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EU Publishes New Draft Law for Digital Currencies to Combat Financial Crime and Terrorist Financing

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On March 9, EU lawmakers published new draft legislation that covers the use of cryptocurrencies within the borders of the European Union. The proposal suggests changes and additions to the “Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing” that include regulating and overseeing electronic money transfer systems, which could potentially be used for money laundering and terrorist financing activities.

The New Proposed EU Draft Law’s Effect on Cryptocurrencies

In new proposed directive changes it states that digital currencies should not be anonymous and that financial intelligence agencies should be able to link digital currency wallet addresses to their owners.

To combat the risks related to the anonymity, virtual currencies should not be anonymous and national Financial Intelligence Units (FIUs) should be able to associate virtual currency addresses to the identity of the owner of virtual currencies,” Amendment 6 Proposal for a directive Recital 7 states.

The new draft law also says that currently, no digital currency exchange, issuer, administrator, intermediary and online payments provider has an obligation to report suspicious activity, which gives terrorists the opportunity to funnel money into the European Union anonymously. Therefore, digital currency services providers, such as exchanges and wallets, should, instead, be subject to the same financial reporting obligations as traditional financial services providers and “competent authorities should be able to monitor the use of virtual currencies in order to identify suspicious activities.”

Lawmakers also suggest that “anonymity will become more a hindrance than an asset for virtual currencies taking up and their potential benefits to spread,” and while they do not want to stifle technological innovation, regulating the use of digital currencies in the EU would help curb terrorist financing and money laundering activities.

Given the pseudo-anonymous state of bitcoin and fully anonymous digital currencies, such as Monero, DASH, and ZCash, it will be next to impossible, however, to fully de-anonymize digital currency transactions and holdings should these new law amendments take effect.

While individuals may self-declare their digital currency holdings, the more likely scenario is that those who do not want to have banks or the government knowing how much money they have and how they spend will move towards using more fully anonymous cryptocurrencies.

While the EU lawmakers’ perspective is understandable and make sense from a governing point of view, the reality is that banning anonymous digital currencies will not work as they are based on global peer-to-peer networks that cannot be seized or destroyed by governmental bodies. Also, since they are anonymous in nature, banning them will not restrict individuals from using them to make peer-to-peer payments or transferring them into other currencies on exchanges outside of the EU.

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Are Cryptocurrencies Being Used in Terrorist Financing?

While regulators are keeping an eye on digital currencies that enable the quasi-anonymous or anonymous transfer of money, the question that should be asked is whether digital currencies are being used for terrorist financing. Or whether this is simply an attempt by authorities to stamp out digital currencies as they are beyond the control of governments and banks?

A recent commentary published by the Royal United Services Institute for Defence and Security Studies (RUSI), titled “Cryptocurrencies and Terrorist Financing: A Risk, But Hold the Panic,” looks into case studies of potential terrorist financing using digital currencies.

The article suggests that lawmakers and law enforcement should keep an eye on digital currencies and their potential use in terrorist financing, but should do so with caution not to stifle technological innovation. Furthermore, the author states that bitcoin has only been used in terrorist financing activities in a few confirmed minor instances and does, therefore, currently not pose a threat in that area.

In January 2017, Indonesia’s anti-money laundering/counterterrorist finance (AML/CTF) Agency confirmed the first public allegation from a government that terrorists are using digital currencies for financing purposes. Indonesian government sources stated that bitcoin was used to transfer money by a member of Daesh (also known as ISIS or ISIL).

Other cases of cryptocurrency-based terrorist financing activities are rather limited. In June 2015, a Virginia-based teenager pled guilty to the charges of conspiring to provide material support to Daesh. He tweeted about how bitcoin could be used to send funds to help the terrorist organization. Whether funds were sent or not was unconfirmed.

In August 2016, an ex-CIA counterterrorism analyst stated that a Gaza-based jihadist news agency, Ibn Taymiyyah Media Center, which has been labeled as having terrorist connections by the US, has received small bitcoin donations.

These minor cases illustrate that there is little evidence that suggests that cryptocurrencies are actually being used in terrorist financing. Instead, according to a RUSI report, lone actor and small terror cells fund their activities on a small scale by utilizing readily available financial services, such as student loans, payday loans, benefits, and, of course, cash.

These funding methods are difficult for the financial industry or intelligence agencies to discover ahead of their use in terrorist attacks. With these easily available funding options at hand, there is little need for terrorists to rush into digital currencies to fund their activities.

However, as terrorists are increasingly leveraging technology, such as social media channels for recruitment, and as there are numerous completely anonymous cryptocurrencies, it is definitely possible for digital currencies to play a role in the future of terrorist financing.

As a true “be your own bank” bitcoin idealist it may look like governments are purely looking to control financial transactions to give power back to financial institutions and their central banks by imposing regulations on the use of cryptocurrencies. However, the reality is that if bitcoin wants to succeed in becoming a viable alternative international currency it needs to be recognized by regulators as such and, therefore, requires some form of regulation so that it can finally lay off the image of being the currency of the criminal underworld.