The fast expansion of digital technologies has contributed to the boom of cryptocurrencies over the past year. Taking into account the involvement of virtual money in cyber attacks and illegal transactions, how and to what extent should the EU legislate currencies such as Bitcoin, Ethereum and IOTA? Chaired by Nazeli Ghazaryan (AM) Key Terms Cryptocurrency is any medium of exchange that only exists digitally. Blockchain is a digital database/digital ledger, a system in which a record of transactions made in bitcoin or another cryptocurrency, where the last are maintained and shared across several computers. Cryptocurrency mining is a process in which transactions for various forms of cryptocurrency are verified and added to the blockchain digital ledger. For this effort, successful miners obtain new cryptocurrency as a reward. E-wallet is a type of electronic card which is used for transactions made online through a computer or a smartphone.
It is a decentraliszed digital currency without a central bank or single administrator that can be sent from user-to-user on the peer-to-peer Bitcoin network without the need for intermediaries IOTA is a cryptocurrency designed for the Internet of Things, the fourth largest digital asset. It is an open-source eco-system where people and machines can transfer value (i.e. money) and/or data without any transaction fees. The internet of things (IoT), is a system of interrelated computing devices, mechanical and digital machines, objects, animals or people that are provided with unique identifiers (UIDs) and the ability to transfer data over a network without requiring human interaction. The dark web is the World Wide Web content that exists on darknets, overlay networks that use the Internet but require specific software, configurations, or authoriszation to access. Dark Net is a set of are networks that are not indexed by search engines such as Google, Yahoo or Bing or any other.. A Ponzi scheme is a form of fraud which lures investors and pays profits to earlier investors by using funds obtained from more recent investors. Relevance and Explanation of the Problem Over the past four years, cryptocurrencies have become very widespread ubiquitous, prompting more national and regional authorities to tacklegrapple with their regulation.
Digital currencies are created through a process of ‘mining’ to verify each transaction on a blockchain. While information on each transaction is recorded on the blockchain, this data is not directly linked to names, physical addresses, or other identifying information. This makes digital currencies anonymous to a certain degree and makes it hard for law enforcement agencies to identify individual transactions and link them to users. The European Banking Authority argues that virtual currencies should be made distinct from conventional fiat currencies and reject the term currency altogether. Meanwhile, the European Central Bank does not consider cryptocurrencies to be money but recognises that they’re something worth looking at as their nature could change in the future. The European Central Bank (ECB) proposed a new definition: “virtual currency is a digital representation of value, not issued by a central bank, credit institution or e-money institution, which, in some circumstances, can be used as an alternative to money” – purposefully omitting words such as “digital money” or “unregulated.” A 2018 study conducted by blockchain analysis startup, Elliptic, and the Center on Sanctions and Illicit Finance, found a fivefold increase in the number of large-scale illegal operations working on the Bitcoin blockchain between 2013 and 2016.
By analysing the history of more than 500,000 bitcoins, the organisations identified 102 criminal entities, which included dark-web marketplaces, ponzi schemes, and ransomware/malware attackers. It could be where a person could play the technology to facilitate a crime. And it seems to have been happening already. A Europol report released in February found that criminals in Europe had laundered $5.5 billion worth of undeclared cash via cryptocurrencies. However, cryptocurrencies do have interesting characteristics that make them attractive in ways other currencies are not. They are truly global in nature and easily accessible to potential users. Key Actors A law enforcement agency (LEA) is any agency which enforces the law. This may be a special, local, or state police, federal agencies such as the Federal Bureau of Investigation (FBI) or the Drug Enforcement Administration (DEA). European Parliament is the EU’s law-making body. The Council of the European Union is where national ministers from each EU country meet to adopt laws and coordinate policies. EU Commission is responsible for proposing legislation, implementing decisions, upholding the EU treaties and managing the day-to-day business of the EU.
The European Central Bank(ECB) is the central bank for the euro and administers the monetary policy of the Eurozone. Its main aim is to keep prices stable, thereby supporting economic growth and job creation. The European Banking Authority (EBA) is a regulatory agency of the European Union. Its activities include conducting stress tests on European banks to increase transparency in the European financial system and identifying weaknesses in banks’ capital structures. One of its functions is providing safety to the financial activities that occur in Europe. European citizens and enterprises play a key role, as they are the main users of the cryptocurrencies. National, Bankers governments and central banks play an important for cryptocurrencies, the regulations they impose impact the expansion or prohibition of cryptocurrencies. Measures in Place One of the most common actions is government-issued notices about the pitfalls of investing in the cryptocurrency markets. Such warnings, mostly issued by central banks, are largely designed to educate the citizenry about the difference between actual currencies, which are issued and guaranteed by the state, and cryptocurrencies, which are not. Many of the warnings issued by various countries also note the opportunities that cryptocurrencies create for illegal activities, such as money laundering and terrorism.
For example, Lithuania while not banning its citizens from investing in cryptocurrencies, imposed indirect restrictions by barring financial institutions within its borders from facilitating transactions involving cryptocurrencies. Some countries go beyond simply warning the public and have expanded their laws on money laundering, counterterrorism, and organized crimes to include cryptocurrency markets, and require banks and other financial institutions that facilitate such markets to conduct all the due diligence requirements imposed under such laws. Not all countries see the advent of blockchain technology and cryptocurrencies as a threat, albeit for different reasons. Some not recognizing cryptocurrencies as legal tender, see potential in the technology behind it and are developing a cryptocurrency-friendly regulatory regime as a means to attract investment in technology companies that excel in this sector. In this class are countries like Spain, Belarus, and Luxemburg. The local financial services and regulatory landscape differ significantly by country. Rather than seeing cryptocurrencies as a threat, governments and regulators in some countries (Switzerland and Malta) are embracing them as a route to growth.
The European Union adopted the first anti-money laundering Directive in 1990 in order to prevent the misuse of the financial system for the purpose of money laundering. It provides that obliged entities shall apply customer due diligence requirements when entering into a business relationship. In 2015, the EU adopted a modernised regulatory framework. 5AML, includes a number of amendments aimed at further strengthening the modernized EU anti-money laundering regime established under 4AMLD. These amendments include additional transparency provisions around beneficial ownership, enhanced due diligence measures around high-risk third countries, and transparency measures around the use of prepaid cards. 5AMLD also seeks to broaden the categories of “obliged entities” that are subject to the provisions of the EU anti-money laundering regime, to include, most notably, virtual currency exchange platforms and wallet providers. Once implemented into national law, cryptocurrency exchanges and wallet providers covered by 5AMLD will be subject to the anti-money laundering requirements set out in 4AMLD. In particular, they will be subject to the requirement to carry out identity checks on their customers, as well as their customers’ beneficial owners, the aim being to help reduce the anonymity associated with cryptocurrency transactions.
The increase in the use of cryptocurrencies has risen a number of issues for EU. It both created new opportunities and threats. The anonymity of cryptocurrency transactions became an effective method of money transactions for terrorists. However, for businesses and citizens of EU, it also created new opportunities both as a currency and also as good mean for income and investments. Prior to the introduction of 5AMLD, there has been no EU-wide regulatory framework dealing expressly with the regulation of cryptocurrency exchanges so each member state had its regulations regarding cryptocurrencies. The regulations concentrate on the threats of cryptocurrencies, especially the anonymity of transactions. Questions What threats and opportunities have cryptocurrencies introduced for EU? What should be the role of the ECB in legislating virtual currencies? What common cryptocurrency rules should EU adopt? Should EU adopt stricter regulations? Should EU stimulate the use of cryptocurrencies?
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