Clifford Chance

On 2 July 2019, a draft bill that implements the Fifth Anti-Money Laundering Directive ((EU) 2018/843, AMLD5) into Dutch law was submitted to the Dutch House of Representatives.The Draft Bill will shift the regulatory landscape for cryptocurrency related businesses in the Netherlands as it will introduce a regulatory regime for cryptocurrency-related businesses that function as financial 'gatekeeper'.

In this article we will briefly discuss the scope, the new requirements and the implementation of the Draft Bill.

In scope: Virtually everything

Virtual currencies

The Draft Bill does not include terms such as "cryptocurrencies", but instead uses the definition "virtual currency", which is defined as:

"a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically".

This is a very broad definition which includes cryptocurrencies (which are factually virtual currencies relying on cryptographic techniques) and everything that comes near it.

The Draft Bill makes clear that the definition of virtual currencies is meant to be a "catch all" definition that is able to respond to future technological developments and should be interpreted and applied broadly. A virtual currency can take many different forms, it can be a means of exchange, an investment object, a store-of-value product etc.

Virtual currency service providers

Two types of virtual currency service providers (or VCSPs) are caught within the scope of the Draft Bill:

• Providers engaged in exchange services between virtual currencies and fiat currencies: This includes online crypto brokerage and exchange platforms that offer exchange services between cryptocurrencies (such as Bitcoin) and fiat currencies (euros and dollars). Offline providers of automated teller machines (ATMs) that enable such exchanges also fall within the scope.
• Custodian wallet providers: This service is defined in the Draft Bill as "entities that provide services to safeguard private cryptographic keys on behalf of their customers, to hold, store and transfer virtual currencies". Custodian wallet providers that offer so-called multi-signature wallets (using multiple private cryptographic keys to safeguard the wallet) also fall within the scope.

Registration requirement with DNB – Are you on the list?

Under the Draft Bill, any VCSP that provides virtual currency services in the exercise of its profession or business in or from the Netherlands will be subject to a registration requirement with the Dutch Central Bank (DNB).

This means that the registration requirement applies to

• VCSPs incorporated in the Netherlands providing virtual currency services solely on a cross-border basis to other Member States, or vice versa
• VCSPs incorporated in another Member State providing virtual currency services on a cross-border basis in the Netherlands (i.e. when serving Dutch clients). 

VCSPs incorporated in a third country are prohibited from providing virtual currency services in the Netherlands, unless this third country is a designated country with equivalent regulatory framework.

To register, VCSPs must, among other things, provide DNB with information that shows that they meet certain governance requirements and that they comply with the Dutch AML/CTF and sanctions rules. Once the required information is provided and DNB is satisfied, DNB will register the VCSP in an online register within two months after receiving such a request.

Regulatory requirements for registered VCSPs

Governance

Registered VCSPs must comply with the following as part of the governance requirements: 

• make sure the persons that are able to (co)determine the day to day policy or can apply a certain amount of influence on the VCSP are vetted by DNB on integrity and/or suitability (depending on their role)
• have a transparent governance structure (enabling DNB to properly supervise the VCPS) and 
• have policies in place to ensure a controlled and ethical business operation.

CDD, transaction monitoring and reporting of unusual transactions

VCSPs should also – amongst others – comply with the following Dutch AML/CTF requirements:

• Customer due diligence (CDD): A VCSP must trace transactions up to the point where the identity of its users can be linked to an account or address. This includes tracing an IP-address in order to link an identity to a certain account.
• Transaction monitoring: VCSPs, will need to determine the destination of virtual currency involved in their transactions, as well as the origin and source of the client's assets. This will all need to be laid down in a transaction monitoring process.
• Reporting of unusual transactions and sanctions: VSCPs are required to report unusual transactions to the Financial Intelligence Unit of the Netherlands.

Implementation

The Draft Bill is scheduled to take effect on 10 January 2020. VSCPs which are currently live should be registered with DNB within a transitional period of six months after the Bill enters into force. This means that VSCPs should prepare for the abovementioned governance requirements and AML requirements well in advance.