatory approaches from different agencies .............................................................................. 30

a. FinCEN: Federal Regulations ................................................................................................................... 32

b. Bitlicense: State Regulations ................................................................................................................... 35

3.2 Best practices and shortcomings in the U.S. .................................................................................................. 37

3.3 Conclusion ...................................................................................................................................................... 41

4. Regulating Bitcoin in the EU: Proposal and Lessons from the U.S. framework ............................................... 42

4.1 Existing regulatory attempts from different Member States ........................................................................ 42

4.2 The 5th Anti-Money Laundering Directive and Future Recommendations .................................................... 45

a. The Directive (EU) 2018/843 ................................................................................................................... 45

b. Recommendations .................................................................................................................................. 51

4.3 Conclusion ...................................................................................................................................................... 55

5. Conclusion ........................................................................................................................................................ 57

References ............................................................................................................................................................... 59

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List of Abbreviations

AMLD Anti-Money Laundering Directive 5AMLD EU Fifth Anti-Money Laundering Directive AML/CFT Anti-money laundering and countering the

financing of terrorism CDD Customer due diligence DLT Distributed ledger technology EBA European Banking Authority FATF Financial Action Task Force FinCEN US Financial Crimes Enforcement Network FIUs Financial intelligence units G20 Group of Twenty KYC Know Your Customer MSB Money service business P2P Peer-to-peer RBA Risk-based approach STR Suspicious Transaction Report SNRA Supra-National Risk Assessment TF Terrorist financing VC Virtual currency

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1. Introduction

1.1 Background

During the time the current thesis was drafted, Bitcoin hit $20.0001 and dropped down to $11.621

within the extremely short period of one month (17 December 2017 – 18 January 2018).2

Bitcoin has gained enormous popularity during the year 2017, proving that the technological

innovation of cryptocurrencies is worth warrants not only users’ attention, but also the attention

of the regulatory world.

Figure 1: A graph representing the high volatility of Bitcoin’s price within December and February by Coindesk,

retrieved from the website of Coindesk: https://www.coindesk.com/price/.

Bitcoin is a technological innovation that enables decentralized, peer-to-peer transactions

anonymously, with speed and low cost, safeguarding privacy of its user. Lately, cryptocurrencies

have triggered regulators’ attention, willing to impose implementations to gain oversight and

control, deterring its risks through the limitation of their decentralized feature. Moreover, the

1 The CoinTelegraph, Bitcoin Hits $20.000 Per Coin, Capping Year of Enormous Growth, by William Suberg. Available

at: https://cointelegraph.com/news/bitcoin-hits-20000-per-coin-capping-year-of-enormous-growth (accessed

August 22, 2018).

2 Coinbase Charts, available at: https://www.coinbase.com/charts (accessed August 22, 2018).

https://www.coindesk.com/price/

https://cointelegraph.com/news/bitcoin-hits-20000-per-coin-capping-year-of-enormous-growth

https://www.coinbase.com/charts

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focus has been on the potential risks, concerning activities of money laundering and financing

terrorism, since the transactions via cryptocurrencies are untraceable and anonymous, traits that

are luring criminals.3 More specifically, according to the “Report from the Commission to the

European Parliament and Council, where a risk assessment took place upon those two areas was

performed, perpetrators might use virtual currency systems to transfer funds having their

anonymity secured.4 The transactions are lacking face-to-face customer relationships, permitting

cash funding or purchasing through virtual exchangers without enabling the identification of the

funding source.5

Therefore, and as a response to the above risks, and given the special features of Bitcoin and

other cryptocurrencies that can potentially turn them into tools for criminal activities, Commission

adopted amendments to the “(EU) 2015/849 Directive of the European Parliament and Council, on

the prevention of the use of the financial system for the purposes of money laundering or terrorist

financing and amending Directives 2009/101 EC and 2013/36/EU”. The adopted Directive, officially

called Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018

amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the

purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and

2013/36/EU, seeks to address the gaps that exist concerning the control upon financial means

used by terrorists, such as virtual currencies, focusing on the virtual currency exchange platforms

and custodian wallet providers to be implemented within the scope of the Directive. Moreover,

through such an enforcement, the Directive aims to gain effective control upon suspicious

activities and set obligations of registration with licensing requirements.6

3 Commission Report to the European Parliament and to the Council on the assessment of the risks of money

laundering and terrorist financing affecting the internal market and relating to cross-border situations (2017).

Paroduct: Virtual Currencies, available in: http://europeanmemoranda.cabinetoffice.gov.uk/files/2017/07/10977-

17-ADD-2.pdf.

4 Ibid.

5 Commission, Communication to the European Parliament and the Council on an Action Plan for strengthening the

fight against terrorist financing, (2016).

6 Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU)

2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist

financing and amending Directives 2009/138/EC and 2013/36/EU. Available at: https://eur-lex.europa.eu/legal-

content/EN/TXT/?uri=CELEX%3A32018L0843 (accessed August22, 2018).

http://europeanmemoranda.cabinetoffice.gov.uk/files/2017/07/10977-17-ADD-2.pdf


https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32018L0843


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The call for regulating virtual currencies has raised a big debate on whether cryptocurrencies

must be regulated, and to which they extend. Controversial arguments do exist, with the

adherents of cryptocurrencies arguing that potential regulation of cryptocurrencies could stifle

innovation in the distributed ledger known as blockchain, a digital financial record with encrypted

information about the transactions with virtual currencies,7 degrading at the same time essential

characteristics such as anonymity and decentralization of peer-to peer transactions. Furthermore,

a rigorous regulation of virtual currencies raises issues concerning personal data privacy, since in

order to gain oversight on the transactions and to impose KYC (Know-Your-Customer) measures

and assess efficiently ML/TF (Money Laundering/Terrorism Financing) risks, competent entities

must collect, process and record personal data or sharing them with public authorities.8

Given the above regulatory deficiencies and considering the recent adoption of the 5th Anti-

Money Laundering Directive,9 it would be useful to examine and provide an extended analysis

upon the Directive, which introduces, for the first time at a European level, the implementation of

rules upon certain aspects of virtual currencies. In addition, the focal point of the thesis is the

attempt of carrying out a critical examination on the existing Directive, identifying gaps, if any, in

the current regulatory scope of virtual currencies, delivering also recommendations for

improvement of the adopted Directive, by constructing a regulatory framework that would be

capable of safeguarding effectively EU, from using Bitcoin for the criminal purposes of money

laundering and terrorist financing. Future recommendations concerning an effective law

enforcement measures in the EU, not only will help towards constructing a robust regulatory

framework that adequately will work as a shield, tackling money laundering and financing

terrorism activities within Europe, but also will work as an example for improvements in different

jurisdictions worldwide. Moreover, will work as a motivation for taking an effective approach

7 Briefing of the European Parliamentary Research Service by Christian Scheinert. Virtual Currencies, Challenges

following their introduction, March 2016.

8 Governments want to control cryptocurrencies-but there's a danger to too many rules by Saheli Roy Choudhury.

Published 2017, assessed in 24/11/2017. Available at: https://www.cnbc.com/2017/09/12/regulators-are-turning-

their-attention-to-cryptocurrencies.html.





https://www.cnbc.com/2017/09/12/regulators-are-turning-their-attention-to-cryptocurrencies.html

https://www.cnbc.com/2017/09/12/regulators-are-turning-their-attention-to-cryptocurrencies.html



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towards this technological development by enforcing an international cooperation, acting as an

example for other jurisdictions to improve and learn from EU’s virtual currency laws.

1.2 Problem Statement and Research Question

The increased popularity of the use of virtual currencies and especially Bitcoin, which is the

market’s leader in the field, has created controversial views upon the matter of regulating these

means of payment, due to their unique nature and characteristics. 10 Several bodies, such as the

European Central Bank, European Banking Authority, the European Commission and the Council,

as well as other intergovernmental organisations as the Financial Action Task Force (FATF), have

addressed the need of regulating this form of transactions, carrying out risk assessments on their

potential threats.11

Through their delivered opinions, ECB and EBA, stressed the extremely volatile nature of virtual

currencies and the danger they entail to lose their value. Risks such unregulated exchanging

platforms entailing threats for consumers on losing their money, due to the risk of stealing the

digital wallets through hacking attacks, the non-reversible nature of payments and the lack of tax

liabilities create a significant problem and impose demands from law enforcement to regulate

virtual currencies as soon as possible.12 Furthermore, according to the Recommendation of FATF,

since virtual currencies can been traded only on the internet, they permit transactions without

face-to-face customer relationships that are deemed to be anonymized. This anonymity in the

transaction becomes a crucial component when it permits funding and third-party funding,

without being able to identify the source and the recipient of the payment. In this direction, FATF

10 Briefing of the European Parliamentary Research Service by Christian Scheinert. Virtual Currencies, Challenges

following their introduction, March 2016.

11 Andres Guadamuz and Chris Mardsen, 2015. “Blockchains and Bitcoin: Regulatory responses to cryptocurrencies”.

First Monday, Peer-Reviewed Journal on the Internet. Available at:

http://firstmonday.org/article/view/6198/5163#153 (accessed August 22, 2018)

12 Opinion of the European Banking Authority on the EU Commission's proposal to bring Virtual Currencies into the

scope of Directive (EU) 2015/849 (4AMLD), 2016.

http://firstmonday.org/article/view/6198/5163#153

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concluded that cryptocurrencies and especially Bitcoin, where no customer identification is

attached upon its addresses, can increase the potential ML/FT risks.

For the reasons mentioned above and taking as a focal point the recent EU response, with the

adoption of the Directive (EU) 2018/843, my aim is to analyze the aspects of virtual currencies that

are being addressed in this regulation and whether these kinds of measures are adequate against

the fight of money-laundering and financing terrorism within Europe. Since the evaluation of the

European regulatory attempts on such an immature technological development entail many

challenges, I am aiming to use the regulatory responses that U.S. has taken so far, to carry out a

comparative analysis. Therefore, the main research questions will be constructed as follows:

Does the 5th Anti-Money Laundering Directive adequately address the risks imposed from the

use of virtual currencies in order to prevent money laundering and financing terrorism in

Europe?

For the aim of the research question and for carrying out a concrete research, I shall formulate

the following sub-questions:

What are the aspects of virtual currencies that are prone to ML/FT risks and are falling out of

the scope of the adopted Directive and shall be included in a European regulatory framework in

order to make it possible to prevent acts of Money-Laundering and Financing Terrorism?

This question shall be answered using the analysis that will be provided in the first chapter,

concerning the features of virtual currencies that make them prone towards money-laundering

and financing terrorism activities and are not included in the adopted Directive. Furthermore, by

identifying the gaps in the recent EU regulation, the thesis aims to provide future

recommendations and build a revision of a future Directive that will address effectively virtual

currencies, covering all the aspects that are making them prone to the risks of money laundering

and financing terrorism.

Furthermore, as i mentioned above, the thesis will use as a roadmap the current regulatory

framework used in the U.S., in order to carry out a comparative analysis and analyze the approach

that the U.S. has adopted towards virtual currencies in the fight against ML/FT. A comparative

analysis will help addressing similarities and differences between the U.S. and EU approach

towards legal regimes on virtual currencies, defining which are the regulatory obligations that the

EU borrowed from the U.S. regulatory model. A critical examination of the U.S.’ virtual currency

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regulatory system seems imperative and will serve the aim of trying to identify regulatory pitfalls,

if any, which should be avoided. Further, in the last section we will provide also recommendations

suggesting to the EU the adoption of the U.S.’ best practices that proved effective in addressing

the activities of money-laundering and financing terrorism. Therefore, the second sub-question

that will be addressed in the current thesis is the following:

What lessons can the EU take from the U.S.’ current regulatory responses implemented on

Bitcoin and virtual currencies? Are there any shortcomings in the U.S.’ regulatory environment

that can be avoided by the EU?

1.3 Limitations of the Research

The current thesis will not provide an analysis concerning the advantages of the use of Bitcoin,

which inevitably are many and certainly this mean of payment is creating more and more

proponents, fighting for equality and transparency through the current centralized financial

system.13 In contrast, the analysis shall focus on trying to give answers to questions like, why

bitcoin has triggered the attention of the regulatory world. Thus, how bitcoin has been associated

with the criminal acts of money-laundering and financing terrorism.

The major reason why there is research limitation around Bitcoin is due to its widely use

globally and due to the unique nature of each cryptocurrency and its special characteristics.14

Thus, by describing the technical characteristics of bitcoin, I am not referring to the special

characteristics of the technology such as the specific algorithm of bitcoin, but to the general

technical features of all cryptocurrencies, meaning that they are sharing the same general features

13 Flamur Bunjaku, Olivera Gjorgieva-Traijkovska, Emilija Miteva-Kacarski, 2017. “Cryptocurrencies -Advantages and

Disadvantages”. ISSN 1857-9973. “Advantages: 1. Open code for mining currency, 2. No inflation 3. Peer-to-peer

cryptocurrency network 4. Unlimited possibilities of transaction 5. No boundaries 6. Low operation cost 7.

Decentralization 8. Easy to use 9. Anonymity.” Available in:

http://eprints.ugd.edu.mk/18707/1/Cryptocurrencies.pdf.

