Virtual- and cryptocurrency – A guide to identify whether your business may be subject to anti-money laundering regulation

Introduction

In January 2020, the fifth Anti-Money Laundering Directive was implemented in Sweden, (the “5AMLD”) through revision of 14 different laws. Revisions deemed necessary because of i.a. terrorist attacks in Europe and technological advancements regarding virtual financing where so-called virtual- and cryptocurrencies have been proven to be used by criminal networks.

The effect of the 5AMLD is that persons or companies offering i.a. currency exchange services or platforms for virtual and cryptocurrency, will have to comply and undertake the required actions as necessary in accordance with all anti-money laundering regulations. This guide may help you to identify whether the 5AMLD and its implementation in Swedish law applies to your business.

A step by step guidance

First step: what is deemed as virtual currency?
All virtual currencies have the following in common and this can be used as a checklist to identify whether the means of payment can be deemed as virtual currency. However, please note the exceptions in the second step. Virtual currencies;

• are not issued nor guaranteed by a central bank or a public authority,
• are not necessarily attached to a legally established currency (legal tender),
• do not possess the same legal status as currency or money,
• are accepted by natural or legal persons as a means of payment, and
• can be transferred, stored and traded electronically.

Cryptocurrency is a sub-group of virtual currencies. One of the best-known virtual currencies is Bitcoin, which is a decentralised virtual currency that can be exchanged for a legal tender, such as the euro. It was also the first cryptocurrency, i.e. a virtual currency based on encryption algorithms. A cryptocurrency is built on public and private keys by which value is transferred from one person to another and which are encrypted prior to every transaction.

Furthermore; virtual currencies can be roughly divided into three categories.

A. Payment instrument-like virtual currencies
Virtual currencies originally planned as alternatives to traditional currencies as well as intended to be used as payment instruments elsewhere than together with and for its issuer’s services. The best-known payment instrument-like virtual currency is Bitcoin.

B. Virtual currencies used as payment for a certain commodity (utility coin)
Virtual currencies that can be used to pay (only) for its issuer’s products or services. Like a coupon or a gift card, but virtual.

C. Financial instrument-like virtual currencies
Virtual currency that have features in common with securities such as company shares, e.g. voting and ownership rights or expected returns. These kind of virtual currencies may also be referred to as “security tokens” or “virtual assets”.

In addition, hybrid models combining different features described in A-C above have also been observed on the market.

Second step: does an exception apply?
As have been explained above, virtual currency is a broad umbrella term for a lot of different kinds of virtual means of payment. 5AMLD has therefore outlined two exceptions. Do note that these exceptions have not explicitly been implemented in Swedish law and that Swedish law lacks a general definition of “virtual currency”. The preparatory work however mentions the definition of virtual currency and recital (10) of the 5AMLD, where the exceptions are outlined, as to how to define virtual currency in regard to the implementation and application of the 5AMLD in Swedish law.

With that said, if an exception applies, the means of payment may still be a virtual currency, but your business is not subject to the anti-money laundering regulations. These exceptions are:

• any in-game currencies, that can be used exclusively within a specific game environment. Take for example Riot Points – or RP – which are one of the main currencies in League of Legends, as well as,
• local currencies, also known as complementary currencies, that are used in very limited networks and among a small number of users.

Do note that “electronic money”, despite the misleading term, is a completely different type of legal creature from virtual currency. Electronic money is not a currency at all, but an electronically stored monetary value represented by a claim on the issuer, which is issued on receipt of funds for the purpose of making payment transactions, and which is accepted by a natural or legal person other than the electronic money issuer. To simplify, think of virtual currency as a commodity that can be purchased in physical currency or electronic money.

Third step: who may be deemed as a virtual currency provider?
A virtual currency provider is a natural or legal person, which as a business provides ser-vices that can be deemed as “virtual currency provision”. Virtual currency provision, ac-cording to the 5AMLD and the revised 1 § 2 of the Swedish Act on Currency Exchange and Other Financial Operations (1996:1006) as well as the Swedish Government bill 2018/19:150, includes:

• issuing of a virtual currency,
• virtual currency exchange services, which are either (a) the exchange of a virtual currency into a legal tender or another virtual currency or (b) the exchange of a virtual currency into another commodity or the exchange of another commodity into a virtual currency,
• operation of a marketplace where a provider’s customers may engage in the activities referred to in (a) and (b) above, and/or
• providing “wallets” for virtual currencies by holding the account of some other party or by providing storage or the transfer of virtual currency.

As a final note, it also pays to have in mind that the 5AMLD specifically states that the objective of the 5AMLD is to cover all of the potential uses of virtual currencies. Some-thing that has also been pointed out in the Swedish prepatory work. Meaning that the listed examples above shall not be seen as an exhaustive list of what may be deemed as virtual currency provision.

Conclusion: what obligations are you as a virtual currency provider required to fulfil according to the 5AMLD and its implementation in Swedish law?
As a virtual currency provider you will have to register at the Swedish Financial Supervisory Authority (the “SFSA”), sw: Finansinspektionen and comply with the anti-money laundering regulations. Meaning everything from undertaking customer due diligence, duly reporting to the SFSA as well as conducting risk-based assessments, internal instructions and training of personnel. Would you like to discuss with experts in the field what this means for your business, do not hesitate to contact our FinTech team.