Regulatory Technical Standards (RTS)

The European Banking Authority (hereinafter referred to as “EBA”) has launched a public consultation on draft Regulatory Technical Standards (hereinafter referred to as “RTS”) [1] with the aims of delineating the criteria for appointing a central contact point (hereinafter referred to as “hereinafter referred to as “CCP”) for crypto-asset service providers (hereinafter referred to as “CASPs”). [2] The final report on draft RTS is envisaged to be published in the Second Quarter of 2025.

The initiative is based on provisions of the 4^th AML Directive (Directive 2015/849) which mandate the EBA to develop RTS for determining when a CCP is necessary and to define its functions. In essence, this is part of the broader effort to enhance compliance with anti-money laundering (AML) and countering the financing of terrorism (CFT) obligations within the European Union.

Initially, Regulation 2018/1108’s[3] scope was limited to payment service providers (PSPs) and electronic money issuers (EMIs), and on the 9^th June 2023 the co-legislator extended its scope to include CASPs as well.

Purpose and Scope of establishing a CCP

The extension of the CCP requirement to CASPs comes in response of the ever-evolving nature of crypto assets, which are often used in cross-border transactions and which may bypass traditional financial systems. Whilst the underlying blockchain technology offers traceable transactions and immutable records, crypto-asset businesses can be abused for AML/CFT purposes, through the features that make crypto-assets and crypto-asset businesses particularly vulnerable.

Such features include:

1. Customer identities that are hidden rendering it easier for criminals to conceal their tracks;
2. Certain distribution channels and business models which are new and are neither regulated nor supervised;
3. Some crypto services having a global reach. In fact, CASPs often operate without a physical presence in each member state.

Additionally, PSPs, EMIs, and CASPs that are authorised by an EU Member State may operate establishments in other Member States, and upon their establishment they must comply with local AML/CFT obligations. This must be done even if their establishments are not ‘obliged entities’ themselves.

To this effect, the EBA is proposing the PSPs, EMIs or CASPs to appoint a CCP in their territory, as a means of ensuring consistent monitoring and accountability for crypto transactions considering all vulnerabilities. The CCP will act on behalf of the appointing institution and ensure compliance with local AML/CFT obligations.

Moreover, the CCP would also be acting as a liaison between the CASP and the host Member State's authorities. Its responsibilities will include ensuring that the CASP's AML/CFT policies and procedures are effectively implemented, and that relevant information is communicated to the authorities.

This proposal is envisaged to enhance the EU's capacity to regulate crypto-assets, particularly regarding the identification and reporting of suspicious activities tied to AML/CFT. These measures are also being designed to close regulatory gaps and to ensure that crypto-asset service providers adhere to the same stringent AML/CTF standards as traditional financial institutions.

Key guidelines and proposals of the RTS

The draft RTS outlines when a CCP should be appointed and their responsibilities. This includes factors such as the scale and nature of the CASP's operations, the risk profile of the services provided, and the complexity of the AML/CFT obligations in the host Member State.

The EBA is proposing several introductions, and these include:

1. Defining CASPs in Article 2 (reflecting the definition in the 4^th AML Directive);
2. Extending definitions of 'competent authority' and 'host Member State' to encompass CASPs;
3. Extending the applicability of various provisions to CASPs;
4. Introducing additional criteria for appointing a CCP for CASPs, focusing on the scale of their activities within the host state, similar to regulated EMIs and PSPs, but tailored to crypto-assets;
5. Member States requiring CASPs to appoint a CCP even if they do not meet the usual criteria, based on the risk of AML/CFT; and
6. Aligning the concept of establishment with Regulation (EU) 2024/1624 (the AML Regulation), focusing on services delivered remotely and disregarding physical presence or national law classifications as obliged entities, due to the difficulties that may be experienced upon trying to define the term.

Implications for Crypto-Asset Service Providers

By appointing a CCP, CASPs will be subject to more rigorous oversight, ensuring that they adhere to AML/CFT regulations even when operating across borders. CASPs may need to adjust their internal processes to comply with the new requirements. This will include appointing a CCP and ensuring that their AML/CFT policies are aligned with the host Member State's regulations.

Conclusion

The EBA's proposal to appoint a central contact point for CASPs represents a significant step towards strengthening the EU's AML/CFT framework. By ensuring that CASPs comply with regulations, the financial system’s integrity and security is being enhanced.

In order to ascertain a fully functioning and practical framework, stakeholders are being encouraged to participate in the consultation process. This will help shape the final standards and ensure that they address the unique challenges of the crypto-asset sector, in a practical and effective manner.

For any information or assistance please contact us at info@gtg.com.mt

Author: Dr Catriona Cuschieri

[1] Draft Regulatory Technical Standards amending Commission Delegated Regulation (EU) 2018/1108 on the criteria for the appointment of central contact points for electronic money issuers and payment service providers and with rules on their functions under Article 45(10) of Directive (EU) 2015/849;              

[2] The EBA has opened the consultation for comments until 4 February 2025. A virtual public hearing will be held on 16 January 2024 to discuss the proposals. Stakeholders are invited to submit their feedback and participate in the hearing.

[3] Commission Delegated Regulation (EU) 2018/1108 of 7 May 2018 supplementing Directive (EU) 2015/849 of the European Parliament and of the Council with regulatory technical standards on the criteria for the appointment of central contact points for electronic money issuers and payment service providers and with rules on their functions