14 Katalin Ligeti and Michele Simonato, Chasing Criminal Money: Challenges and Perspectives On Asset Recovery in

the EU, Bloomsbury Publishing, 2017.

http://eprints.ugd.edu.mk/18707/1/Cryptocurrencies.pdf

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as Bitcoin, from where risks of money laundering and financing terrorism can arise.15 Therefore, it

is worth to state that the description of the technical characteristics will only contain those that

turn Bitcoin into a susceptible tool for the aforementioned criminal activities. Lastly, from my

analysis I shall exempt Monero,16 since it constitutes a cryptocurrency with special features, that

differentiates from other cryptocurrencies.17

1.4 Research and Methodology

For the purpose of the thesis the doctrinal type of legal research was adopted. It appears the most

suitable method for the aim of the thesis, since the doctrinal legal research enables for a rigorous

analysis of legal provisions, judicial statements, case law and principles. More specifically doctrinal

research aims to study case law and statutory law, looking upon the consistency and certainty of

law, upon the purpose and policy of law that exists by examining legal institutions.18

Doctrinal research aligns with the type of analysis and aim of the current thesis, since our

purpose is to examine the 5th Anti-money Laundering Directive that amends the Directive (EU)

2015/849 and to identify gaps concerning the regulation of virtual currencies, that are not

addressed through the current Directive.

The research emphasizes on gaps of the recent Directive, since as will be analyzed in the first

chapter, virtual currencies are a complex technological innovation with distinctive features, that

15 Empirica, “Different types of Cryptocurrency”, Blog Spot. “Bitcoin, Litecoin, Ethereum, Zcash, Ripple, differentiate

with each other as for the algorithms they have built upon, except Monero which has the unique characteristic

that is completely untraceable” Available at: http://empirica.io/blog/different-types-cryptocurrency/ (accessed

August 22, 2018).

16 getmonero.org, “Private Digital Currency: Monero is untraceable, fungible, private and secure” Available at:

https://getmonero.org/ (accessed August 22, 2018).

17 Investopedia, “The Most Important Cryptocurrencies Other than Bitcoin”, by Prableen Bajpai, December 2017:

“Monero is not like other cryptocurrencies that derivatives of Bitcoin, Monero is based on the CryptoNight PoW

hash algorithm, which came from CryptoNote protocol” Available at: https://www.investopedia.com/tech/most-

important-cryptocurrencies-other-than-bitcoin/ (accessed August 22, 2018).

18 Khushal Vibhute and Filipos Aynalem, Legal Research Methods. Chillot, Wordpresss.com, 2009.

https://getmonero.org/

https://www.investopedia.com/tech/most-important-cryptocurrencies-other-than-bitcoin/


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make them difficult to be addressed and controlled from a central authority, exceeding territorial

jurisdictions. Those features can set significant challenges on regulators, and their attempts on

setting rules and implementing anti-money laundering regimes on virtual currencies and

addressing all the potential ML/FT risks arising from their wide range of use. For example, their

decentralized feature, and their peer-to-peer transaction authentication, that will be analyzed in

the first section, makes them by nature an independent mean of payment without any centralized

control imposed by institutional intermediaries. Therefore, banks that are usually serving as a

gatekeeper applying AML regimes, in the case of virtual currencies are by design absent. In

addition, the enhanced mutual anonymity they provide, can frustrate the application of Know-

Your-Customer (KYC) and Customer Identification procedures (CIP), that represent the essence of

AML regimes and require a complete identification of the transacted subjects, gathering

information and keeping records of the account holders.19

Therefore, throughout the sections we are going to explore how first the U.S. and further the

EU, dealt with the above challenges on regulating virtual currencies and how they tailored their

regulatory responses. The aim of such an analysis, is to evaluate the current U.S. and EU responses

as for their efficiency, examining if there is a room for improvement.

As will be analyzed, with the adopted legislation in the EU, covering specific aspects of virtual

currencies, we argue that a narrow approach in addressing virtual currencies, might be proved

inadequate to tackle risks of ML/FT. Thus, an examination of the current gaps existing in the

Directive will serve the purpose of strengthening and improving the EU regulatory framework

towards virtual currencies.

In order to identify regulatory gaps, the thesis will look upon the main features of virtual

currencies and how each of them can be exploited by criminals, serving as a mean for money

laundering and financing terrorism activities. In this direction, a classification can be made

between the aspects that are already covered in the Regulation and those that are left outside and

must be included in a future regulation, since they can result in disruptive effects for the financial

system.

19 Daniel Holman and Barbara Stettner, (2018). “Anti-Money Laundering Regulation of Cryptocurrency: U.S. and

Global Approaches”. Allen & Overy, LLP. Available at: http://www.allenovery.com/publications/en-

gb/Documents/AML18_AllenOvery.pdf.

http://www.allenovery.com/publications/en-gb/Documents/AML18_AllenOvery.pdf


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Furthermore, the aim of the thesis is not limited only to addressing those gaps, but also on

constructing a proposal that is aiming to fulfill the purpose of fighting money laundering and

financing terrorism in Europe. To touch efficiently the subject of the thesis, we shall use as a

comparative model the U.S. regulatory responses that have been taken so far for tackling AM/FT

activities.

1.5 Literature Review

For the aim of the research the thesis will focus and make use as a primary source the Directive

(EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive

(EU) 2015/849 on the prevention of the use of the financial system for the purposes of money

laundering or terrorist financing and amending Directives 2009/138 EC and 2013/36/EU.

Furthermore, complementary legal documents such as opinions will be consulted and reviewed,

such as the opinion of European Central Bank, delivered already in 2016 upon the proposal for the

directive of the European Parliament and of the Council amending Directive (EU) 2015/84920, the

Opinion of European Banking Authority on the EU Commission's Proposal to bring Virtual

Currencies into the scope of Directive 2015/849 (4AMLD) 21, the risk assessment upon the issues of

money laundering and terrorist financing, affecting the internal market and relating to cross-

border situations that has been delivered with the Report from the Commission to the European

Parliament and the Council in 2017 22 and the Recommendations from the independent inter-

governmental body, Financial Action Task Force concerning Virtual Currencies and the potential

20 Opinion of the European Central Bank on a proposal for a directive of the European Parliament and of the Council

amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money

laundering or terrorist financing and amending Directive 2009/101/EC, 10/2016.

21 Opinion of the European Banking Authority on the EU Commission's proposal to bring Virtual Currencies into the

scope of Directive (EU) 2015/849 (4AMLD), 2016.

22 Commission, Report to the European Parliament and to the Council on the assessment of the risks of money

laundering and terrorist financing affecting the internal market and relating to cross-border situations. (2017).

Product: Virtual Currencies, available at: http://europeanmemoranda.cabinetoffice.gov.uk/files/2017/07/10977-

17-ADD-2.pdf (accessed August 22, 2018).



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Anti-money laundering and Counter financing terrorism risks.23 These Reports and Opinions are

referring to the proposal prior to the adoption of the Directive, thus they can assist on evaluating

and comparing the prior and after the adoption regulatory situation in the EU.

Recommendation Reports from governmental authorities and Central Banks from different

member states in Europe were used for addressing the risks of money laundering and financing

terrorism, and existing regulatory gaps in the European law enforcement in the field of virtual

currencies. Opinions from the Bank of France, the Dutch Bank, HM Treasury of UK, agreements

from workshops and conferences, such as the conference from Europol, Interpol and G20 meeting

in Argentina, were for the aim of the research. Moreover, for serving the aim of the comparative

analysis, we shall use the guidance published by the different U.S. regulatory bodies such as

FinCEN, the Commodity Futures Trading Commission, the IRS’s and the Security, Exchange

Commission (SEC). In addition, since the nature of cryptocurrencies is extremely volatile, and their

technological development expands at a fast paced, this thesis will make use of websites where

the most recent developments concerning the crypto world are published, such as

Cointelegraph.com, news.bitcoin.com and Investopedia.com. Lastly, the use of results from

reports and researches such as the most recent research that was carried out by Elliptic, is

deemed to be necessary for addressing the evidence existed concerning the levels of the risks, the

countries where these risks originated and their sources.24

23 FATF REPORT, Virtual Currencies, Key Definitions and Potential AML/CFT Risks, June 2014.

24 Yaya J. Fanusie and Tom Robinson, “Bitcoin Laundering: An Analysis of Illicit Flows into Digital Currency Services”,

Elliptic, Center on Sanctions and Illicit Finance, January 2018. Available at:

http://www.defenddemocracy.org/content/uploads/documents/MEMO_Bitcoin_Laundering.pdf (accessed August

22, 2018).

http://www.defenddemocracy.org/content/uploads/documents/MEMO_Bitcoin_Laundering.pdf

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2. Bitcoin: Money Laundering and Financing Terrorism

The first chapter will serve the aim of analyzing the nature of bitcoin and how certain features

make it prone for money laundering and financing terrorism activities. It shall focus on its

decentralized and transnational nature, and the “quasi-anonymity” it bears, demonstrating how

these features can be exploited to launder money. To serve concretely the purpose of this

exploration, we are going to use the traditional stages of money laundering (placement, layering

and integration) and address how each feature can be exploited at each level resulting the

materialization of money laundering and the potential disruption of financial system.

Furthermore, we will examine the Distributed Ledger Technology, (hereafter DLT), the

decentralized system, the Bitcoin Blockchain has been built on. The examination of DLT will work

both for understanding the whole process of how bitcoin transactions occur, as well as for

revealing how this technology can turn into an ally for law enforcement and a key instrument for

the fight against money laundering. Lastly, a discussion upon the famous “anonymizers” is deemed

necessary, since they work as tools for enhancing the anonymity of the transactions by obscuring

the identity of the parties and impending the transparency of Blockchain technology and working

as constraints for the effective implementation of AML regulations. Thus, an examination of their

functionality and the way they have been used in practice so far, it can assist for exposing their

risks, enabling law enforcement to tackle their use by adopting the adequate implementations

against money laundering.

2.1 Features of Bitcoin that impose risks of money-laundering and financing terrorism activities

According to the definition given by the International Monetary Fund (hence IMF),

Cryptocurrencies are: “digital representations of value, that are issued by private developers and

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denominated in their own unit of account”.25 However, there is a lack of a global definition of the

term “virtual currencies”. For example in a more technical definition used by Malcolm Campbell-

Verduyn in his paper “Bitcoin, crypto-coins, and global anti-money laundering governance”, we

read that bitcoin and virtual currencies can be defined as follows: “Crypto-coins are digitally

encrypted sequences of numbers, enabling digital transactions to be undertaken both securely and

with a varying level of anonymity”.26 As it can be observed from this definition, Campbell-Verduyn

prefers to define Bitcoin as a Crypto-coin, simply because he wants to avoid the misleading

definition of crypto-currency. Yet, there is no authority from any State, which recognizes bitcoin or

any other altcoin as a currency within the meaning of a legal tender.27 In this direction, the

ministry of finance in Germany and France, have suggested that the term “crypto-assets” might

appear more appropriate, since virtual currencies are used mainly for speculative purposes and

rarely for commercial and retail transactions.28 For example, users usually purchase virtual

currencies with fiat money (e.g. Euro) through exchange platforms, aiming to profit from

fluctuations in value, due to their volatile nature.29 However, the names cryptocurrencies or

virtual currencies are more frequently used, since the concept of bitcoins and altcoins is covering a

wide array of ‘currencies’ (e.g. backed by assets like gold).

25 International Monetary Fund (IMF), “Virtual Currencies and Beyond: Initial Considerations”. By Dong He, Karl

Habermeier, Ross Leckow, Vikram Haksar, Yasmin Almeida, Mikari Kashima, Nadim Kyriakos-Saad, Hiroko Oura,

Tahsin Saadi Sedik, Natalia Stetsenko and Conceptio Verdungo-Yepes. 2016. Available at:

https://www.imf.org/external/pubs/ft/sdn/2016/sdn1603.pdf (accessed August 22, 2018).

26 Malcom Campbell-Verduyn, 2018. “Bitcoin, crypto-coins, and global anti-money laundering governance”. Springer

Science and Business, Crime Law Soc Change, 69:283-305. Available at:

https://rd.springer.com/article/10.1007%2Fs10611-017-9756-5 (accessed August 22, 2018).



Tahsin Saadi Sedik, Natalia Stetsenko and Conceptio Verdungo-Yepes. 2016.

28 Financial Times, “France and Germany join calls for global bitcoin clampdown: Finance ministers and central bank

chiefs say digital tokens aren’t ‘currencies’ ”, by Nicholas Megaw, February 2018. Available at:

https://www.ft.com/content/03511abe-0d86-11e8-839d-41ca06376bf2.

29 European Parliament, (2018). “Virtual currencies and terrorist financing: assessing the risks and evaluating

responses”. Study for the TERR committee. Policy Department for Citizens’ Rights and Constitutionals Affairs.

Directorate General for Internal Policies of the Union.

https://www.imf.org/external/pubs/ft/sdn/2016/sdn1603.pdf

https://rd.springer.com/article/10.1007%2Fs10611-017-9756-5

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Bitcoin can be obtained, stored and transacted online and used for multiple purposes, as

long as the parties agreed upon its use.30 The underlying mechanism that enables the transactions

to take place is called Blockchain and it is based on a system called Distributed Ledger Technology,

that is going to be analyzed further in this section. In general, the transactions are verified through

a decentralized peep-to-peer network, and after they are transmitted on a public ledger (Bitcoin

Blockchain), where every single transaction history of each bitcoin is recorded, they stay and are

stored there in an encrypted form.31 The design of bitcoin is based on an open source, first found

in the white paper published, by a person or group of people with the pseudonym Satoshi

Nakamoto, back in 2007.32

As was already mentioned in the introduction of this section, there is a big debate about

the nature of bitcoin and whether it constitutes a currency within the grasp of the conventional

form of currencies, recognized by official authorities. This discussion entails significant

implications, for the aim of the thesis and for the area of money-laundering. Considering that

money-laundering refers to the conventional form of money and given the fact that bitcoin is not

yet recognized as a legal tender, the application of existing anti-money laundering regimes would

deem to be challenging for the law enforcement.33

Gabriella Gimigliano, the author of the book “Bitcoin and Mobile Payments: Constructing a

European Union Framework”, also argues that the names “cryptocurrencies” and “virtual

currencies” that define Bitcoin, are misleading, due to the lack of status as a legal tender in any

national jurisdiction. 34 In October 2012 the European Central Bank published “The Virtual

Currency Schemes”, Bitcoin was classified as a virtual currency scheme, without accepting it as a

real currency, since as argued, lacks one of the three core characteristics of the traditional

30 Ibid.


Science and Business, Crime Law Soc Change, 69:283-305.

