Adam Vaziri is the founder of Diacle, a "finreg" compliance and legal consultancy based in London and Hong Kong, and a member of the UK Digital Currency Association.

In this opinion piece, Vaziri discusses the European Banking Authority's new proposals for digital currency regulation and why they could make starting a bitcoin exchange more onerous than opening a bank.

The European Banking Authority (EBA) wrote an opinion on the application of its 4th Anti-Money Laundering Directive (4AMLD) to virtual currency exchanges and wallets last week.

A response to recommendations from the European Commission, the EBA's remarks notably mention that VC exchanges and wallets operating in multiple countries in the EU "may […] be required to be registered or licensed in each Member State in which they intend to provide VC-related services".

The seemingly small aside in the nine-page response is notable, as such a measure would be akin to the state-by-state registration process that VC exchanges have to do in the US.

This is due to the fact that there are no passporting rights granted under 4AMLD – understandable, as the regulations are not designed to facilitate the movement of goods, services or capital, but are simply motivated by the public policy imperative of protecting the EU from terrorism and crime.

At Diacle, we take the view that a member state-level registration is an unnecessary burden placed on VC exchanges and wallets.

A small VC exchange and wallet operating in the EU would not only need to register as an "obligated entity" in its home state, but in every other member state of the EU where it operates – an unfathomable task. This particular duplication of registrations would create a disproportionate burden on VC operators compared with other regulated institutions in the EU.

A prepaid card is issued by an electronic money institution (EMI) licensed by the Electronic Money Directive. That EMI can 'passport' the services it provides to other member states seamlessly through its home state regulator.

Yes, indeed, that EMI still needs to adapt its customer due diligence (CDD) to any additional requirements of AML or counter-terrorist financing (CTF) laws in the host state. However, the EMI does not need to apply directly state-by-state for AML/CTF registration.

If a standard authorization or licence takes six to 12 months to obtain, then what of an AML/CTF registration?

Usually that process can take between three to six months, however, the VC exchanges and wallets will now need to contend with language barriers, administration and bureaucratic fragmentation in each member state where it wants to do business.

It is sadly ironic that registering in 50 states in the US may be easier as at least the process is in one language. The same state-by-state requirement in the EU will mean the VC exchange operator will need to contend with 24 official languages.

Paradoxically, the process of state-by-state registration will be far more cumbersome in terms of capital and operational resources than if the VC exchange and wallet simply applies to become an EMI or, at a push, a challenger bank.

This surely must be an unintended consequence.

The EBA interprets this implication as a matter of fact, however our view is that this must, at the very least, be unintended as the result is absurd considering the following preamble statements from the EU Commission.

These read:

The above position is worsened when you consider the requirement that, according to the EBA, the "amendments proposed by the Commission introduce a requirement that those who hold a management function in, or are the beneficial owners of, [VC exchanges and wallets] are fit and proper persons".

Although evidently the EU Commission has not fleshed out what 'fit and proper' test will be in practice, it is reasonable to expect that this will be an assessment of the background of the applicants and provision of documentation (passport, proof of address) possibly notarized, apostilled and translated.

Imagine a VC exchange or wallet having to do this in 28 member states.

The average costs of producing documentation that has been officially translated will be a minimum of €1,000 to €2,000 per owner or manager.

If the EU Commission were to accept the EBA’s interpretation that all VC exchanges and wallets will need to register individually in each member state where they operate, this would be the biggest regulatory blunder for a region expounding the job creation opportunities of FinTech.

Again, it would be absurd to assume that the intention of the EU Commission is to make it cheaper to set up a licensed payment institution or electronic money institution or even challenger bank than be regulated under 4AMLD as a VC exchange or wallet.

Overnight, the overhead of VC exchanges and wallets would increase exponentially, meaning most likely the beginning of January 2017 could see a full consolidation of the VC exchange and wallet market in the EU.

This article originally appeared on Diacle's blog and has been republished here with the author's permission.

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