On 18 January 2019, the Dutch Central Bank (De Nederlandsche Bank, "DNB") and the Netherlands Authority for the Financial Markets (Stichting Autoriteit Financiële Markten, the "AFM") published their joint advice recommending a Dutch national licensing regime for crypto exchange platforms and crypto wallet providers, and the amendment of the European regulatory framework to enable the offering and trading of cryptos that are comparable to shares or bonds, which can provide opportunities for SME funding.
In this short read, Roderik Vrolijk and Soeradj Ramsanjhal, both senior-associates in the Financial Regulatory practice of Stibbe, summarise what the Dutch regulators' proposals entail.
Summary of the proposal
DNB and the AFM have sent their advice to the Dutch Minister of Finance, who forwarded it to the Dutch House of Representatives (Tweede Kamer). Given the international nature of cryptos, the advice contains two specific recommendations.
Proposed introduction of a national licensing regime for crypto exchange platforms and crypto wallet providers
Both the AFM and DNB have repeatedly warned about the risks of deception, fraud, manipulation and cybercrime associated with cryptos and initial coin offerings (ICOs). Cryptocurrency markets are potentially vulnerable to a wide range of criminal activity and financial crimes. Many of these risks materialize in the surrounding ecosystem of issuers, virtual currency exchanges and virtual wallets that support consumer access to the cryptocurrency markets.
The Fourth European Anti-Money Laundering Directive (Directive (EU) 2015/849) has been revised to address these risks. To this extent, the revised Money Laundering Directive (Directive (EU) 2018/843) will also apply the 'know-your-customer' and reporting of unusual transaction requirements to platforms that enable the exchange of cryptos to fiat money, as well as to crypto wallet providers. The revised Money Laundering Directive must be implemented in the EU Member States by 10 January 2020) .
To mitigate the related risks at a national level, the AFM and DNB recommend introducing a licensing regime under the Dutch Anti-Money Laundering and Anti-Terrorist Financing Act (Wet ter voorkoming van witwassen en financiering van terrorisme, the "Wwft"). The AFM and DNB are of the opinion that this will allow preventative assessment – and rejection – of potential market parties that cannot adequately address the AML-risks related to cryptos.
We believe however that a licence requirement for crypto exchange platforms and crypto wallet providers , if introduced, belongs in the Dutch Financial Supervision Act (Wet op het financieel toezicht, the "Wft"), rather than in the Wwft. The structure and purpose of the Wft seem more apt to introduce such licencing regime, since the Wwft has been written with the primary aim to prevent terrorism financing and money-laundering.
Proposed amendment of the European regulatory framework for capital market funding
The AFM and DNB also see the advantages of disruptive technologies, such as blockchain. They expect that, insofar as the particular crypto offered presents a clear and enforceable right (as is the case with shares and bonds), corporate funding through cryptos may eventually grow into a supplemental form of capital market funding.
To this extent, the AFM and DNB recommend amending the European regulatory framework for corporate funding to enable the use of cryptos that are comparable to shares or bonds. This will require proportionate rules for trading as well as amendments to the rules for custody and settlement in order to prevent them from unnecessarily reducing the benefits of blockchain technology, as I the case under the current EU regulatory framework.
At a national level, the AFM and DNB propose to bring the Dutch definition of a security in line with the broader definition used in other pieces of European legislation. This will allow the AFM to bring specific cryptos under the scope of its supervision and to offer investors a level of protection against these activities similar to the level of protection available for other regulated activities.