Easier to set up Bank than a Virtual Currency Exchange? Impact of EBA’s Opinion

On 11 August 2016, the EBA wrote an Opinion on the application of 4AMLD to VC exchanges and wallets.

The EBA mentions 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“.

This would be akin to the state-by-state registration process that VC exchanges have to do in the United States.

This is due to the fact that there are no passporting rights granted under the 4th Anti-Money Laundering Directive – 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 European Union from terrorism and crime.

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.


Further, this particular duplication of registrations creates a disproportionate burden on VC operators compared with other regulated institutions in the EU. A pre-pay 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 (i.e. ‘goldplating’) 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 authorisation/licence takes 6-12 months to obtain from application then what of an AML/CTF registration? Usually that process can take between 3-6 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 preambule statements from the EU Commission:

In respect of designating providers of exchange services between virtual currencies and fiat currencies as obliged entities, the proposed amendments respect the proportionality principle

Similarly, due account was taken of the need to respect the freedom to conduct a business, and while there will be an impact on market players becoming obliged entities and currently not performing any customer due diligence (CDD) on their customers, the ability to operate a virtual currency exchange platform is not affected by the proposed amendments.


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 notarised/apostilled and translated officially. Imagine a VC exchange or wallet having to do this in 28 member states. Average costs of producing validated documentation that has been officially translated will be a minimum of EUR1-2k per owner/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. Overnight, the overhead of VC exchanges and wallets will increase exponentially and most likely the beginning of January 2017 will see a full consolidation of the VC exchange and wallet market in the EU.

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.