Cryptocurrencies and the Spanish transposition of the 5th Laundering Prevention Directive

18 Jul Cryptocurrencies and the Spanish transposition of the 5th Laundering Prevention Directive

Posted at 11:05h in Tokenization by Icofunding’s Team

This post is also available in: Español

The Spanish regulators launched a preliminary project to regulate the providers of services related to cryptocurrencies in the field of Prevention of Money Laundering (PMLA). In this article we explain the implications for the crypto and digital asset ecosystem.

June 15, 2020, the Draft Law amending the Law on the Prevention of Money Laundering (Law 10/2010) was published, the purpose of which is to transpose the Fifth Directive of the European Union on the Prevention of Money Laundering and the Financing of Terrorism.

This European Directive already anticipated that two new subjects would appear who would be obliged to comply with these regulations from the cryptoscope:

Providers of virtual currency exchange services for legal tender and;
providers of electronic storage and custody services.

The Money Laundering Prevention Directive (PMLA) also contained some definitions that echoed the ecosystem of cryptosystems and digital assets:

“Virtual currencies”: a representation of value not issued or guaranteed by a Central Bank or Public Authority, not necessarily associated with a legally established currency, which does not have the legal status of currency or money, but accepted by natural or legal persons as means of exchange and which can be transferred, stored and traded electronically.
“Electronic purse storage service provider”: an entity that provides cryptographic private key safeguarding services on behalf of its customers for the holding, storage and transfer of virtual currencies.

However, the transposition of the European Directive into the regulations has not been limited to including the above mentioned points in Law 10/2010 on the Prevention of Money Laundering, it also adds another series of aspects to be taken into account.

Relevant aspects of the Spanish transposition affecting Digital Assets

1. Obligated Subjects. Extension of the scope of the standard to virtual currency exchange services (Crypto-to-Crypto)

The FATF (Financial Action Task Force) recommended that providers of exchange services between different virtual currencies (and not only between virtual currencies and legal tender), i.e. Crypto-to-Crypto, to be included as obligated subjects in their respective regulations, in addition to States keeping records of them.

Thus, the Spanish regulator has decided to incorporate these provisions as well.

By virtue of the preliminary draft, they will finally be subject to the regulations on the Prevention of Money Laundering:

Providers of exchange services between virtual currencies,
of virtual currency exchange by fiduciary currency,
of virtual currency transfer and;
of electronic purse custody.

Non-residents who, through branches or agents or by providing services without a permanent establishment, carry out in Spain activities of the same nature as those mentioned in the previous sections shall be deemed to be subject to this law.

2. Mention of “Security Tokens”

In the referred recommendation, FATF also recommended the regulation of financial service providers that allow the issue and negotiation of digital assets that have the consideration of negotiable securities, that is to say, Security Tokens.

However, the Spanish regulator has decided not to give a specific reference to this issue, given that the consideration as a negotiable security stipulated by the National Securities Market Commission (CNMV) implies the application of the existing regime for the rest of the negotiable securities, already subject to the regulations on the Prevention of Money Laundering.

3. Definitions

Like the European Directive, the preliminary draft also introduces definitions of the elements related to the crypto ecosystem that are affected by this regulation:

Virtual currency: A digital representation of value not issued or guaranteed by a Central Bank or Public Authority, not necessarily associated with a legally established currency and which does not have the legal status of currency or money, but which is accepted as a means of exchange and can be transferred, stored or traded electronically.
Exchange between virtual currencies: Exchange between one or several types of virtual currencies.
Virtual Currency Exchange for Fiduciary Currency: Purchase and sale of virtual currencies by delivering or receiving Euros or any other foreign currency of legal tender or electronic money accepted as a means of exchange in the country where it has been issued.
Electronic purse custody service providers: Those natural or legal persons that provide safeguarding or custody services of cryptographic private keys on behalf of their clients for the holding, storage or transfer of virtual currencies.

4. Supplier Registration

Furthermore, the draft law also adds a provision on the registration of providers of virtual currency exchange services for legal tender and escrow money.

In this sense, those providing registration of service providers to residents in Spain related to the above mentioned definitions must be registered with the Bank of Spain (BoE) for this purpose.

They shall be entered in the register:

Natural persons who provide these services when the direction and management of the activities is exercised in Spain, regardless of the location of the recipients of the service. The preliminary draft adds that the requirements for linking the services to Spain will be determined by regulation.
Legal entities established in Spain that provide these services, regardless of the location of the recipients.

In addition, access to this register will be subject to compliance with the requirements of commercial and professional honesty as determined by regulation. Failure to comply with the requirements of good repute will result in the loss of registration in the aforementioned register.

The competent body for supervising compliance with the registration obligation and conditions of good repute shall be the Banco de España (Bank of Spain).

As for the deadlines for registration:

The service providers of virtual currency exchange, virtual currency exchange for legal tender and custody will be in operation within 6 months from the entry into force of this Law.
Individuals or legal entities that were providing any of the services described above to residents in Spain must register with the Bank of Spain within a maximum period of 9 months from the entry into force of the Law.

Last but not least, the preliminary draft law also mentions the penalty regime for non-compliance with registration requirements, with very serious infringements constituting the provision of services without the required registration and serious infringements if the activity is occasional or isolated.

Other general aspects of the Spanish transposition

1. Actual holders

On the other hand, the 5th Directive also reforms everything related to the registry of actual holders, establishing a system of public access that is not limited only to obligated subjects and authorities.

To this end, Spanish legislation will create a new model for identifying beneficial ownership based on the creation of a single registry at the Ministry of Justice, centralizing information from the registers and databases of the General Council of Notaries and the Commercial Registry.

This register will be connected to the EU registers and will control access.

This new regulation will establish the obligation to obtain, keep and update the information of real ownership and its provision to authorities and obliged subjects.

The data required from natural persons who are actual owners in relation to the above will be as follows:

Name and surname
Date of birth
Type and number of identification document
Country of issue of the identification document
Country of residence
Nationality
Criterion that qualifies the person as the actual holder
Percentage of ownership in the case of real ownership by ownership (direct or indirect) or information on interposed legal persons and their participation in the case of indirect ownership.
Those others that are determined by regulation.

2. Telematic Identification

This draft also develops the identification by obliged subjects when business relations or operations are carried out by telematic, electronic or telephone means with clients who are not physically present, which must be in one of the following ways:

The customer’s identity must be accredited by a qualified electronic signature in accordance with the European Regulation on Electronic Identification.
That the first deposit comes from an account in the name of the same client opened in an identity domiciled in Spain, in the EU or in equivalent third countries.
That the requirements established by regulations are verified.

3. Responsibility of External Experts

This preliminary draft law also modifies the responsibilities of the external experts in charge of carrying out the reports on the adequacy of the prevention measures established by an obligated subject with the requirements of the regulations in force.

4. Representative

In addition, the draft establishes that the obligated parties must designate a person resident in Spain who is in charge of the administration or management of the company as a representative before the SEPBLAC (Spanish Executive Service of the Commission for the Prevention of Money Laundering and Monetary Offences).

As we can see, this is a transposition of the Directive that develops in a very broad way the agents that provide services of exchange or custody of crypto assets and that will mark a before and after for the providers of related services in Spain.

The regulations that will follow this Law will clarify some of the unknowns that still remain to be resolved, above all in the area of due diligence that will have to be carried out in such a unique sector as cryptocurrencies.