32 Satoshi Nakamoto, (2008). “Bitcoin: a peer-to-peer electronic cash system”. Available at:

https://bitcoin.org/bitcoin.pdf (accessed August 22, 2018). 33 Malcom Campbell-Verduyn, 2018. “Bitcoin, crypto-coins, and global anti-money laundering governance”. Springer


34 Gabriellla Gimigliano, Bitcoin and Mobile Payments: Constructing a European Union Framework. Springer

Publications, 2016.

https://bitcoin.org/bitcoin.pdf

17

currency. According to ECB the legal nature of money consists of three core functionalities: a)

money as a means of exchange, b) money as a unit of account and c) money as a store of value.35

Those components can be found in the usage of Bitcoin. For example, some authors are stressing,

at least in a certain extent, the functionality of Bitcoin as a store of value. In this direction,

Gimigliano states, that Bitcoin can be used as a mean of storing value, a fact that can raise serious

concerns, from the perspective of market supervision authorities, since it can be perceived as an

“investment instrument”, which is already regulated under many legal systems.36 Still though, such

a view is not supported by the European Central Bank and EU. 37

More specifically, as ECB addresses in the latest and updated analysis provided on virtual

currencies schemes published in February 2015, both from economic and legal perspective these

concepts cannot be part of the world of money. Firstly, because they cannot serve as a medium of

exchange, due to their low level of public acceptance. Secondly, because they cannot work as a

store of value (within the meaning of saving or retrieving money through virtual currencies in the

future), due to their extremely high volatile nature, neither for short-term purposes, nor as a long-

term saving instrument. Lastly, as resulted from their volatility, in conjunction with the low level

of acceptance, virtual currencies appear unsuitable to serve as a unit of account, due to the lack of

the adequate purchasing power.38

In this direction, European Central Bank argues that a huge gap could exist between the actual

and the optimal price of Virtual Currency schemes: “A stable value is required to underpin effective

pricing. Similarly, households benefit from being able to optimise their spending over time by

saving. To do so, they need an effective store of value that they can be sure will enable them to buy

goods and services in the future. When there is considerable uncertainty around how many goods

and services an asset can buy in the future, or indeed whether it can be used to purchase anything

35 European Central Bank. Virtual Currency Schemes. Published in October 2012. Available at:

https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf (accessed August 22, 2018).

36 Gabriellla Gimigliano, Bitcoin and Mobile Payments: Constructing a European Union Framework. Springer

Publications, 2016.

37 European Central Bank. Virtual Currency Schemes. Published in October 2012. Available at:

https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf (accessed August 22, 2018).

38 European Central Bank, “Virtual currency schemes-a further analysis”. February 2015. Available at:

https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemesen.pdf (accessed August 22, 2018).

https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf


https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemesen.pdf

18

at all, it is a poor store of value”.39 In contrast with the traditional money where a centralized

authority guarantees their stability and an existing regulatory framework punishes fraudsters, the

extremely high volatility of bitcoins, make them unsuitable to serve as a reliable store of value:

“Both prices and volatility appear to be unrelated to economic or financial factors, making them

hard to hedge or forecast”.40

Notwithstanding that money-laundering laws seem to understand money in a more traditional

sense, there are emerging reasons why money-laundering regimes are required to focus on

cryptocurrencies. These are reasons that might turn certain features of bitcoin and other altcoins,

into a threat for financial stability, and thus are going to be examined in the following section.

Campbell-Verduyn accurately stressed this need, by arguing that global anti-money laundering

efforts should stay vigilant on the matter of bitcoin, understanding cryptocurrencies more as

money for two main reasons: “Firstly, because anti-money laundering governance is concerned

with illicit transactions and financial flows whether or not they meet theoretical standards of

money and secondly, due to the novel manners in which altcoins enable the nearly real-time

undertaking, verification and publication of transactions across political boundaries”.41 In the

following sub-sections we will analyze each feature of bitcoin that impose ML/FT risks to its use.

a. Decentralization of transactions

In contrast with the conventional currency that is issued by central banks, bitcoin and other

cryptocurrencies are not depending their existence on any banking authority. Bitcoin’s open source

design has been created to challenge traditional currency and as a response to the financial crisis,

39 European Central Bank, “Virtual or virtueless? The evolution of money in the digital age”, Lecture by Yves Mersch ,

Member of the Executive Board of the ECB, Official Monetary and Financial Institutions Forum, London, February

2018. Available at: https://www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180208.en.html (accessed

August 22, 2018).



Tahsin Saadi Sedik, Natalia Stetsenko and Conceptio Verdungo-Yepes. 2016.



https://www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180208.en.html

19

when people lost their faith in banking institutions, back in 2008. In principal, bitcoin enables peer-

to-peer transactions skipping the “middle man” of financial institutions, without any interference

of governments, politics and central banks. It relies purely on its users’ network that will validate

the transactions. 42

Decentralization constitutes one of the pivotal features of Bitcoin, because it can be issued

without any involvement of a central bank or governmental authority, as required with the

conventional currency, a fact that creates serious consequences and constraints as for the

implementation of anti-money laundering regimes. Usually, central banks are the responsible

intermediaries that are implementing AML measures, such as KYC, requiring to keep records of

their customers. However, in the case of bitcoin, this type of measures, set by centralized

institutions, are completely overlooked. Therefore, given the absence of auditors that usually

oversee the integrity of financial transactions, bitcoin can turn into a serious threat for global anti-

money laundering efforts.43

In this direction and as analyzed below, authorities and legislators focusing their regulatory

attention on the financial intermediaries, that are providing services on transactions made with

cryptocurrencies, since as mentioned above, the only concrete way to regulate cryptocurrencies

may be achieved at the point where the digital value moves into the physical sphere: “At this point

regulators can engage with a tangible known, with a physical rather that digital presence, that is

the financial intermediary”.44

These efforts illustrate another crucial feature of bitcoin and of virtual currencies in general,

that concerns their ability to be convertible.45 This feature works as key for law enforcement

implementations, since it creates the bridge linking the virtual nature of Bitcoin to the real world.

42 PwC, Consumer Intelligence Series, 2014. “Digital Disruptor: How Bitcoin is driving digital innovation in

entertainment, media and communications (EMC). Available at:

https://www.pwc.com/sg/en/tmt/assets/tmtnews201402/digital_disruptor.pdf (accessed August 22, 2018).



44 David Lee, Kuo Chuen, Robert H. Deng. Handbook of Blockchain, Digital Finance, and Inclusion: Cryptocurrency,

FinTech, InsurTech, Regulation, ChinaTech, Mobile Security, and Distributed Ledger,Academic Press, 2017.

45 FATF REPORT, Virtual Currencies, Key Definitions and Potential AML/CFT Risks, June 2014 Available at:

http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potential-aml-cft-

risks.pdf (accessed August 22, 2018).

http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf


20

In fact, Bitcoin can be exchanged for fiat currency, therefore its virtual value can be materialized

into real money. The significance of convertibility creates both positive and negative implications:

First, convertibility creates the passage through which regulators can apply their potential laws

upon virtual currencies, since it “localizes “this mean of payment by converting it to real money.46

According to David Lee, the problematic in regulating cryptocurrencies is indeed “due to their

digital and virtual form...What is within the grasp of authorities, is the ability to regulate to a

certain extent how cryptocurrencies are used at the point where the value generated in the digital

sphere moves into the physical fiat-based economy”.47 In practice, this issue is illustrated in the

regulatory efforts of the U.S. and EU, where both are emphasizing on imposing obligations upon

the intermediaries that exchange virtual currencies with conventional money and vice versa.

Taking as an example the Directive (EU) 2018/843 analyzed in the current thesis, we observe that

regulators are trying to eliminate the feature of decentralization, simply by using those exchange

providers as a substitute of the central authority that would be responsible for monitoring the

transactions and imposing AML obligations.48 In the same direction , in the U.S. the Financial

Crimes Enforcement Network of the US Department of the Treasury (FinCEN), recognizes those

exchangers as “money services businesses” (MSBs), meaning that are falling under the scope of

FinCEN’s regulations for MSBs, requiring to registration, reporting and keeping records of the

account holders.49

However, over the time and with the increased use of cryptocurrencies in the U.S., criminals

have found new methods to obtain bitcoins, transact and launder the proceeds of crime,

maintaining their anonymity by evading the obligations that are required under a licensed MSB.

According to Jay Palmer Fawcett, these kind of methods are including unregistered bitcoin ATMs,


FinTech, InsurTech, Regulation, ChinaTech, Mobile Security, and Distributed Ledger,Academic Press, 2017.

47 Ibid.





49 FinCEN, Guidance: application of FinCEN's regulations to persons administering, exchanging, or using virtual

currencies. Available at: https://www.fincen.gov/resources/statutes-regulations/guidance/application-fincens-

regulations-persons-administering (Accessed August 22, 2018).



https://www.fincen.gov/resources/statutes-regulations/guidance/application-fincens-regulations-persons-administering


21

peer-to-peer transactions and Bitcoin property exchange services.50 In Peer-to-peer transactions

for example, information such as KYC cannot be gathered, simply because the typical transaction

between the buyer and the seller often takes place in a public place with a public Wi-Fi

connection, where illicit cash is converted into bitcoins. The seller uses the bitcoin wallet

information provided by the buyer and completes the transaction. Through this way the buyer,

places the fiat money into the financial system, maintaining the anonymity of the transaction and

avoiding the engagement of the licensed exchangers.51 In addition, bitcoin ATMs in the U.S. are

rarely collecting KYC information from the users that can obtain or convert bitcoins anonymously.

However, some States in the U.S. require bitcoin ATMs to be registered as MSBs, but they are not

reliable in gathering the required KYC information, since they lack a verification and transactor's

identification process.52 Ultimately, bitcoin property exchanges are quite popular in the U.S. by

using for example websites such as Pursue.io that enables the exchange of property for bitcoins:

“The website allows for global and anonymous P2P unregistered bitcoin exchanges by manipulating

purchases on Amazon, the popular retail website, which does not accept bitcoin payments”.53

With this view, convertibility can be seen from a different perspective and can boost criminal

activities, since criminals can use this feature to launder proceeds of crime.54 Besides the U.S., a

recent evidence comes also from the UK, London, where drug dealers found that were using

cryptocurrency ATM's to launder proceeds of their crimes.55

b. Cross-border character

50 Jay Palmer Fawcett. Bitcoin Regulations and Investigations: A Proposal for U.S. Policies. Published by ProQuest LLC

(2016).

51 Ibid.

52 Ibid.

53 Ibid.



55 Business Insider: The UK and EU want to force bitcoin users to reveal their identities, 4 Dec 2017, by Camilla

Hodgson. Available at: https://www.businessinsider.nl/anti-money-laundering-cryptocurrencies-regulation-eu-uk-

identity-2017-12/?international=true&r=UK (accessed August 22, 2018).

https://www.businessinsider.nl/anti-money-laundering-cryptocurrencies-regulation-eu-uk-identity-2017-12/?international=true&r=UK


22

The decentralization feature that was analyzed above also reflects another crucial aspect of

virtual currencies with tremendous implications for the law enforcement. That is bitcoin’s stateless

nature.56 And by stateless nature I am referring to the fact that bitcoin does not limit its existence

to national borders as regular currencies. The use of bitcoin can be made by anyone, anywhere just

by downloading the specific software from the internet.57 Since, there is no central authority to

issue bitcoin, consequently it is impossible to be grasped within territorial borders. Moreover,

given the transnational characteristic that give rise to transnational transactions and commerce,

which occurs beyond territorial jurisdictions, tremendous regulatory challenges are raised, and

complexity increases when authorities are called to implement anti-money laundering regulations

upon bitcoin. Consequently, this regulatory uncertainty may result in exploitation of inadequate

regulatory systems with more lenient or even absent AML regulations from money launderers and

terrorists.58

In addition, overseas transactions that bitcoin enables, can assist criminal organizations to

transfer criminal proceeds to other countries and be used to fund terrorist activities. Moreover,

illicit cash can be converted to bitcoin, in other countries where there is a lack of money-

laundering regulations or a lenient regulatory framework and transmitted back to the country

from where the transaction initiated.59

To date, there is a lack of an international law enforcement that harmonises virtual currencies’

regulations across jurisdictions, concerning the most borderless technological innovation.60 Every

regulatory attempt is highly localized and is limited to national jurisdictions or recently between

56 Gabriela Gimigliano. Money, Payment Systems and the European Union: The Regulatory Challenges of

Governance, Gambridge Scholars Publishing, 2016.



58 Zachary K Goldman, Ellie Maruyama, Elizabeth Rosenberg, Edoardo Saravalle and Julia Solomon-Strauss, Terrorist

Use of Virtual Currencies: Containing the Potential Threat, 2017.

59 FATF REPORT, Virtual Currencies, Key Definitions and Potential AML/CFT Risks, June 2014 Available in:


risks.pdf.

60 European Parliament, “Virtual currencies and central banks monetary policy: challenges ahead”, Monetary

Dialogue July 2018. Policy Department for Economic, Scientific and Quality of Life Policies. Available at:

http://www.europarl.europa.eu/cmsdata/149900/CASE_FINAL%20publication.pdf.



