Andrew Tzialli and Rachel McCausland

Bitcoin in particular recently earned its place on a global platform by exceeding a $1 trillion market cap and investors (and recently converted cynics) suddenly find it very difficult to ignore the potential for returns. It is this realised potential which makes the need to address the chasms in regulation even more demanding. As is often the case where the potential to make greater monetary gains exists, interest has peaked not only for sophisticated investors but the public at large. By virtue of this fact alone, global governments and regulators have a greater responsibility to protect potential investors from a new and sometimes volatile, investment market.

In essence, much of this changes with new legislation being introduced into Ireland (following that in place across the EU), with a broad range of crypto-related services providers now being subject to registration obligations.

What’s new in the regulatory space – 5AMLD

Directive (EU) 2018/843 is the 5th anti-money laundering directive published by the European Union (5AMLD) and at its core, it aims to better equip European member states to prevent financial systems from being used for money laundering and for funding terrorist activities.

In the context of “digital assets”, 5AMLD seeks to enhance transparency by establishing publicly available registers for companies operating in the space and also in respect of the beneficial owners of those companies. These measures are coupled with protocols which seek to curtail the anonymity relating to virtual currencies and digital wallet providers, with combative measures against the potential exploitation of digital assets for fraud and criminal activity.

Implementation in Irish law

The Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Bill 2020 which amends the draft Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (CJA 2010) gives effect to the provisions of 5AMLD and is currently before the Houses of Oireachtas for debate.

The Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Bill 2020

Whilst still in draft form and not yet implemented into Irish law, notable aspects of the 2020 Bill in relation to digital assets include the following:

1. The definition of a “Virtual Asset” as “a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes but does not include digital representations of fiat currencies, securities or other financial assets” (which as it stands would suggest that “stable coins” pegged to say USD (such as Tether) or gold (such as Paxos Standard), are excluded);
2. The introduction of the concept of a “Virtual Asset Service Provider” (VASP) which is discussed below in greater detail;
3. Categorising a “VASP” as a “Designated Person” which carries an imposition of anti-money laundering and counter-financing of terrorism obligations; and
4. A requirement for VASPs and their beneficial owners to register with the Central Bank of Ireland (“CBI”).

If a business provides at least one of the following activities, they may be classed as a VASP and subject to the obligations imposed on VASPS in the 2020 Bill:

• Exchanging Virtual Assets and fiat currency (e.g. using Euro to buy Bitcoin);
• Exchanging one class of Virtual Assets for another (e.g. using Bitcoin to buy Ethereum);
• Transfers of Virtual Assets (this need not necessarily be a transfer of cryptocurrency, this may also include the transfer of digital tokens from one wallet to another);
• Custodian wallet providers (providing investors with a wallet for holding different classes of Virtual Assets); and
• Financial services relating to the offer or sale of Virtual Assets (e.g. ICOs, STOs, derivatives and DeFi services).

CBI registration

VASPs will be required to register with the CBI and it will be a criminal offence to carry on business as a VASP, claim to be a VASP, or represent oneself as a VASP, without being registered.

Beneficial owners of VASPs must also register with the CBI and any direct or indirect change to the beneficial owner of a VASP will require prior approval of the CBI.

As VASPs will be considered Designated Persons for the purpose of CJA2010, they will be required to comply with the AML regulations to the same standard as other financial institutions.

Register of Virtual Asset Service Providers

The CBI will establish and maintain a “Register of Virtual Asset Service Providers” of all persons registered to carry on business as a VASP in Ireland and the register will be available to the public.

Conclusion

Whilst the 2020 Bill is still in draft form and remains subject to further amendment by the Oireachtas, one cannot deny the visible efforts of the 2020 Bill to provide for closer supervision of businesses operating within the Virtual Asset space.

Whilst we await confirmation of the finer details, one can certainly take comfort in the fact that the impending clarification will not be in oblique terms.

• Andrew Tzialli is a partner and Rachel McCausland is an associate at Philip Lee