Two Years of Crypto Anti-Money Laundering Oversight: A Look Back

Tomorrow, May 21, 2022, it will be exactly two years since the Dutch anti-money laundering regulations became applicable to crypto companies and to the purchase, sale and management of virtual currencies. From that moment on, the hitherto customary verification of identity and transactions by crypto companies also became a formal legal obligation. The crypto companies had to register with De Nederlandsche Bank (DNB) and report unusual transactions to the Financial Intelligence Unit.

At the time, the United Bitcoin companies in the Netherlands were concerned that supervision in the Netherlands would become disproportionately heavy. A letter was sent to the Ministry of Finance and the Senate with the concern that the actual rules in the law amounted to a very expensive disguised licensing regime that went further than had been agreed in Europe.

Then Minister of Finance Hoekstra assured the Senate that the supervision costs would be significantly lower than the feared 34,000 euros per year. There would be no question of a disguised licensing regime with admission requirements. He indicated in the Senate, in line with the advice of the Council of State, that he would not go further than Europe prescribed.

You register and you are granted a permit, that is really something else and the bar is really on a different level there Minister of Finance in the Senate on 21 April 2020

Registration or permit: where did that come from?

In 2014, the year of the big Bitcoin conference in Amsterdam, the European Bank Authority (EBA) published a thick report on the future regulation of virtual currencies. It proposed a two-stage rocket. In step one, anti-money laundering regulations would remove the anonymity of virtual currency users and place crypto companies as non-financial institutions under anti-money laundering oversight. Step two would then introduce a European-wide supervision for crypto companies, now known as the Market in Crypto-Assets Regulation.

The European Parliament agreed with this approach and in a resolution in 2016 urged in so many words for a proportionate regulatory approach at EU level in order not to nip innovation in the bud and not to add unnecessary costs at this early stage. That message was also taken up by the European Commission and the Member States

Member States shall ensure that providers of exchange services between virtual currencies and fiat currencies, and custodian wallet providers, are registered Ultimate requirement in Directive (EU) 2018/843

Where the initial text of the European directive wrote about permits or registration, only registration remained in the final text. The idea of a licensing regime was therefore explicitly scrapped. This was an almost unanimous position of all Member States, including the Netherlands. This can be read on pages 50 and 51 of a so-called Impact Assessment in which the costs and effectiveness of registration and permits have been weighed in favor of registration.

It is this history that led the Council of State, when assessing the legislative proposal in the Netherlands, to state very emphatically that no law with a licensing regime or admission requirements could be introduced on the basis of this Directive.

In other words, this means that the Directive does not make it possible to shape the registration obligation prescribed therein as a (further-reaching) licensing obligation with prior assessment. Council of State, Advice 3 June 2019 on the Dutch bill

Two years of supervision shows a licensing regime

If we look back on the past two years, the inevitable conclusion is that a disguised licensing regime has indeed been introduced in the Netherlands. This is evident from the following.

  • The statutory registration period of 2 months has not been met by DNB for any company, the first company was only registered in October 2020.
  • DNB uses a timeline for license applications (13 weeks), the package of information to be completed is based on the license application for exchange services and the 10-step procedure for crypto is identical to that for obtaining a license.
  • Anyone who receives the registration will see that the letter from DNB does not refer to a decision on a ‘registration request’, but a decision on ‘the application’.
  • During registration, an extra admission requirement was set at the last minute, the requirement to take screenshots of the wallet. This would result in many millions in costs without the requirement having any technical benefit. An urgent letter from 25 of the 38 parties to withdraw it was set aside by DNB.
  • Bitonic was the only party to reverse the claim through the courts. The court pointed to the licensing nature of the procedure and ordered DNB to redo its homework. DNB acknowledged that the requirement had been wrongly imposed.

The interpretation that DNB has given to the registration regime in the case of Bitonic appears, in the provisional view, to have characteristics of a licensing regime, now that the registration requirement is subject to a fairly far-reaching prior assessment. Ruling in preliminary relief proceedings Court of Rotterdam, 7 April 2021

The costs have become exceptionally high

In the Netherlands, the sector association VBNL has pointed out from the outset that no DNB supervision costs can be attributed to non-financial institutions that are not subject to financial supervision on the basis of the Financial Supervision Funding Act. However, DNB implemented the cost allocation and billing for crypto supervision in its own way.

First of all, in 2020 DNB incorrectly charged costs for supervision that took place during registration. This is legally impossible and DNB had to withdraw all sent invoices on the basis of an objection procedure by the VBNL. The costs for the registration thus amount to 5,000 euros and the remaining costs of supervision for 2020 have been set at a low advance level.

It can be seen that the rate of the registration procedure fits perfectly with the stamping procedure that the registration should be. However, DNB carries out an intensive assessment and the actual costs are much higher. DNB’s too intensive assessment of registrations thus leads to budget overruns, which DNB then wrongly apportions across the crypto population.

The intensive testing in the ongoing supervision also means that over 2020 and 2021 supervision costs of more than 100,000 euros will actually be incurred per registered party. Left or right, these must be passed on to the market players. The feared level of supervision costs per company has therefore become considerably higher than the 34,000 euros.

There will therefore still be a lot of litigation about the costs. A salient detail here is that the Financieel Dagblad noted from documents that had been made public that, according to the calculations of the time, the cost levy is ‘legally vulnerable’. This applies all the more since the legal basis for this is based on the reasoning that market parties would also benefit from the high supervision costs because enforcement in the market is carried out by DNB.

I must say that I am shocked by the amounts mentioned Unknown policy officer Finances in WOB documents

Behind the scenes enforcement

Whether and how much DNB enforces on illegal market parties cannot be assessed due to the secrecy in supervision. One public warning has been issued to Binance, but under the DNB enforcement policy that does not count as an enforcement but a warning to the public. However, there would be two enforcement processes, according to an article in the Financiele Dagblad.

It is widely clear that there are several large foreign parties that focus on the Dutch market, but still have no registration. At the same time, in November 2020, the VBNL members had to deal with the threat that they would have to stop their activities if they did not have the registration, according to the chairman in a radio interview with BNR. The unequal treatment is a source of frustration for the parties, precisely because a number of frauds can also take place via those unregistered players that disadvantage the consumer.

Of course, the VBNL hopes that the fines will eventually be imposed and believes that the proceeds should not fall into the large pot of the DNB budget, but should be specifically deducted from the high costs of crypto supervision. Insofar as the court does not draw a line through the supervision account, the VBNL has therefore already asked to amend the Financial Supervision Funding Act on this point.

But those foreign parties can still go about their business, so we believe that DNB’s supervision is ineffective. Patrick van der Meijden, chairman VBNL, 19 May 2022 (FD)

The future: evaluation and innovation

During the discussion of the law in both the Senate and the House of Representatives, the theme of regulatory pressure and the brakes on innovation came to the fore. Like the European Parliament, Dutch politicians emphasized in the Alkaya/van der Linden motion, which was adopted unanimously, that the law must not lead to the displacement of small businesses due to excessive administrative burdens. The Minister of Finance promised to monitor this and to report after two years. That evaluation is expected to be completed in July 2022.

The sector hopes that the evaluation may lead to lower costs and more real room for innovation. Because it would be incredibly unfortunate if we burdened the fertile Dutch innovation climate around virtual currencies too much with unnecessary costly supervision

In any case, Bitonic itself contributes to that innovation by quickly continuing the rollout and experimenting with Lightning after rolling out BITS.

But more on that later.

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