23

the EU member states, with the adoption of the Directive (EU) 2018/843 of the European

Parliament and of the Council of 30 May 2018. Thus,

c. “Quasi-Anonymity”

Undoubtedly, the most popular and debatable feature of bitcoin, it’s the anonymity that

accompanies its nature. Bitcoin operates within a network of anonymity, in a sense that provides

the opportunity for “anonymous” transactions, since they are verified through a peer-to-peer

network, eliminating the role of centralized banks that can work as third parties that monitor and

keep record of these transactions.61 The characteristic of anonymity can challenge law

enforcement, when applying regimes of money laundering, since such implementations require

measures that are able to gather information for the identification of individuals, carrying out

suspicious transactions. For example, the application from financial institution of measures, such

as “Know-Your-Customer”, can be limited dramatically, when they are dealing with unknown

parties that cannot be recognized. Thus, the process of monitoring such transactions becomes

difficult and sometimes even impossible.

Nevertheless, to avoid any misinterpretation and to be precise, bitcoin’s transactions are

not “anonymous” but “pseudonymous”. Blockchain records the IP addresses of the transacting

parties and no other forms of personal data, such as name, telephone or any identifiable

information concerning the parties.62 In this way blockchain keeps track of every transaction that

users carried out, the IP addresses of the parties, recipient and sender, of every past transaction

and the number of bitcoins that have been sent to each party.

In principle, bitcoin’s users seem impossible to be linked in real word identities and this can

be attributed to the “complex mathematical scrambling employed in the public-key cryptography

61 Maya Uchima, 2018. “Bitcoin’s Myth of Anonymity and the Rise of Other ‘Anonymous’ Cryptocurrencies”. The

Columbia Science and Technology Review. Available at: http://stlr.org/2018/05/16/bitcoins-myth-of-anonymity-

and-the-rise-of-other-anonymous-cryptocurrencies/ (accessed August 22, 2018).

62 Ibid.

http://stlr.org/2018/05/16/bitcoins-myth-of-anonymity-and-the-rise-of-other-anonymous-cryptocurrencies/


24

underlying cryptocurrencies”.63 However, as i already mentioned, the records of each and every

transaction remain untouched on the ‘distributed public ledger’: “With Bitcoin, for example, the

record of all transactions undertaken approximately every ten minutes is bundled together in

‘blocks’. Linked together, these blocks form blockchains, as ‘distributed public ledgers’ are more

commonly known”.64 In this way, transactions stay pseudonymous only in a certain extent and

therefore in the given analysis the use of the term of “quasi-anonymity”, that Malcom Campbell-

Verduyn introduces in its article “Bitcoin, crypto-coins, and global anti-money laundering

governance”,65 underpinning the existence of multiple layers of anonymity, seems more ideal. This

quasi-anonymity illustrates the continuous challenge of law enforcement, governments,

companies and individuals, trying to reach a balance between users’ privacy (anonymity) and

transparency within the transactions.

Furthermore, taking into consideration the traditional criminal act of money-laundering

which consist of a three stages process, the placement, layering and integration, it can be

observed that the above described features of transactions impose even more risks at each stage.

The speed that virtual currencies provide to every stage of money-laundering process, creates

serious barriers for traceability, enabling the fast transferability and withdrawal to/from another

country and unknown jurisdictions.66

In particular, during the first stage of money laundering, where the step of placement takes

place by injecting illegally gained money into the financial system, bitcoin provides criminals with a

low risk means, enabling to open accounts fast and anonymously, in order to convert/consolidate

illicit cash.67 At the second stage of layering, where criminals are converting or transferring the

illicit money to disconnect it from its illegal source, bitcoin due to its transnational character



64 Ibid.



66 Ibid.

67 Daniel Holman and Barbara Stettner, (2018). “Anti-Money Laundering Regulation of Cryptocurrency: U.S. and

Global Approaches”. Allen & Overy, LLP. Available at: http://www.allenovery.com/publications/en-




25

appears as the ideal mean to transit illicit money/funds across borders, a fact proved by recent

evidence in Europe, where launderers used bitcoin purchased from an exchange based in Finland.

Through the exchange they converted illicit proceeds coming from drug trafficking into bitcoins, in

order to easily transfer it from Spain to Colombia and Panama. 68 Lastly, at the integration stage,

the already “cleaned” funds insert into the financial system, appearing legitimate. In fact, the fast-

growing list of services and goods that accept as means of payment bitcoins, enables and expands

the integration opportunities of “dirty money”.69

In practice, and for an illustrative representation of a typical transaction with bitcoin,

where money laundering activities take place, must take place the following steps from the

following key entities: 1) Firstly, the bitcoin sender who initiates the transaction (in our case with

“dirty money”) through the network, 2) then the bitcoin receiver, accepts these bitcoins and in

case of launderers, the receiver helps the other party to obscure the source of the “dirty money”,

3) bitcoin miners, further verify the transaction process by completing blocks, 4) bitcoin

development team, updates the codebase and, 5) ultimately, bitcoin exchanges enable the

conversion of bitcoins to “real” currencies and vice versa.70 The analysis of the key players within

a bitcoin transaction will play a significant role for the further examination on how AML

regulations can be implemented effectively on bitcoin.

d. Distributed Ledger Technology

However, as mentioned above in the section of decentralization feature, the whole process

of bitcoin’s transactions is taking place through Blockchain technology. Blockchain is a Distributed

Ledger Technology (DLT), that as analyzed above, replaces the role of a central bank

(intermediary). According to the definition of the Oxford dictionary, Blockchain refers to “ a

system in which a record of transactions made in bitcoin or another cryptocurrency are

68 Europol, Press Release, (2018). “Illegal network used cryptocurrencies and credit cards to launder more than eur 8

million from drug trafficking” Available at: https://www.europol.europa.eu/newsroom/news/illegal-network-

used-cryptocurrencies-and-credit-cards-to-launder-more-eur-8-million-drug-trafficking.

69 Danton Bryans, (2014). “Bitcoin and Money Laundering: Mining for an Effective Solution”. Indiana Law Journal,

Indiana University Maurer School of Law, Volume 89, Issue 1, Article 13.

70 Ibid.

26

maintained across several computers that are linked in a peer-to-peer network.”71 In this

direction, there is not need of an intermediary, such as the existence of a bank to validate the

transactions, but the whole process is taking place in a distributed manner among a network of

participants that are validating the transactions by solving mathematical algorithms.72 That means

that there is no authority that controls or monitors that whole process.

From a more technical perspective, DLT (known as Blockchain) consists of the following

main characteristics: A distributed database which is maintained in a collective manner from all

the participants of the system, called as “nodes”. These “nodes” are the servers of the

participants, containing an identical set of transaction records. Based on peer-to-peer technology

participants are building and maintaining the DLT system which provides transparency, due to the

publicly available transactions and traceability and the permanently stored records of every

transaction occurred in the network.73 Furthermore, Blockchain technology is characterized by

consensus. The consensus feature guarantees the immutability of validation of every transaction

by adding it to the distrusted ledger, since the majority of the participants must reach an

agreement on the proposed transactions. This mechanism ensures also, that identical transactions

do not take place more than once.74

According to the report given by the UK Government (Office of Science), from the Chief

Scientific Adviser, on the Distributed Ledger Technology in 2016, Blockchain, the underlying

technology of Bitcoin, creates a pioneer mechanism for tracking financial transactions, since it

records every transaction made in bitcoin in identical copies of a “shared ledger” (shared among

bitcoin’ users). The feature of the “shared ledger”, can help governments and regulators to tackle

money laundering in different ways:

To date, governments and financial institutions exchanged financial data and details of the

transactions through messages. Through this way, institutions updated their own databases and

71 Oxford Dictionary, Blockchain definition, available in:https://en.oxforddictionaries.com/definition/blockchain

72 FATF REPORT, Virtual Currencies, Key Definitions and Potential AML/CFT Risks, June 2014. Available at:



73 PwC, “Distributed Ledger Technology: The genesis of a new business model for the asset management industry”.

74 Ibid.

https://en.oxforddictionaries.com/definition/blockchain



27

ledgers, but without any assurance that these data would actually match with each other.

However, since Bitcoins’ Blockchain uses the method of cryptography (a method that provides

authentication to the transactions), the above issue can be solved simply by sharing the same

underlying data. For example, different users of the ledger reach to a reconciliation on the state of

data through different algorithms used by Blockchain for validation and authentication of

transacted data, such as Proof of Work or Proof of Stake.75 Moreover, due to the DLT, replication

of all the data can be succeeded and for all the institutions without the fear of losing data if one

ledger is compromised. Another, advantage concerning this technology concerns the ability to

control access in the content of the ledger. DLT uses keys that can have specific capabilities and

only under specific conditions. When a regulator for example wants to gain access to an

institution’s transactions, using a “view key” (for monitoring suspicious transactions), may be

allowed to do so, only if courts provide such a key, thus permit this access.76 Lastly, as discussed

above, since such a “shared ledger” is characterized by enhanced transparency, (due to the

consensus for validation of every record and the provided copy to every party involved) regulators

can check the integrity of the contents, tackling any modifications, preventing fraud and carrying

out regulatory reporting.77

As it can be easily observed, the above characteristics underlying the Blockchain

technology can work in an innovative and effective manner for safeguarding the transparency of

virtual currencies transactions and the integrity of financial system that can be exploited by

criminals. Therefore, law enforcement, regulators, central banks, governments and financial

institutions, can benefit from the unique characteristics that DLT technology provides, turning it

into a gatekeeper for suspicious transactions. According to the European Parliament and the

Committee on Economic and Monetary Affairs in their deliver report in 2016, DLT can work

beyond just a technology that enables virtual currency transactions, underpinning its significant

implications both in private and public sector, acting in three different dimensions: as service

75 Government Office for Science, A Report by the UK Government Chief Scientific Adviser, 2016. “Distributed Ledger

Technology: beyond blockchain”. Available at:

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/492972/gs-

16-1-distributed-ledger-technology.pdf (accessed August 22, 2018).

76 Ibid.

77 Ibid.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/492972/gs-16-1-distributed-ledger-technology.pdf


28

provider, as a supervisor and as a legislator.78 With this view, the Committee on Economic and

Monetary Affairs invites the Commission to create a horizontal Task Force DLT for implementing

smart regulation for DLT.79 There are already some countries that have started to embrace the

beneficial use of the DLT, like Switzerland.

Switzerland consists one of the pioneer countries and a proponent towards the use

cryptocurrencies. Is one of the very early adopters of the digital and virtual currencies as well as of

the DLT technology of Blockchain. Acquiring the nickname “Crypto Valley” the city of Zug in

Switzerland, has become one of the European hubs that welcomes digital currencies startups. In

addition, the creation of the Swiss non-profit cryptographic technology ecosystem, Crypto Valley

Association, shows that Switzerland has embraced the potentials of these technologies following a

non-regulatory manner.

However, according to the report given from the Financial Action Task Force (FATF) in 2014,

criminals have found the way to disrupt the transparency that can be provided by the use of

Blockchain. As I am going to analyze in the following section, there are tools such as the

anonymizers (anonymizing tool) and mixers (laundry service, tumbler), that enable users to

obscure the chain of transactions or mixing their IP addresses and generating transactions that do

not exist.80 Therefore, the transactions that occur between the sender and receiver are masked,

becoming fully opaque.81 Evidence again from the U.S. shows that it has been made popular

among criminals the use of these Bitcoin tumblers, making it difficult to link the transactions with

a specific IP address, resulting the disruption of the transparency provided by Blockchain

technology.

78 European Parliament, Committee on Economic and Monetary Affairs. “Draft Report on virtual currencies”

February 2016. Available at: http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-

%2F%2FEP%2F%2FNONSGML%2BCOMPARL%2BPE-575.277%2B01%2BDOC%2BPDF%2BV0%2F%2FEN (accessed

August 22, 2018).

79 Ibid.

80 FATF REPORT, Virtual Currencies, Key Definitions and Potential AML/CFT Risks, June 2014. Available at:



81 Ibid.

http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-%2F%2FEP%2F%2FNONSGML%2BCOMPARL%2BPE-575.277%2B01%2BDOC%2BPDF%2BV0%2F%2FEN




29

Another useful tool among criminals that enhance the anonymity of the transactions is the

“Tor network”. Tor can be downloaded for free and consists a network for computers that

provides you with anonymity while the user is online, by concealing the true IP addresses, thus

their identity. 82

So far it has been observed that virtual currencies entail specific features that might turn them

into a vulnerable mean that can be exploited by criminals for the facilitation of money-laundering

and financing terrorism acts. Nevertheless, virtual currencies and their underlying technology can

be used from regulators to safeguard their lawful use. Still though, since their nature is purely

technological, belonging into the digital realm, there are new ways that arising and can be used

from criminals to secure their pseudonymized feature.

2.2 Conclusion

Clearly, the features described above, can create many constraints for law enforcement in

terms of regulating effectively bitcoin against money laundering and financing terrorism activities.

However, law enforcement can make use of the advantages provided for example by DLT

mechanism and building an international framework based on enhanced cooperation between

countries worldwide. What is interesting to examine, is the way of how the current law

enforcement in the U.S. and EU has approached bitcoin and whether they have addressed

effectively the treats arising from the aforementioned features, that create loopholes into law

enforcement, enabling ML/FT activities. In this direction and given the above analysis i can identify

whether gaps exist in the recently adopted Directive (EU) 2018/843 and secondly, which are those

aspects that shall be included in the recent EU legislation. For, the purpose of the thesis, the

analysis will start with looking into the U.S. regulatory framework, since they hold an active and

longer contribution into virtual currencies world.

82 The Tor Project, About Tor: Staying Anonymous, Available at:

https://www.torproject.org/about/overview.html.en#stayinganonymous (accessed August 22, 2018).

https://www.torproject.org/about/overview.html.en#stayinganonymous

30

3. Bitcoin: The current regulatory landscape in the U.S.

This chapter will be dedicated to explore the existing regulatory framework in the U.S.

concerning bitcoin. A critical view upon current regulatory attempts in the U.S. will serve a twofold

aim. First, working as a comparative model towards the new regulatory model adopted by the EU

with the 5th Anti-Money Laundering Directive, it can help EU when transposing the new Directive

into Member States to adopt the best practices followed in the U.S. as for the AML law

enforcement and further, to avoid U.S. shortcomings on virtual currency regulations. In other

words, EU can learn from the U.S. experience on regulating virtual currencies, for creating

effective and active AML laws for the complex nature of bitcoin.

