Evaluating Money Laundering Risks in DLT: European Banking Authority’s Proposal

According to reports, the European Banking Authority proposed in a draft guidance issued on Wednesday that EU regulators should consider whether encryption style distributed ledger technology (DLT) is being used when judging money laundering risks. The guidance indicates that banks and payment providers will face pressure to strengthen the review of cryptocurrency companies when considering customer relationships, despite concerns that the blockchain industry is losing traditional financing channels.

EBA recommends that regulators consider the use of DLT when assessing money laundering risks

The European Banking Authority (EBA) has released a draft guidance that suggests evaluating the risks of money laundering in distributed ledger technology (DLT) through encryption techniques. In this article, we will take a closer look at the EBA’s proposal, its effects on the cryptocurrency industry, traditional financing channels and financial institutions.

Understanding the EBA’s Proposal

The EBA suggests that financial regulators should consider the encryption techniques used in DLT to evaluate money laundering risks. This includes blockchain technology, which is widely used in the cryptocurrency industry. The regulators will also evaluate cryptocurrency companies more critically when considering customer relationships, in order to strengthen the review process of such companies.
The EBA’s proposal is based on a belief that the use of encrypted DLT can make it easier for criminals to launder money. The blockchain and cryptocurrency industry has been vulnerable to money laundering, with several instances of fraud and scams appearing in the news frequently. Hence, the EBA believes that the use of encryption in blockchain technology can make it more difficult for regulators to detect unusual activity, leading to an increase in the overall money laundering risk.

Effects on Cryptocurrency Industry

The EBA’s proposal may lead to increased regulatory scrutiny of cryptocurrency companies. It may also motivate banks and payment providers to scrutinize cryptocurrency companies more closely before entering into a relationship with them. Additionally, cryptocurrencies may face the risk of being categorized as high risk or even blacklisted, which could lead to a chokehold on financing channels.
However, this move has already started to cause friction among financial institutions and regulators. While some institutions, such as the Bank of America, have embraced blockchain technology, others such as the UK’s Financial Conduct Authority have warned of the risks associated with cryptocurrencies in general. Nevertheless, regulators across Europe are expected to broadly support the EBA’s proposal.

Impacts on Traditional Financing Channels

The cryptocurrency industry, in general, is heavily reliant on traditional financing channels for its sustenance. The industry is often seen as a high-risk area leading to banks and payment providers distancing themselves from it or avoiding it altogether. This trend has, in the past, hampered the growth and development of small to medium-sized cryptocurrency businesses.
The EBA’s proposal will also mean a further squeeze on the channels of traditional financing for cryptocurrency companies. This would force such companies further towards peer-to-peer financing or crowdfunding platforms, which may not provide the same level of support or depth that traditional financing channels can offer.

Conclusion

The EBA’s proposal of evaluating money laundering risks in DLT through encryption techniques is expected to have far-reaching effects across the cryptocurrency industry, traditional financing channels, and financial institutions. While it may lead to increased regulatory scrutiny, blacklisting of cryptocurrencies, and a further squeeze on financing channels, it could also lead to the development of a robust framework that could foster growth and sustainability in the cryptocurrency industry.
FAQs
1. What is the EBA’s Proposal?
Ans: The EBA has proposed evaluating money laundering risks in DLT through encryption techniques. This includes blockchain technology used in the cryptocurrency industry.
2. How will the EBA’s Proposal impact the cryptocurrency industry?
Ans: The proposal will lead to increased regulatory scrutiny, a further squeeze on traditional financing channels, and a possibility of blacklisting of cryptocurrencies.
3. What are the possible impacts of the EBA’s proposal on traditional financing channels?
Ans: The proposal will force cryptocurrency companies further towards peer-to-peer financing or crowdfunding platforms, which may not provide the same level of support or depth that traditional financing channels offer.