The EU Commission in its latest proposal to regulate virtual currency exchanges and custodian wallets (Proposal) suggests a further amendment to the 4th Anti-Money Laundering Directive (4AMLD) which may result in the creation of a central database of virtual currency users (Central VC User Database).
The Proposal states that the Commission adds to its requirement, in Article 65 of 4AMLD, to produce a report by June 2019 on the success of the implementation of 4AMLD (Report) that it should include in that Report “appropriate proposals, including, where appropriate, with respect to virtual currencies, empowerments to set-up and maintain a central database registering users’ identities and wallet addresses accessible to FIUs, as well as self-declaration forms for the use of virtual currency users“.
The notion of proposing the creation of a Central VC User Database is ambitious. Without wanting to speculate on the contents of such a report, it is not inconceivable to suspect that such a central database will associate public keys with user identities and that Financial Intelligence Units (FIUs) shall contribute to that database as well as use the database for their suspicious activity investigations. This would mean that the input public keys and output public keys will be registered by say a French virtual currency exchange against an individual’s identity, that data would be relayed to the central database and if that same individual used a separate exchange in Estonia the other exchange would collect the new (or same) input and output public keys against the same user identity.
The slight concern here is the integrity of that database. If it were breached then user’s sensitive personal data including all their financial transactions involving virtual currencies would be exposed. At present the Commission is satisfied that the Proposal to regulate virtual currency exchanges and custodian wallets complies with its requirement to protect personal data enshrined in Article 8 of the Charter of Fundamental Rights mainly because the Proposal is in the acclaimed public interest of “enhancing the effectiveness of the fight against ML/FT and complying with new international standards“. Obviously that assessment does not cover the idea of a Central VC User Database as that is being deferred to its subsequent report to be published by June 2019.
Of interest, is that the Commission is considering that individual users of virtual currencies contribute to the Central Database with the use of a self-declaration form. The Commission states: “in addition, the possibility to allow users to self-declare to designated authorities on a voluntary basis should be further assessed”. It is not clear whether that be a legal obligation or what otherwise would incentivise self-declarations. Research being carried out by Bitcrime points towards a regulatory proposal that virtual currencies involved in a stated crime become, under German law, ‘valueless’; if this is indeed the direction of regulation in Germany/Austria then self-declarations of ownership might mitigate such consequences.