U.S. was one of the pioneers in the field of virtual currencies with active contribution from

different regulatory bodies, taken several steps towards to add a definition on virtual currencies

and on the implementation of regulations according to their nature.83 Therefore, we will briefly

examine how different U.S. bodies classify bitcoin, the aspects they target, in terms of

implementing laws against money-laundering and financing terrorism.

3.1 Bitcoin: Regulatory approaches from different agencies

Up to date there is no coherent federal response in the U.S. as for regulating virtual currencies.

Some federal agencies have issued guidance and enforcement actions incorporated in the existing

regulations. For example, the Internal Revenue Service (IRS), for the U.S. Federal tax purposes

treats cryptocurrencies as a property and applies upon them the general tax principles of property

transactions.84 For the U.S. Commodity Futures Trading Commission, Virtual Currencies and

Bitcoin are perceived as commodities, therefore should be covered under the scope of CFTC

83 BitcoinMagazine “The United States is Falling Behind in Bitcoin Regulation”, by Kyle Torpey April, 2016. Available

at: https://bitcoinmagazine.com/articles/the-united-states-is-falling-behind-in-bitcoin-regulation-1461604211/

(accessed August 22, 2018).

84 Internal Revenue Service. Notice 2014-21 on Virtual Currencies. Available at: https://www.irs.gov/pub/irs-

drop/n-14-21.pdf (Accessed August 22, 2018).

https://bitcoinmagazine.com/articles/the-united-states-is-falling-behind-in-bitcoin-regulation-1461604211/

https://www.irs.gov/pub/irs-drop/n-14-21.pdf


31

enforcement actions according to the Commodity Exchange Act.85 Furthermore, according to the

Securities and Exchange Commission and the case of 2013 SEC v. Shavers, the court found and

ruled that bitcoin is a security86 that meets the requirements under the Securities Act and the

Exchange Act of 1934.87 This over-regulating approach will be discussed in the following section

together with whether it can produce enhanced confusion for implementing and conforming with

AML/CFT obligations.

Since the focus of the current thesis is on money-laundering and financing terrorism, it

appears appropriate to start our analysis with the Department of Treasury Financial Crimes

Enforcement Network (FinCEN), which constitutes the primary U.S. regulator for anti-money

laundering law enforcement and became the first regulator on bitcoin with the issuing of the

guidance on administering/exchanging virtual currency back in March 2013.88

85 CFTC An introduction to Virtual Currency. Available at:

http://www.cftc.gov/idc/groups/public/@customerprotection/documents/file/oceo_aivc0218.pdf (accessed

August 22, 2018).

86 Securities Act, Section 2 (a)(1). Definition of Security: “any note, stock, treasury stock, security future, security-

based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-

sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share,

investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil,

gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or

group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle,

option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any

interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary

or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the

foregoing”.

87 Securities and Exchange Commission V. Trendot T. Shavers and Bitcoin Savings and Trust,. United States District

Court, Case No. 4:13-CV-416. Available at: http://www.law.du.edu/documents/corporate-governance/securities-

matters/shavers/SEC-v-Shavers-No-4-13-CV-416-E-D-Tex-Sept-18-2014.pdf (accessed August 22, 2018).




http://www.cftc.gov/idc/groups/public/@customerprotection/documents/file/oceo_aivc0218.pdf

http://www.law.du.edu/documents/corporate-governance/securities-matters/shavers/SEC-v-Shavers-No-4-13-CV-416-E-D-Tex-Sept-18-2014.pdf




32

a. FinCEN: Federal Regulations

As i have mentioned, FinCEN is the main body responsible for anti-money laundering law

enforcement. Moreover, the Bank Secrecy Act of 1970 (BSA), is the main anti-money laundering

regulation in the U.S., which imposes obligations on all virtual currency exchanges, to register as

Money Services Business's (MSB's). The MSBs are required to register with the U.S. Treasury

Department complying with the AML and CTF requirements.89

The attention of the regulators in the U.S., in order to prevent money-laundering and

financing terrorism acts, has been concentrated on the virtual currency intermediaries that are

involved in exchange services, such as the wallet providers and the cryptocurrency exchanges,

through the obliged use of licensing and registration.90 An example of such licensing, takes place

through the mandatory registering as Money Services Business (MSB) and Money Transmitter

licenses. This license requires from the users of Bitcoin, to conform with Anti-Money Laundering

and Countering the Financing of Terrorism requirements, such as Know-Your-Customer (KYC),

customer's identity verification and Suspicious Activity Reporting (SAR).91

The Financial Crimes Enforcement Network (FinCEN, 2013) has issued a guidance where

classified cryptocurrencies as a medium of exchange and not as a currency, regulating them under

the existing laws of a money service business (MSB). As i mentioned above, the Bank Secrecy Act-

BSA (The Currency and Foreign Transactions Reporting Act of 1970), poses obligations to the

financial institutions in order to maintain transaction records and reporting by private individuals,

banks and financial institutions for combating money laundering.92 In detail, BSA requires banks





FinTech, InsurTech, Regulation, ChinaTech, Mobile Security, and Distributed Ledger, Academic Press, 2017.




92 FinCen, History of Anti-Money Laundering Laws. Bank Secrecy Act, 1970. Available at:

https://www.fincen.gov/history-anti-money-laundering-laws. (Accessed August 22, 2018).





https://www.fincen.gov/history-anti-money-laundering-laws

33

and financial institutions to hold information about their account holders, referred as Know-Your-

Customer program (KYC), a program that includes maintenance of records with personal

information of the clients, such as name, address phone number, date of birth etc.. Moreover,

under BSA, banks and financial institutions are required to: “report cash transactions over $10,000

using the Currency Transaction Report, properly identify persons conducting transactions and

lastly, maintain a paper trail by keeping appropriate records of financial transactions. Eventually,

the USA PATRIOT Act of 2001, has targeted the strengthening of the anti-money laundering

provisions, amending the Bank Secrecy Act. In detail, the USA PATRIOT Act that was set in force in

2011 as a response of the terrorist attacks on the 11th of September 2011, imposed a number of

obligations, such as the requirement for the financial institutions to establish AML compliance

programs. These programs included policies, procedures and internal controls for achieving

compliance with the Bank Secrecy Act and procedures for the purpose of detecting/reporting

suspicious transactions under article 31 U.S.C. 5318(g).93 Moreover, the USA PATRIOT Act

imposed customer identification programs, for obtaining customer identifying information, verify

their identity, maintain a record and determine the opening of an account.94 Lastly, the Act

enacted the implementation of due diligence both on foreign correspondent accounts and on

private banking accounts and made mandatory the share of information, when federal law

enforcement requested such information.95

Among the responsibilities of FinCEN, is to ensure compliance with the Bank Secrecy Act by

institutions and banks, providing guidance and drafting regulations for combating money-

laundering. Under, FinCEN a financial institution can be also a Non-bank entity such as MSBs or

casinos. And what is defined as a MSB from FinCEN, is a matter of a great importance, in order to

93 U.S. Code, Title 31, Subtitle IV Chapter 53, Subchapter II, § 5318 – Compliance, exemptions, and summons

authority. Article 31 U.S.C. 5318(g): “Reporting of Suspicious transactions”.

94 CFR, Title 31, Subtitle B, Chapter X, Part 1023, Subpart B Section 1023.220. 31 CFR 1023.220-Customer

identification programs for broken-dealers.

95 FinCEN, USA PATRIOT Act Of 2001. Available at: https://www.fincen.gov/resources/statutes-regulations/usa-

patriot-act (accessed August 22, 2018).

https://www.fincen.gov/resources/statutes-regulations/usa-patriot-act


34

understand which entities that are engaged in virtual currency transactions are obliged to register

under FinCEN regulations. 96

FinCEN provides the following definition on MSBs: “ A currency exchange, an issuer,

redeemer, or cashier of travelers' checks, money orders, or similar instruments, the United States

Postal Service, a person involved in the transmission of funds, any business or agency which

engages in any activity which is determined by regulation to be an activity which is similar to, or a

substitute for these activities”.97 MSB's are generally required to: “1) Establish written AML

programs that are reasonably designed to prevent the MSB from being used to facilitate money-

laundering and the financing of terrorism, 2) file Currency Transaction Reports (CTRs) and

Suspicious Activity Reports (SARs) and 3) maintain certain records, including those relating to the

purchase of certain monetary instruments with currency and certain transmittal of funds.”98

In order to provide clarification upon the matter, the following discussion will focus on the

guidance of FinCEN and on how the above regulations concerning MSBs apply on persons

Administering, Exchanging or Using Virtual Currencies. According to FinCEN a mere user of

cryptocurrencies, is not treated as a MSB, so there is no obligation for people purchasing real or

virtual goods or services to register, be reported or keep a record of them under the MSBs

regulations.99 In contrast, an exchanger: “a person engaged as a business in the exchange of virtual

currency for real money currency, funds or other virtual currency”, and an administrator: “a person

engaged as a business in issuing a virtual currency, and who has the authority to redeem such a

virtual currency” are subjects under FinCEN to follow MSBs regulations.100




97 Jay Palmer Fawcett. Bitcoin Regulations and Investigations: A Proposal for U.S. Policies. Published by ProQuest LLC

(2016).

98 Bank Secrecy Act Regulations. Definitions and Other Regulations Relating to Money Services Businesses, Federal

Register 43585 Vol. 76, No. 140, 21/07/2011.




100 Ibid.





35

b. Bitlicense: State Regulations

In addition to the FinCEN’s federal regulation, the use of virtual currencies is required to

comply also with different state regulations. For example, each State in the U.S. regulates MSBs

under its own laws.101 The most representative example comes from New York State: In July 2014,

the New York State's Department of Financial Services, published rules and regulations which it

modified in July of 2014 and finalized in June 2015, concerning the registration and licensing

requirements for entities that are engaging in commerce with virtual currencies within the state.

With the launch of Bitlicense, New York introduced the first comprehensive and obligatory

regulatory regime within the United States. In practice virtual currency businesses are obliged to

be licensed when they operate in New York or/and engage with New York customers. According to

Section 200.3 a) License of the regulation: “No person shall, without a license obtained from the

superintendent as provided in this Part, engage in any Virtual currency Business Activity. Licensees

are not authorized to exercise fiduciary powers, as defined under Section 100 of the Banking

Law”.102 Under the scope of Bitlicense, virtual currency is defined as “any type of digital unit that

is used as a medium of exchange or a form of digitally stored value. Virtual currency shall be

broadly construed to include digital units of exchange that have a) a centralized repository or

administrator; b) are decentralized and have no centralized repository or administrator; or c) may

be created or obtained by computing or manufacturing effort”.103 This definition differentiates

from what we have seen so far from the U.S. regulatory bodies, introducing a more broad

definition of virtual currencies, covering more aspects of virtual currencies usage. More

specifically, when receiving virtual currency for transmission or transmitting it, holding it for

others, buying and selling as customer, providing exchange services and/or controlling,

101 Obiamaka P. Madubuko and Margaret Ukwu, (2018). “Fintech in Focus: Anti-Money Laundering Regulatory

Developments for Virtual Currencies and Initial Coin Offerings”. Thomson Reuters, Westlaw.

102 Department of Financial Services. Virtual Currency Licensing.. New York Rules and Regulations. Available at:

http://www.dfs.ny.gov/legal/regulations/adoptions/dfsp200t.pdf (accessed August 22, 2018).

103 Ibid.

http://www.dfs.ny.gov/legal/regulations/adoptions/dfsp200t.pdf

36

administering or issuing virtual currencies within New York must be registered under Bitlicense

regulations.

As for the anti-money laundering protection, Bitlicense introduced strict requirements that

were characterized even more severe than the requirements imposed on federal level. Strict

procedures and obligatory measures such as risk assessments, compliance functions (system of

internal controls, policies, AML policies reviewed/approved by the boards of directors), audit

functions (annual testing from independent parties), prohibitions (not allowing use of

tumblers/mixers, and use of fully anonymized virtual currencies e.g. monero), keeping records (at

least 7 years of the identity and the address, the amount of transaction etc.), reports (notifying

New York Department of Financial Services when exceed the amount of 10.000 $ within one day)

and lastly customer identification programs (verifying identity of account holders, enhanced due

diligence policies for non-U.S. people, identification/verification of identity when opening a new

account).104 Clearly, the requirements imposed by the Bitlicense are stringent from the FinCEN

regulations for Money Transmitters, where for example in the records keeping process the

retention is limited up to 5 years lacking the required details under Bitlicense. Despite that, both

requirements are in a great extent consistent. A virtual currency business must register and is

subject both of the FinCEN regulations (federal AML requirements) and Bitlicense laws (when

operating in New York or with New York customers).

These implications have produced a significant impact on the industry, imposing strict rules

and creating barriers with tremendous compliance costs. According to Jay Palmer Fawcett,

Bitlicense did not gain much of appreciation from many authors, since they have argued that

Bitlicense can appear overbearing on smaller companies due to the high costs that AML and KYC

programs are bearing.105 Fortune website, together with many others, such as Reuters and big

part of the academic world, have criticized the effectiveness of Bitlicense, pointing out the

deficiencies on the applicability of such license. According to Reuters, only two large companies

have succeeded to obtain and comply with the onerous regulations of Bitlicense, with 15 other

104 Department of Financial Services. Virtual Currency Licensing.. New York Rules and Regulations. Available at:

http://www.dfs.ny.gov/legal/regulations/adoptions/dfsp200t.pdf (accessed August 22, 2018).

