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Will EU regulation of Bitcoin and other cryptocurrencies succeed?

Written by Contributor, on 30th Jan 2018. Posted in General

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Next year the EU plans to introduce measures to regulate the cryptomarkets. There's no date yet,  but the supposed crackdown is likely to happen sometime in 2020 once new directives have been transposed into national law.

The biggest issue the EU is going to face is this: cryptocurrency is out of the box and there's just no way anyone is going to get it back in.

The idea is simple, cryptocurrency in addition to the myriad of other benefits and features, allows its holders a degree of anonymity. This is of particular interest to parties with a need to move money around with some degree of opacity. Namely, the black market.

Many people believe that one of the reasons for the rise of crypto coins is nefarious users. The ways these coins work makes them perfect for money laundering, drug money and the funding of terrorism.  So ultimately new legislation aims to end the anonymity of wallet addresses and make exchanges, and their users, more transparent to the world.

The virtual elephants in the room.

The problem with these directives is they fail to address a couple of major issues.

1. The biggest abuses of this anonymity are those engaged in tax avoidance or in the criminal world and they generally have a lot of money, power and sway.

2. The other issue with regulation is the very nature of cryptocurrency, which is, by its very essence, deregulated.

Regulation will come down hardest on established cryptocurrency exchanges and wallets who will need to adhere to ‘Know Your Customer’ protocols and collect, process and record data on users that could be easily shared with public authorities.

The EU Commission highlights that “suspicious transactions made through virtual currencies are not sufficiently monitored by the authorities, which are unable to link the transactions to identified persons” and it’s clear that this will be their biggest challenge when implementing regulation.

Future-Proof

One of the most interesting parts of the proposed legislation is its definition of cryptocurrency.

Article 3 in the European Commission’s Directive is amended as follows:

(c) the following point … is added: …” ‘virtual currencies’ means a digital representation of value that is neither issued by a central bank or a public authority, not necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically.“

This is interesting for a number of reasons, not least in the way it doesn't mention the word cryptocurrency. This definition is designed to capture the thousands of new coins which will come after Bitcoin, Ripple, Ethereum and the like. We've seen some of these already - Iota and Raiblocks to name but two - with multiple Initial Coin Offerings (ICO’s) occurring on a daily basis. 

The EU plans to change the way these virtual currencies are traded by adding them to The 4AMLD (4th Anti-Money Laundering Directive). This will give authorities the jurisdiction they need to investigate individuals, exchanges and wallets as they see fit.

The exact wording is as follows.

 “In respect of designing providers of exchange services between virtual currencies and fiat currencies as obliged entities, the proposed amendments respect the proportionality principle. In order to allow competent authorities to monitor suspicious transactions with virtual currencies, while preserving the innovative advances offered by such currencies, it is appropriate to define as obliged entities under the 4AMLD all gatekeepers that control access to virtual currencies, in particular exchange platforms and wallet providers.”

But will these new regulations be ineffective because of the way 'virtual currencies' work?

Trust is not governed by a central body like a fiat currency, it is inherently built into the core principle of cryptocurrency. Blockchain technology, the digital ledger behind coins like Bitcoin, is virtually tamper-proof and does not require monitoring. If the EU does manage to enact this legislation, will they only succeed in pushing the ‘dirty’ money further behind the firewalls and into the dark web? 

Easy Money

As it stands there are already numerous ways to shift alt-coins on the fly and that's not going to stop.

Bitcoin, despite its relative underground reputation, has become a mainstream transaction option in recent months. Use cases have been highlighted on online gaming sites, boutiques like Openbazaar and even on the high street at CEX.

As cryptocurrency continues to creep into the mainstream, these opportunities will continue to grow. Those with the know how will continue to trade them as they see fit.

Is Net Neutrality the Answer?

One way to attempt to gain control over these new 'virtual currencies' could be the end of net neutrality. The US government has already started to make inroads to this effect but it won’t be a straightforward process.

Will the EU succeed?

The proposed changes will have an effect, at least initially, but then there’s little which doesn’t affect the cryptomarkets.

Regulation can benefit the everyday consumer, with increased security requirements on exchanges and other platforms creating a greater degree of trust and transparency.

At the same time, you can expect regulation to have plenty of opponents. A popular concept is that the the entire purpose of cryptocurrencies is less government oversight, and whether the activities of groups holding this belief can be monitored remains a completely different question.

Another way to look at the issue facing the EU is this. If the entire weight of the US government hasn't been able to force tech giants Apple to decrypt a single iPhone, even those belonging to known felons and terrorists, it’s clear that the EU faces an upward battle against the complex and fast-paced world of crypto.

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