Court case Bitonic vs DNB on wallet verification requirement: live stream on March 23, 10 a.m.

On March 23, at 10 a.m., the case of Bitonic regarding a technical admission requirement from De Nederlandsche Bank (DNB) will be heard by the preliminary relief judge in Rotterdam. This requirement, also known as whitelisting or wallet verification requirement, was made mandatory as a condition for crypto companies to be admitted to the market with a two-month transition period still to come. The case can be followed via this live stream on Tuesday, but what exactly should you pay attention to? What exactly are the do’s and don’ts to do? An overview.

Update 23-03-2021: The preliminary relief judge has now heard both parties. On April 7, around 10:00 am, she will rule on the admissibility and on a temporary suspension of the whitelisting measure. Bitonic looks forward to the sequel with good courage, or to summarize in the words of Bitonic’s Jouke Hofman: “What can’t be done in Bitcoin, can’t be done in Bitcoin. I believe it will all work out and we hope that we as a company can experience that. “

The legal rules are not in question

Live stream

The case can be followed live on Tuesday 23 March at 10 a.m. via this live stream on Rechtspraak.nl.

As the oldest bitcoin company in the Netherlands, Bitonic has always attached great importance to a well-organized and professional industry. It was one of the founders of the trade association United Bitcoin Companies of the Netherlands (VBNL) to ensure that the industry properly assumes its responsibility to prevent fraud and abuse with bitcoin and to comply with regulations. Bitonic is familiar with the rules on money laundering, anti-terrorism financing and the Sanctions Act and also applies them, which is not up for discussion as far as they are concerned.

The European rules prescribe registration

From May 21, 2020, Dutch crypto companies are obliged – now officially – as so-called ‘reportable entities’ under the anti-money laundering rules, to identify customers, monitor transactions and report unusual transactions. In addition, the companies had to register so that the government knows exactly which companies and customers are active with crypto and that suspicious transactions are also reported. The question of whether further supervision would be necessary in Europe was answered by the European regulator with no.

DNB suddenly wanted a licensing regime in the Netherlands after all

Initially, there was little going on in the transposition of those European rules in the Netherlands. Both the Ministry of Finance and De Nederlandsche Bank were very happy with a direct transposition of European rules into Dutch law. At the end of 2018, however, the Minister of Finance suddenly presented a licensing regime to the market. Subsequently, in January 2019, it turned out that DNB had also changed its position and nevertheless proposed a separate licensing regime (without Sanctions Act).

DNB and AFM wrote:

Compared to a registration system, a licensing system offers the important advantage that it allows parties to be tested at the gate for their (ability to) comply with the AMLD5 requirements. As a result, the focus of the prevention of those risks does not lie exclusively with the ongoing Wwft supervision, which is also prescribed by AMLD5. Parties can also lose their license (and thus access to the market) if the requirements are not met. Registration does not offer these possibilities, or to a lesser extent, because this only allows a substantive assessment to take place to a limited extent.

Hoekstra: ‘You register’

The market pointed out to politicians the major difference between permits and registration and the choice already made in Europe for registration. The Council of State confirmed that from a legal point of view no licensing regime was possible in the Netherlands. However, professional lawyers warned: under the name of registration, a de facto licensing regime is now being set up under the hood. However, Minister Hoekstra repeatedly indicated in both the House of Representatives and the Senate that this was not the intention, with the winged words:

‘You register, you are granted a permit’ .

Did DNB proceed to a substantive assessment beforehand?

If you look at the registrations of crypto companies, you will see that in May 2020, about 50 companies applied for registration and not a single company was registered in 2 months, which was the legal requirement. The first registration followed after more than four months. Ultimately, only 15 companies had been registered at the end of the registration period and after all kinds of further requirements had actually been set by DNB. Those were requirements about privacy coins, about the internal organization, and so on. This already raised the first questions in the industry about whether this could still be seen as a registration without prior testing.

The case revolves around DNB’s whitelisting admission requirement

At the end of September, just two months before the end of the transitional regime, DNB suddenly appeared to have new and stricter requirements for checking the wallets that were used. DNB announced on September 21 that the identity of the counterparty had to be verified in a transaction and that it had to be technically demonstrated with a screenshot, video calling or message signing that the receiver of crypto was also the holder of the wallet. The demand was non-negotiable and led to an urgent letter from 25 of the 38 registering parties to DNB requesting immediate withdrawal of the demand. DNB did not respond to this.

What has Bitonic done?

Immediately after the claim became known, Bitonic called in an external expert in the field of the Sanctions Act, a former DNB employee (see box). An internal study was also submitted, which substantiated the fact that the technical suggestions that DNB itself proposed were ineffective. However, the conversation about this could not get started at all. In the words of Jouke Hofman:

‘During the registration process, we repeatedly tried to convince DNB of the illegality and ineffectiveness of the additional technical requirement. Unfortunately, they never responded substantively to our objections and did not want to separate the discussion from the registration.’

When it turned out that no discussion about the difference of opinion was possible, while there was a risk that the company would have to be closed, Bitonic introduced the prescribed technical measures under protest and proposed to seek a joint solution through consultation with the industry. After registration, it was also asked whether the requirement could be withdrawn. When this turned out not to be possible, a great interest arose to have the lawfulness of this mandatory unnecessary data processing tested by the court as soon as possible.

What do other market parties think of this?

The support of the market is evident from this English-language letter that was sent to the District Court of Rotterdam. In the letter, all those parties agree that DNB has also set strict technical admission requirements for them. They received little understanding of the requirement, because it goes beyond the law and actually adds little. The requirement is stricter than that for banks, credit card companies, exchange offices and other financial institutions. After all, for bank transfers abroad you do not have to first ask the recipient to transfer a cent in connection with a sanctions check.

How will it go later?

During the hearing, the preliminary relief judge will conduct further investigation and ask questions to Bitonic and DNB. A ruling in the case will follow on April 6. It is important that this lawsuit does not aim to get to the bottom of the difference of opinion. What Bitonic has asked is to be temporarily relieved of the obligation until the outcome of a fundamental objection and appeal procedure has been completed. Even after April 6, the last word on this requirement has certainly not been said.

Sanctions law expert B??kkerink:

The RTSw does not include a standard for establishing the identity and residence of a relationship or a requirement to establish that an individual is in fact the recipient or sender of a credit or economic resource.

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