105 Jay Palmer Fawcett. Bitcoin Regulations and Investigations: A Proposal for U.S. Policies. Published by ProQuest

LLC (2016).


37

applications still pending and some others already withdrawn or denied.106 In this view, it could

be argued that the deficiencies of Bitlicense not only can challenge its AML effectiveness, since by

the long last and uncertain process of obtaining such license, a business stays unprotected,

without having any obligation of adopting AML requirements, but also it can be argued that such

strict and burdensome regulations can significantly harm the local industry, hampering business

operations within New York, the capital of financial markets and early adopter of virtual

currencies.

3.2 Best practices and shortcomings in the U.S.

Undoubtedly, U.S. has introduced an effective and paradigmatic approach on regulating

virtual currency, focusing entirely on exchanges that create the primary entry points, enabling

virtual currency customers and traders to interact with DLT. The importance of regulating

exchanges is proved by the fact that, those intermediaries create a substantive and tangible body

where regulators can impose AML obligations, grasping their digital nature.

The numerous obligations that the U.S. imposes on virtual currency companies that act as

money transmitters (exchanges, centralized virtual currency administrators as well as brokers-

dealers of virtual currencies), falling under the scope of FinCEN regulations, has enabled a

meaningful oversight in virtual currency operations. But most importantly, U.S. regulation has

covered exchanges of virtual currencies for virtual currencies, a fact that can be used as a

significant lesson and must be adopted from the EU, since as i will analyze in the next section, the

recent Directive covers merely virtual currency to fiat money exchanges. This provision entails a

significant value, covering and regulating parties that exchange for example bitcoin to other more

106 Reuters, “New York’s bitcoin hub dreams fade with licensing backlog”, by Suzanne Barly, October 2016. Available

at: https://www.reuters.com/article/us-bitcoin-regulations-dfs/new-yorks-bitcoin-hub-dreams-fade-with-

licensing-backlog-idUSKBN12V0CM (accessed August 22, 2018).

https://www.reuters.com/article/us-bitcoin-regulations-dfs/new-yorks-bitcoin-hub-dreams-fade-with-licensing-backlog-idUSKBN12V0CM%20(accessed%20August%2022

https://www.reuters.com/article/us-bitcoin-regulations-dfs/new-yorks-bitcoin-hub-dreams-fade-with-licensing-backlog-idUSKBN12V0CM%20(accessed%20August%2022

38

anonymous alt-coins, like Monero enabling them to retain opaque towards potential illicit

transactions.107

As we read in the statement of the U.S. Department of the Treasury under Secretary Sigal

Mandelker: “Through FinCEN, Treasury regulates virtual currency exchangers as money

transmitters and requires them to abide by Bank Secrecy Act obligations. We also use our strong

enforcement powers to target those who fail to live up to their responsibilities. Virtual currency

businesses are subject to comprehensive, routine AML/CFT examinations, just like financial

institutions in the securities and future markets”.108

Indeed, in July 2017, the U.S. FinCEN regulators, imposing their strict enforcement powers on

AML/CFT violators using virtual currencies, levied a penalty up to $110 million on the BTC-e virtual

currency exchange for not conforming with the registration obligations under FinCEN, therefore

acting as an unlicensed money transmitter, falling outside the scope of the AML/CFT measures.109

Furthermore, an evidence confirming the deterrent nature and the efficiency of U.S. measures

towards illicit actors, can be found in the recent report carried out by Elliptic 2013-2016, where

Europe proved that has received five times more illegal bitcoin compared to North American

services.110

However, as i mentioned previously in the current section, several U.S. federal bodies have

taken multiple approaches on how virtual currencies should be treated as for their status. In this




108 U.S. Department of the Treasury, Statements & Remarks (2018), “U.S. Department of the Treasury under

Secretary Sigal Mandelker speech before the Securities industry and financial markets association anti-money

laundering & financial crimes conference. Available at: https://home.treasury.gov/news/press-release/sm0286

109 U.S. Treasury, Financial Crimes Enforcement Network, (2017). “FinCEN fines BTC-e virtual currency exchange $110

Million for facilitating ransomware, dark net drug sales”. Press Release. Available at:

https://www.fincen.gov/news/news-releases/fincen-fines-btc-e-virtual-currency-exchange-110-million-facilitating-

ransomware





39

sense, different regulatory bodies want to impose their own regulations depending on their

defined status, meaning regulating virtual currencies in various ways. For example, SEC that

perceives virtual currencies as subject under the supervision of security laws, recently issued a

statement, considering exchanges for virtual currency as subject of its jurisdiction. In the same

direction the U.S. Commodity Futures Trading Commission (“CFTC”) claims that virtual currencies

as commodities must be subject under their jurisdiction. The problem with all these multiple

regulations, lies on the tension that can be caused between different jurisdictions, since the

requirements from the different obligations of each federal body, may vary and most importantly

contradict with each other.111 For example, looking into the BSA regulations and the definition

that provides on MSBs (at 31 C.F.R. § 1010.100(ff)(8)(ii): “… the term ‘money services business’

shall not include; (ii) a person registered with, and functionally regulated or examined by, the SEC

or the CFTC, or a foreign financial agency that engages in financial activities that, if conducted in

the United States, would require the foreign financial agency to be registered with the SEC or CFTC;

“. 112 But, taking into consideration the registration requirements under FinCEN, how virtual

currency businesses can be at the same time subject of the FinCEN’ jurisdiction, and at the same

time subjects under SEC and CFTC jurisdictions?

As a response to the above tension, in February 2018, a letter from FinCEN to U.S. Senator

Ron Wyden of the Senate Committee on Finance tried to underpin the intersection of those three

federal bodies, addressing close cooperation on enforcing and clarifying the AML/CFT obligations

imposed on virtual currency businesses.113 Furthermore, according to the letter, in certain cases

are subject of BSA laws not because they act as MSBs, but due to the fact that they constitute

broken-dealers ( another type of ‘financial institution’ that is subject of the BSA laws) therefore,

they have to comply with SEC regulations. This adds another layer of complexity on the U.S. laws,

in regulating virtual currency exchanges. Just consider the surprise of all these virtual currency




112 CFR, Title 31, Subtitle B, Chapter X, Part 1010, Subpart A, section 1010.100-General Definitions. Available at:

https://www.law.cornell.edu/cfr/text/31/1010.100

113 Department of the Treasury, (February 2018). “FinCEN Letter” from the Honorable Ron Wyden, Ranking Member,

Committee of Finance.

40

exchanges that have already registered as MSBs under FinCEN, now government with the recent

changes may perceive them as broken-dealers. Lastly, add in this already very complex regulatory

environment the licensing requirements for virtual currency under state law (e.g. Bitlicense) that

exist independently of the federal law.114

The consequences of this “over-regulating” approach create confusion and set serious

constraints on businesses engaging with virtual currencies, since they remain unsure of their

regulatory obligations. This may result many of the obliged entities to overlook the requirement of

registering as an MSB, simply because they are not aware of their status. Lastly, different AML

requirements as for the reporting and programming process, may apply under the BSA based on

the nature of the Financial Institution involved (whether is a U.S. broker-dealer or another type of

financial institution), creating vagueness as for the AML processes that a business must follow.115

In this view, a clear definition as for the status of virtual currencies must be given. Are virtual

currencies commodities, securities, digital assets, currency or something else? The question of

how Bitcoin and other cryptocurrencies have been regulated in the U.S. can be answered probably

by determining first the purpose behind this regulation. In this view, U.S. regulations depend

exclusively in the “agency” the individual refers to. Therefore, bitcoin has been characterized as

the “regulatory platypus” in the U.S. managed by several different agencies.116 This fact creates

multiple implications for the subject of combating money laundering and financing terrorism with

the use of virtual currencies analyzed above in the current section, especially for regulators, virtual

currency businesses and courts when they are asked to deal with solving cases involving virtual

currencies.







116 Investopedia, ”Bitcoin Has A Regulation Problem” by Rakesh Sharma, January 23, 2018. Available at:

https://www.investopedia.com/news/bitcoin-has-regulation-problem/ (accesses August 22, 2018).

https://www.investopedia.com/news/bitcoin-has-regulation-problem/

41

3.3 Conclusion

U.S. has been carrying out actions against illegal activities of ML/FT, by imposing a strict

regulatory framework and focusing exactly at the point, where virtual currencies are becoming a

part of the real world by influencing the non-virtual-economy. Intermediaries, such as exchangers

of virtual currencies, are the main concern of the regulatory attention in the U.S., an approach that

has been followed also by the EU with the recent adoption of the Directive (EU) 2018/843 of the

European Parliament and of the Council of 30 May 2018. And as I have analyzed in the U.S. section,

such an approach proved to be effective against the fight of money laundering, enabling the

imposition of AML regimes.

However, the U.S. still by the time of this writing, lacks a coherent approach on virtual

currency regulation and most importantly on how it classifies Bitcoin, since there is a huge

disparity among the states and federal responses.117 Despite the fact that U.S. has taken effective

steps on imposing AML regimes on Bitcoin, there is still a lack of congruity in defining the status of

virtual currencies among the different regulatory agencies in the U.S. The divergence on

classification will only lead to a great confusion, since different classification requires different

regulatory responses. Moreover, the potential application of different regulations with an absence

of a clear line on the definition on virtual currencies only causes confusion on the regulatory status

of certain customer types and activities that must be defined for enabling them to be subjects

under relevant AML regulations.

117 Investopedia, “Bitcoin has a Regulation Problem” by, Available at: https://www.investopedia.com/news/bitcoin-

has-regulation-problem/#ixzz59wvqBShZ (accessed August 22, 2018).

https://www.investopedia.com/news/bitcoin-%20has-regulation-problem/#ixzz59wvqBShZ

https://www.investopedia.com/news/bitcoin-%20has-regulation-problem/#ixzz59wvqBShZ

42

4. Regulating Bitcoin in the EU: Proposal and Lessons from the U.S. framework

In this chapter i aim to explore the EU territory, concerning the regulatory approach taken

towards Bitcoin, analyzing how different Member States are dealing with the emergence of this

technological innovation and the risks of money-laundering and financing terrorism that

accompany virtual currencies’ reputation.

The focal point of this chapter will be on the recent adoption of the 5th Anti-Money

Laundering Directive, and the exploration of the aspects of virtual currencies that EU covered

through the enforcement of this regulation. Furthermore, taking as a comparative model the U.S.

regulatory responses, will try to demonstrate the need of EU to adopt the best U.S. practices for

improving the new regulation, for addressing effectively threats of money laundering and terrorist

financing in the EU and to avoid U.S. shortcomings when transposing it into the Member States, in

order to avoid “the over-regulating approach” that U.S. has been holding.

4.1 Existing regulatory attempts from different Member States

In contrast with the U.S., over time, the EU has taken a slow and progressive stance on how

Bitcoin and in general virtual currencies should be treated from law enforcement.118 Several

countries within the EU, have been trying to address the benefits but also the potential threats

that Bitcoin may entail. The idea that Bitcoin and other virtual currencies are a nascent

technology, therefore regulators must be conscious on how should be treated and in which extend

should be regulated to avoid stifling this innovative mean of payment, has become highly

debatable, since the adoption and the use has been highly increased. By the end of the year of

2017, Bitcoin has reached a skyrocketing value, thus cryptocurrencies are increasingly becoming

mainstream.

118 Investopedia, “Bitcoin Government Regulations Around the World”, by Joe Liebkind, December 2017. Available at:

https://www.investopedia.com/news/bitcoin-government-regulations-around-world/#ixzz59edKZEW5 (accessed

August 22, 2018).

https://www.investopedia.com/news/bitcoin-government-regulations-around-world/#ixzz59edKZEW5

43

Due to the widespread use and the fact that cryptocurrencies have started to become

mainstream, many governments and central banks in the EU, have expressed their concerns and

fears as for the various risks that virtual currencies entail and more specifically, towards their

anonymized nature and their capability of becoming vehicles for criminal activities. The latest

extended research launched by Elliptic has demonstrated that Europe has received over the years

2013-2016, the largest amounts of illicit bitcoins and scored number one concerning the identified

jurisdictions on the overall Bitcoin laundering activity among Africa, Asia, North and South America

and Oceania.119 Moreover, according to the study illicit entities such as Darknet Marketplaces,

Darknet Services, Vendors and Fraud Activities, have been growing with fast pace over the time

2013-2016, with Bitcoin Exchanges to be on the epicenter of the services, though which big

amounts of bitcoin are laundering by entering into the EU’s financial system with the form of real

currency: “Bitcoin exchange services received roughly 75 percent of all incoming (illicit and licit)

Bitcoin entering conversion services in our study”.120 As the study concludes, Bitcoin and

cryptocurrencies are here to stay and is unlikely that they will disappear in the future, exactly as

with the rest of the digital means of payments in the recent past like credit cards and prepaid

cards, that were all used for criminal purposes. Further, it underpins the need from cybercrime law

enforcement to acquire the adequate technological expertise to combat their illicit use.121

In addition, several Member States in the EU, over the past few years have been

addressing the risks of money laundering and financing terrorism that the use of virtual currencies

entails. For example, the Dutch Central Bank has raised concerns about cryptocurrencies and their

potential risks of money-laundering and financing terrorism. More specifically, in their position

paper, the Bank of Netherlands stresses the fact that since bitcoins and other cryptocurrencies are

playing a role outside the monetary system, therefore there is a lack of a gatekeeper like for

example a bank, that will ensure their integrity and value. In 2017, HM Treasury published a

National Risk Assessment concerning the use of virtual currencies for criminal activities. The UK



http://www.defenddemocracy.org/content/uploads/documents/MEMO_Bitcoin_Laundering.pdf (accessed

August 22, 2018).

