Crypto exchanges in Europe may have to store all transactional data as regulators set up a new anti-money laundering watchdog

• The EU is drawing up plans to set up a new agency to counter money laundering and create transparent rules for crypto exchanges and other businesses.
• So far, each European country has relied on national regulatory agencies to enforce anti-money laundering laws.
• A report by CipherTrace stated that even robust regulatory regimes are still lacking in some areas, such as money laundering through crypto exchanges and privacy coins.

The crypto industry has been around for quite some time, but governments are still wondering -- how can one regulate an industry without borders? And, the European Union (EU) may have an idea.

According to a report by Reuters, the EU is drawing up plans to set up a new agency to counter money laundering and create transparent rules for crypto exchanges and other businesses.

The proposal expects crypto exchanges, payments processors, and others to collect and store all transactional data. The documents hint towards creating an Anti-Money Laundering Authority (AMLA) to keep an eye on suspicious transactions and directly combat crypto-enabled crimes.

Regulating a currency without borders

The traditional concept of border-based jurisdiction doesn't apply to decentralised servers that function independently. While crypto has helped democratise real-time payments and digital currencies for the underprivileged, there have been cases of abuse, and leveraging the system to launder money, fund illegal activities, and hide crucial data from law enforcement authorities.

"The lack of such rules leaves holders of crypto-assets exposed to money laundering and financing of terrorism risks, as flows of illicit money can be done through transfers of crypto-assets," the documents filed by the EU said.

The new body will help reduce the movement of illicit money and terrorism financing "by directly supervising and taking decisions towards some of the riskiest cross-border financial sectors obliged entities."

Data about every transactions' originator and beneficiary shall be recorded. Before the legislation is implemented, it'll have to gain approval from the European Parliament, and all member states will be needed for the new regulations to come into force.

Why does the EU need a centralised regulator?

So far, each European country has relied on national regulatory agencies to enforce anti-money laundering laws. But it's getting harder and harder to exert jurisdiction since most of these transactions are cross-border, adding a layer of diplomatic complication. A pan-European agency directly under the European Commission has more teeth and less red tape.

The EU has been nudged to take the idea of a larger AMLA seriously because of the recent Danske Bank debacle. An investigation carried out by an outside law firm for the Danish bank found that it could not account for the origin of more than €200 billion ($240 billion) that flowed through its Estonian branch from 2007 to 2015. Thomas F. Borgen, the CEO of Danske Bank, resigned in the wake of the scandal, and the bank closed its operations in the Baltic States and Russia.

A report by CipherTrace stated that even robust regulatory regimes are still lacking in some areas, such as money laundering through crypto exchanges and privacy coins. US exchanges are estimated to have received $8.4 million worth of Bitcoin directly from criminal addresses in 2020 and sent $41.2 million to illegal addresses. These are transactions that could've been potentially investigated or prevented but seeped through.

EU isn't the only one worried about money laundering

On an individual scale, however, countries have ramped up regulatory oversight, and crypto exchanges are the first ones to bear the brunt. The UK's Financial Conduct Authority (FCA) issued a formal warning about Binance last month, banning it from regulated financial activities. The regulator also stressed that no entity within the Binance Group holds any form of authorisation, registration or licence to conduct a regulated activity in the country.

Binance is the world's largest crypto exchange group in terms of volume traded. It's incorporated in the Cayman Islands but has previously operated from bases in China, Japan and Malta. However, it has been in warm waters with regulators in Japan, Thailand, and even Germany.

In countries like India, crypto exchanges have resorted to self-regulation and claim to have measures in place to prevent money laundering. These include internal safety checks, robust KYC (know your customer), and cooperation with local enforcement agencies. However, these are mere claims at the moment without any third-party audit or oversight.

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