Dear bitcoin customer - can you show some ID?

Published in: Berlingske Business 


Dear bitcoin customer - can you show some ID?

Even since the anonymous Satoshi Nakomoto published his "white paper" in 2009 and presented the bitcoin, the digital cryptocurrency has been in a legal no man’s land, beyond financial regulation and in a grey tax zone.

In line with the dissemination and price increases of bitcoin and other cryptocurrencies, on which there was apparently no cap in 2017, the phenomenon has been heavily criticised. It has been criticised that the digital cryptocurrencies are an obvious opportunity for criminals to launder and conceal their funds. Blockchain, the underlying bitcoin technology, serves as an open peer-to-peer protocol where the system’s transactions are made publicly accessible. However, while the transactions are publicly accessible, the users are anonymous, and this has given bitcoin a credibility problem, which has made the banking sector reluctant to accept new bitcoin customers.

A new EU directive will now put a stop to the anonymity associated with cryptocurrencies. The directive, which is yet to be finally adopted, will extend the anti-money laundering rules to include also trade in cryptocurrencies. When the directive is adopted, it will be the first time in the EU that cryptocurrencies are covered by financial regulation, which has so far been a self-regulating area.

Who is covered?

The directive will cover cryptocurrency exchanges and wallet providers, which means that they will have to demand identification from their customers in the future. This is in sharp contrast to the rules today where companies are not subject to any financial regulation and are thereby not controlled by any supervisory authority.

However, bitcoin will not finally settle with the anonymous transactions, which is also mentioned in the directive. Bitcoin is based on a technology which is difficult to regulate centrally. For example, it is difficult to regulate decentralised cryptocurrency exchanges, offline wallets and private transactions, and it is also obvious that most cryptocurrency exchanges and wallet providers are placed outside the EU and are therefore not covered by the regulation.

A concern may therefore be whether the regulation will be futile at best and restraining on innovation on the market at worst. However, many companies in the area wish to be regulated as the lack of regulation gives them a creditability problem, which means that they currently have to be self-regulating based on “best practice”. In addition, the lack of regulation presumably contributes to preventing the financial institutions from cooperating with cryptocurrency companies, let alone entering the market themselves.

A central register with bitcoin data

The directive will not only cover cryptocurrency companies. A central register across the EU will also be introduced, storing the data collected by cryptocurrency companies. At present, it is difficult to predict how the register will be used, but it prepares the ground for public authorities having access to the data.

It must be assumed that the reason for the register must be found in the vast amounts of money which the cryptocurrency market has come to represent. It poses a threat not only by way of money laundering and terrorist financing, but also gives rise to the question how the authorities can effectively tax cryptocurrency funds. There is still also significant doubt as to how cryptocurrency profits are to be taxed.

Keenly awaited bill

The digital cryptocurrencies have changed from being an uninteresting Internet phenomenon to being covered by anti-money laundering rules on the same level as the traditional financial institutions. The industry is now moving from being self-regulating and without any regulatory scrutiny to being subject to strict rules and supervision by the Danish FSA.

As soon as the directive has been finally adopted, the Member States have 18 months to implement it into national legislation. We are keenly awaiting the presentation of the bill.

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