120 Ibid.

121 Ibid.


44

has continuously stressed the risks that virtual currencies can entail especially concerning

cybercrime activities. The most current National Risk Assessment of 2017, published by the UK

government, emphasized the vulnerabilities and the imperative need of adding cryptocurrencies,

such as Bitcoin under the scope of the EU fifth Anti-Money Laundering Directive (5AMLD).122

According to the assessment anonymity, cross-border exposure and lack of a specific

regulatory framework, were identified as the main vulnerabilities concerning the nature of Bitcoin

and other cryptocurrencies within the Digital sector. More specifically, the NRA found that the

likelihood of the risks of money-laundering and financing terrorism been materialized is higher

when these risks are seen from a cybercrime perspective. And this is because based on the

Assessment, virtual currencies are facilitating crime-as-a-service and cyber-dependent crime. For

example, virtual currencies are playing crucial role on laundering the proceeds of crime and are

the main method of payment between cybercriminals and the main mean for purchasing or selling

illicit services within dark webs. As the report explains: “These risks are expected to grow as digital

currencies become an increasingly viable and popular payment method…there is an increasing risk

of criminals using the currencies to launder funds without needing to cash out into non-digital or

‘fiat’ currencies”. Thus, the report underpins the need of regulatory regime through the

application of the EU Anti-Money Laundering Directive: “The reporting and detection of suspicious

activity is likely to increase when exchanges and custodian provides become regulated through the

EU Anti-Money Laundering Directive (5MLD)”.123

122 HM Treasury, National Risk Assessment of Money-Laundering and Terrorist Financing 2017, Home Office October

2017. Available at:

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/655198/Nati

onal_risk_assessment_of_money_laundering_and_terrorist_financing_2017_pdf_web.pdf (accessed August 22,

2018).

123 HM Treasury, National Risk Assessment of Money-Laundering and Terrorist Financing 2017, Home Office October

2017. Available at:

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/655198/Nati

onal_risk_assessment_of_money_laundering_and_terrorist_financing_2017_pdf_web.pdf

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/655198/National_risk_assessment_of_money_laundering_and_terrorist_financing_2017_pdf_web.pdf




45

4.2 The 5th Anti-Money Laundering Directive and Future Recommendations

a. The Directive (EU) 2018/843

In June 19, 2018 the 5th Anti-Money Laundering Directive, officially called “Directive (EU)

2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU)

2015/849 on the prevention of the use of the financial system for the purposes of money

laundering or terrorist financing and amending Directives 2009/138/EC and 2013/36/EU”, was

formally adopted. The Directive took into account the 2012 Recommendations with measures

which countries should follow for combating ML/FT threats, made by the Financial Action Task

Force (FATF), setting as central objectives of the amendments, the prevention of the use of the

financial system for the funding of criminal activities and the reinforcement of transparency rules

for the prevention of large scale concealment of funds.124 As for the main changes of the directive

that was adopted by the European Parliament and the Council, these are concerning the

improvement of transparency in the ownership of companies through an increment of access to

beneficial ownership registers. More specifically, as i will analyze in the following section, the 5th

AMLD extents the scope of the “obliged entities” under article 2.1 of the Directive, including

virtual currency exchange platforms and custodian wallet providers. In addition, it strengthens the

access of Financial Intelligence Units to information, by enabling them to request information

concerning money laundering and financing terrorism from any obliged entity. These kind of

information (financial, law enforcement and administrative information) should be made available

in a timely fashion without a prior suspicious transaction report as required before.125 Under the

Directive, Financial information Units of the Member States are encouraged to set up systems of

124 Council of the European Union, “Money Laundering and terrorist financing: Presidency and parliament reach

agreement”. December 2017. Available at: http://www.consilium.europa.eu/en/press/press-

releases/2017/12/20/money-laundering-and-terrorist-financing-presidency-and-parliament-reach-agreement/




financing and amending Directives 2009/138/EC and 2013/36/EU.

http://www.consilium.europa.eu/en/press/press-releases/2017/12/20/money-laundering-and-terrorist-financing-presidency-and-parliament-reach-agreement/


46

centralized banking registries that would enable them to identify bank account holders and

payment accounts. However, the easy and fast detection that would take place under the

centralized registries and mechanisms, such as data retrieval systems for the purpose of

identifying suspicious money laundering and financing terrorism transactions, raises concerns of

privacy and data protection breaches, putting also at stake the fundamental rights of private and

family life (Article 7), the protection of personal data (Article 8) and the right of the freedom to

conduct a business (Article 16), under the Charter of Fundamental Rights of the European Union.

Therefore, such actions shall be performed taking all the necessary measures for preventing

extensive interference, based on the principle of proportionality. Thus, the Directive encourages

Member States to take measures setting down requirements concerning the storing, the amount

and retention period (an adequate reasoning for any extended duration), of the data necessary for

the performance of AML/CFT investigations.126

Furthermore, the new Directive focuses on the need of risk assessments (Supra national

and national risk assessments).127 Taking into consideration the risk factors that are explicitly

mentioned in the Directive, including those that are related to the customers of the obliged

entities, countries, geographic areas, services products or transactions,128 national obliged entities

are required to determine the level of due diligence measures that must be taken. Besides the

internal risk assessments, the Commission must carry out a risk assessment at the EU level and

according to the level of risk a subsequent national risk assessment must be performed from all

Member States. Through this procedure, the Directive ensures that all Member States are in line




content/EN/TXT/?uri=CELEX%3A32018L0843 (accessed August 22, 2018).

127 European Commission, 2017. “Strengthened EU rules to tackle money laundering, tax avoidance and terrorism

financing enter into force. “The Supranational Risk Assessment Report a tool to help Member States identify,

analyse and address money laundering and terrorist financing risks. It analyses the risks in the financial and non-

financial sector and looks also into newly emerging risks such as virtual currencies or crowdfunding platforms”.

Available at: http://europa.eu/rapid/press-release_IP-17-1732_en.htm (accessed August 22, 2018).



financing and amending Directives 2009/138/EC and 2013/36/EU. “Annex II, point 3: Geographical risk factors-

registration, establishment, residence”.



http://europa.eu/rapid/press-release_IP-17-1732_en.htm

47

with its provisions and stay vigilant concerning the ML/FT risks, enhancing cooperation within the

EU territory.129 In this direction, the Directive is seeking to harmonize the EU approach especially

towards high-risk third countries that are lacking adequate AML/CFT regimes, applying increased

customer due diligence measures by the obliged entities (Article 18).130

Concerning virtual currencies, the 5th Anti-Money Laundering Directive, is mainly targeting

the exchange platforms and custodial wallet providers, which are the responsible entities, serving

as a link and facilitate the connection between virtual and real economy. 131 In this direction,

Member States have the right to request access to information: “addressing risks linked to prepaid

cards and virtual currencies. The threshold for identifying the holders of prepaid cards is lowered

from €250 to €150, and customer verification requirements are extended. Virtual currency

exchange platforms and custodian wallet providers will have to apply customer due diligence

controls, ending the anonymity associated with such exchanges;”.132 According to the statements

given by Timmermans, First Vice-President, Vice-President Dombrovskis and Commissioner

Jourová, these amendments can prevent risks linked with the use of cryptocurrencies for financing

terrorist activities and money-laundering.133

More specifically, as i mentioned above the new Directive has expanded its scope, in order

to designate virtual currency exchanges and custodian wallet providers as obliged entities under

the article 2 of the 5th Anti-Money Laundering Directive. According to the Report from the





130 Ibid.


FinTech, InsurTech, Regulation, ChinaTech, Mobile Security, and Distributed Ledger, Academic Press, 2017.

132 Council of the European Union, “Money Laundering and terrorist financing: Presidency and parliament reach

agreement”. December 2017. Available at: http://www.consilium.europa.eu/en/press/press-

releases/2017/12/20/money-laundering-and-terrorist-financing-presidency-and-parliament-reach-agreement/


133 European Commission-Statement, Statement by First Vice-President Timmermans, Vice-President Dombrovskis

and Commissioner Jourová on the adoption by the European Parliament of the 5th Anti-Money Laundering

Directive. Brussels, April 2018. Available at: http://europa.eu/rapid/press-release_STATEMENT-18-3429_en.htm






http://europa.eu/rapid/press-release_STATEMENT-18-3429_en.htm

48

Commission to the European Parliament and the Council, on the assessment of the risks of money

laundering and terrorist financing affecting the internal market and relating to cross-border

activities, financial products that are providing enhanced anonymity, and complicating tracing the

identity of the transacted parties, are vulnerable to ML/FT activities, with different risks levels

from cash transactions: “they require more sophisticated planning, cover lower volumes of

transactions and my be subject to a certain level of monitoring”. In addition, they are easy to store

and transfer due to their digitalization.134 Moreover, as can be read in the Directive, due to the

high degree of anonymity, virtual currencies may be used for terrorist financing purposes for

concealment of their financial funding and transfers. The complex and opaque technology and the

lack of regulatory safeguards are increasing even more the risks raised from the use of virtual

currencies.

Therefore, the 5th AMLD by expanding the scope of the obliged entities, regulates wallet

providers and virtual currency exchanges, requiring them to function similarly as financial

institutions. Thus, those two obliged entities become subjects to certain obligations for reporting

suspicious transactions and applying due diligence and preventive measures. In this direction,

through this provision, EU is seeking to set down the conditions for monitoring virtual currencies

(through the obliged entities), thus limiting their anonymity. In order to be able to monitor the

anonymized transactions, Financial Intelligence Units of the Member States, should obtain

information that enables them to assign virtual currency addresses to the identity of the virtual

currencies’ owners. This information can be obtained from the exchange and custodian wallet

providers. Thus, Member States are required under the Directive to ensure that the exchanging

services are licensed or registered.135 In this view, we observe that EU followed a very similar

approach as the U.S., targeting the virtual currency exchanges by imposing registering obligations

and increasing the monitoring mechanisms and applying AML and KYC practices.

134 European Commission, 2017. “Report from the Commission to the European Parliament and the Council on the

assessment of the risks of money laundering and terrorist financing affecting the internal market and relating to

cross-border activities.







49

However, as the European Parliament stressed before the adoption of the 5th Anti-Money

Laundering Directive and through the provisional agreement for the proposal for the adopted

revision of the 4th Anti-Money Laundering Directive, the inclusion of these obliged entities would

not be able to address entirely the issue of anonymity, since most of the transactions taking place

using virtual currencies, do not engage the intermediary providers.136 Therefore, a part of virtual

currency transactions will remain unmonitored within an anonymous environment. In addition,

the Directive does not acknowledge the fact that virtual currencies do not limit their use through

the exchange with fiat money. They can be used to purchase services or goods, they can be

exchanged also with other types of virtual currencies or used for crypto-to-crypto transaction

without requiring the engagement of the proposed as ‘obliged entities’ providers. This comes in

contrast to the U.S. practice, where the current regulations are covering also crypto-to-crypto

transactions.

At this point i identify a serious gap in the adopted Directive, concerning virtual

currencies’, since crypto-to-crypto transactions are left outside its scope. Therefore, such

transactions stay unregulated without any control measure.137 Moreover, even if the Directive

expands further its scope, individuals with an advanced knowledge in the use of virtual currencies

can find the way to secure the anonymized nature using tools, such as tumblers and mixers (I

already analyzed their functions above), to obscure the real addresses of the transacted parties. In

this way, the Directive neglects to address a large part of the complex aspects that derive from the

use of virtual currencies.

Furthermore, the Directive for legal certainty reasons introduces a definition of “virtual

currencies”. According to the amended Article 3 (point 18 added) of the Directive ‘virtual

currencies’ means: “a digital representation of value that is neither issued by a central bank or a

136 European Parliament, “Provisional Agreement Resulting from Interinstitutional Negotiations”, December 2017.

Available at: http://www.europarl.europa.eu/RegData/commissions/econ/inag/2017/12-

20/CJ12_AG(2017)616577_EN.pdf (accessed August 22, 2018).

137 European Central Bank, Opinion of the European Central Bank on a proposal for a directive of the European

Parliament and of the Council amending Directive (EU) 2015/849 on the prevention of the use of the financial

system for the purposes of money laundering or terrorist financing and amending Directive 2009/101/EC

(CON/2016/49). October 2016. Available at: http://data.consilium.europa.eu/doc/document/ST-13303-2016-

INIT/en/pdf (accessed August 22, 2018).

http://www.europarl.europa.eu/RegData/commissions/econ/inag/2017/12-20/CJ12_AG(2017)616577_EN.pdf


http://data.consilium.europa.eu/doc/document/ST-13303-2016-INIT/en/pdf

http://data.consilium.europa.eu/doc/document/ST-13303-2016-INIT/en/pdf

50

public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal

persons as a means of payment and can be transferred, stored or traded electronically”.138 The

definition provided by the Directive accepts virtual currencies to be declared as legal tender.

However, as we have already discussed above, neither EU member states nor European bodies,

such as the European Central Bank accepts virtual currencies as currencies within the meaning of a

legal tender. Given the fact that virtual currencies can be used in multiple ways, for example as a

mean of exchange, store of value or for investment purposes, or they can even be used for non-

payment purposes such as online casinos, it’s necessary that a revised definition shall be included

in the Directive that will cover the broad application of virtual currencies.139 In this way, the

Directive will provide a definition in a more effective manner covering the potential multiple use

of virtual currencies, including a wider range of its aspects and thus, regulating a larger part of the

risks of ML/FT associated with their use.

Another issue arising from the adopted Directive concerning virtual currencies, deals with

the obligation of Member States to set up national centralized registries with automated

mechanisms and electronic data retrieval systems for enabling the identification of natural or legal

entities and controlling payment and bank accounts. In this direction, Member States assign as

administrator of the central register of bank, their national central bank (NCB). This central

register shall stay accessible for the FIUs and other authorities. Nevertheless, the European

Central Bank has already expressed before the adoption of the Directive, that tasks related to the

establishment of a central registries of bank accounts, shall not be considered as tasks assigned to

National Central Banks in the European System of Central Banks. Under the Article 30 of the

previous Directive 2015/849/EU such establishments are considered entirely as tasks taken from

national governments for the purposes of combating money-laundering and financing terrorism.

Therefore, to safeguard and ensure the independence of the European System of Central Banks



financing and amending Directives 2009/138/EC and 2013/36/EU. Article 3 point 18 added.

139 European Central Bank, Opinion of the European Central Bank on a proposal for a directive of the European

Parliament and of the Council amending Directive (EU) 2015/849 on the prevention of the use of the financial

system for the purposes of money laundering or terrorist financing and amending Directive 2009/101/EC

(CON/2016/49). October 2016.

51

members, the Directive shall include a process of a cost recovery mechanism that will address the

costs incurred by the National Central Banks that dealing with the accessibility and operation of

the central registries.140

b. Recommendations

Undoubtably, Europe has been taken an active approach towards the regulatory treatment

of virtual currencies following the example of the U.S. With the adoption of the recent 5th Anti-

Money Laundering Directive, European Union for the first time introduces a regulatory regime that

addresses virtual currencies against activities of money laundering and financing terrorism. It’s the

first EU step towards an alignment with the FATF recommendations made back in 2012. Member

States will have 18 months to transpose the new Directive into their local regulations. Therefore,

by the end of 2019 Member States shall make sure to implement comprehensive regulation

towards virtual currency exchanges and custodial wallet providers.

In my view, this Directive has room for improvement, since it lacks substantive measures

for protecting virtual currencies against their use for Money Laundering and Financing Terrorism

practices. In this direction, European Union must take a more effective and active role adding

more regulatory measures in the Directive, concerning virtual currencies.

Firstly, as discussed above, the Directive is targeting exchangers that are transmitting

virtual currencies. Thus, Europe must implement requirements and strong procedures for verifying

customers’ identity and make it obligatory for all the Bitcoin and other virtual currencies

businesses to adopt AML policies. As i have analyzed, the Directive takes an effective approach,

increasing preventive measures, by applying Customer Due Diligence measures, especially to high

risks third parties with inadequate and insufficient AML regulations. However, the amendments of

the Directive include AML practices that are covering providers, engaging in exchanger services for

exchanging solely virtual currencies for fiat money and vice versa. Therefore, the Directive leaves

aside other forms of exchanges such as crypto-to-crypto trading, where bitcoin users are

140 Ibid.

52

exchanging with other types of anonymous crypto coins, that can be used for criminal purposes

and are completely untraceable (e.g. Monero).141 At this point the EU can use as guidance the U.S.

approach, extending its regulations to exchanges of virtual currencies for virtual currencies. Such

response will ensure that Know-Your-Customer measures are followed and crypto-to-crypto

platforms file Suspicious Transaction Reporting (STR) when observing suspicious activity.142

Furthermore, the improved Directive must ensure clarity as for the scope and the intent of

the regulation. For example, whether ATMs are covered from the current 5th AML Directive is

completely unclarified and whether ATMs fall under the scope of virtual currency exchange

platforms. Therefore, a clarification as for the status of bitcoin ATMs must be clarified in order to

harmonize the practices across Member States.

In the same direction, as we have seen from the U.S., the use of mixers, tumblers and

online gambling sites, appears as a serious vehicle for enabling money laundering and financing

terrorism activities, simply by making it impossible to impose AML and KYC practices.143 This

constitutes a serious threat for the EU, since the Directive in the provision for virtual currencies

does not address with adequacy the advanced technological nature of virtual currencies. In this

direction, a large part of the transactions that can possibly take place, will remain anonymous.

Thus, each Member State and subsequently the European Union, must set as a priority to

implement regulations targeting mixers, tumblers and gambling sites. Authorities must increase

the AML enforcement for these means, that enable to obscure the identity of the users and

location of operation, making the transactions untraceable and seeking to evade regulations.

According to Elliptic’s analysis, identification even with the use if these means can be achieved

from forensic experts: “Even when mixers and gambling sites do not publicize their jurisdictions or



http://www.defenddemocracy.org/content/uploads/documents/MEMO_Bitcoin_Laundering.pdf.




143 Jay Palmer Fawcett. Bitcoin Regulations and Investigations: A Proposal for U.S. Policies. Published by ProQuest

LLC (2016).


53

ownership, investigators can use website domain analysis as well as Bitcoin blockchain analysis

forensics to identify the probable owners and administrators of these sites”.144

Clearly, regulations are highly diversified between countries worldwide, and this is because

each country faces different risks. Therefore, differed regulatory responses are required to be

taken from each one of them. Concerning the area of virtual currencies, situation is slightly

different, since regulators are dealing with something difficult to be grasped and implemented

from law enforcement, due to its unique nature (e.g. transnational characteristic, no specific

governmental regulatory agencies).145 Thus, a harmonized approach with a robust global

coordination serves as one of the priorities, creating consistency as for AML practices among

countries and covering loopholes between different regulatory jurisdictions.146 This can work as an

effective way to fight potential future launderers who are seeking more lenient jurisdictions or

countries without any regulatory measure on cryptocurrencies for money-laundering, in order to

cash out the proceeds of crime and place illicit cash in the legal financial systems (e.g. using ATM’s

in countries where no registrations as an MSB is required or where KYC are not applied).147

Moreover, this type of cooperation among countries must be active, meaning that countries with

different AML jurisdictions should share lessons with others with weak or even absent AML

regulations. In this way prospective AML jurisdictions can avoid inadequate measures, learn from

the others experience, but at the same time adopting the best practices, as proposed in the

current thesis with the case of the U.S.


Elliptic, Center on Sanctions and Illicit Finance, January 2018.

145 Investopedia, “Bitcoin has a Regulatory Problem” by Rakesh Sharma, January 2018. Available at:

https://www.investopedia.com/news/bitcoin-has-regulation-problem/ (accessed August 22, 2018).

146 European Banking Authority, “EBA Opinion on ‘virtual currencies’”, July 2014. Available at:

https://www.eba.europa.eu/documents/10180/657547/EBA-Op-2014-08+Opinion+on+Virtual+Currencies.pdf


147 David Bååth and Feliz Zellhorn, 2016 “How to combat money laundering in Bitcoin? An institutional and game

theoretic approach to anti-money laundering prevention measures aimed at Bitcoin” Linköpings Universitet,

Institutionen för ekonomisk och industriell utveckling. Available at: http://www.diva-

portal.org/smash/get/diva2:1039181/FULLTEXT01.pdf (August 22, 2018).

https://www.investopedia.com/news/bitcoin-has-regulation-problem/


http://www.diva-portal.org/smash/get/diva2:1039181/FULLTEXT01.pdf


54

In this direction, during the workshop for financial investigators on the detection,

investigation, seizure and confiscation of cryptocurrencies, organized on January 2018 by Europol,

Interpol and the Basel Institute on Governance, all the participants concluded to increase

cooperation on information sharing about money laundering and virtual currencies and take

actions against mixers, tumblers that are aiming to enhance the anonymity and create a burden on

the work of law enforcement to detect suspicious transactions. 148

I recommend that the adopted Directive must wide its scope, concerning virtual currencies

and should be revised followed by probably a 6th Money-Laundering Directive. This can be

achieved by adopting a broader definition that will include all the possible uses that can take place

through virtual currencies exchanges. Clearly, this comes with many possible costs for the nature

and the initial purpose of virtual currencies. Rigorous regulations on money laundering will

eliminate one of the main features of virtual currencies that is their decentralized and anonymized

nature, simply because money laundering regimes require the collection of information for

account holders and transactions. This can be achieved only by setting intermediaries that will act

as gatekeepers. And in our view, regulating exchange platforms is something different than

regulating virtual currencies. In addition, such regulations can provide a safeguard for a lawful use

and increase the trust within the market by gaining more potential users. In addition, EU bodies

must make sure to understand deeply the functionality and complex nature of virtual currencies.

This requires advanced knowledge and experts on the field to be able to tackle the possible ML/FT

risks. In this view developing law enforcement knowledge and new techniques as for the complex

technology of virtual currency appears as a requisite, since criminals adapt faster on new

technological developments compared to law enforcement.149

Eventually, self-regulation can hold a crucial role towards regulating effectively the

dynamic nature of virtual currencies, since it can standardize responsible practices among virtual

148 Europol, Global Workshop for Financial Investigators on Detection, Investigation, Seizure and Confiscation of

Cryptocurrencies, Press Release January 2018. Available at:

https://www.europol.europa.eu/newsroom/news/global-workshop-for-financial-investigators-detection-

investigation-seizure-and-confiscation-of-cryptocurrencies (accessed August 22, 2018).




https://www.europol.europa.eu/newsroom/news/global-workshop-for-financial-investigators-detection-investigation-seizure-and-confiscation-of-cryptocurrencies


55

currency community. For example, in February 2018, a self-regulatory body launched in the UK

called CryptoUK, which is comprised by 8 cryptocurrency and blockchain companies. Members of

this body must make sure to follow the organization’s Code of Conduct, and comply with due

diligence checks on platforms against illicit acts such as ML/FT.150 In this direction and according to

the opinion given from the European Banking Authority, adopting a non-governmental authority

that will be accountable to regulators and remains aligned with the non-central nature of

cryptocurrencies, Europe can not only maintain transparency with the contribution of crypto

experts but will also promote and benefit by the special features of Blockchain and cryptocurrency

technology.151

4.3 Conclusion

In the last section we examined the EU regulatory response on virtual currencies

concerning ML/FT threats. The EU has made the first step in gaining oversight on virtual currency

operations with the 5th Anti-Money Laundering Directive, aiming to build a comprehensive

regulatory framework for virtual currencies. However, as discussed previously, EU must now make

sure that further measures must be taken, in order to respond effectively to the complex threats

of money laundering and financing terrorism imposed by virtual currencies. Furthermore, EU must

ensure that these efforts will not be undermined by regulatory gaps that already exist in the

recent Directive. In this direction, a transnational approach among the different jurisdictions, with

a harmonized regulatory approach in order to be compatible with the trans-border feature of

150 CryptoUK, “Principles & Code of Conduct”. Available at: https://www.cryptocurrenciesuk.info/code-of-conducts/.

151 European Banking Authority, “EBA Opinion on ‘virtual currencies’”, July 2014. Available at:




56

virtual currencies and combat crimes with borderless character, such as money-laundering and

financing terrorism, is strongly recommended.152

Eventually, the EU, as a very well-connected network of Member States, that promotes

innovation and economic growth, to be able to welcome and make responsible use of virtual

currencies must promote and encourage comprehensive and effective regulations at least on the

aspects that are more vulnerable to be exploited from criminals. On the other hand, strict forms

and “much” of regulation such as the approach followed from the U.S., imposing at the same time

multiple laws in different levels, (for example through Bitlicense in the New York Sates) must be

avoided, resulting confusion on implementing accurately AML regimes. There is a need of

securing the financial system in EU and tackle the manipulation of financial system from criminals,

but at the same time EU must make sure that acts as the hub were innovation can find a secure

place and the breeding ground to give its fruits.

152 European Parliament, “Virtual currencies and central banks monetary policy: challenges ahead”, Monetary

Dialogue July 2018. Policy Department for Economic, Scientific and Quality of Life Policies. Available at:


57

5. Conclusion

In the current Thesis, the risks of money laundering and financing terrorism have been

analyzed related to the technology of bitcoin. Moreover, some of the general characteristics, can

turn bitcoin into a vehicle for criminal purposes. Different regulatory responses from several

federal bodies in the U.S. proved to be too complex and too vague for addressing effectively these

areas of risks. On the other hand, U.S. has taken also many effective approaches as for combating

ML/FT risks, by achieving to implement AML regimes on the exchange platforms.

Moreover, the 5th Anti-Money Laundering Directive adopted recently in the European Union,

appears as too narrow and inadequate for the purposes of fighting money-laundering and

financing terrorism in Europe. The scope of this Directive covers only the regulation of the

exchanges and the custodian wallet services, and solely providers engaged in exchanges services

between cryptocurrency and fiat money. Despite that, important steps have been taken from

European initiatives to embrace the beneficial use of blockchain and cryptocurrencies, such as the

launch of the European Blockchain Observatory and Forum. At the same time, National Banks and

governments from different Member States are underpinning the risks following the rise of virtual

currencies, a fact that requires an adequate, strong and comprehensive regulation for tackling the

use of virtual currencies for criminal activities. Therefore, the thesis demonstrated future

recommendations on how a non-lenient and concrete European regulatory environment should

look like. In this direction, as argued, the U.S. active regulatory approach with a strong deterrent

effect, can work as a guidance for the EU, adopting the strict AML obligations. Thus, as main

priorities I underpinned the obligatory imposition of strict AML and KYC practices for exchangers

that are engaging to any kind of crypto trade, concerning even trading between crypto-to-crypto,

a measure that is already covered under the U.S. regulations. Furthermore, a focus was given on

the regulatory measures taken for mixers/tumblers, online gambling sites and dark webs, since are

the most prominent example of platforms working as source for activities of money-laundering.

Lastly, a cross-border and harmonized response has been strongly recommended as promoting

enhanced cooperation between not only the European Member States, but also between the

countries worldwide. This kind of approach can work as an effective response to the transnational

character of cryptocurrencies.

58

Clearly, we cannot reach a level of certainty on whether the risks imposed by virtual

currencies will increase over time and become capable for a massive break down of the financial

system. However, European Union is obliged to take all the safety measures to prevent such a

potential materialization.

59

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