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BC/FT risks of crypto-asset markets: Adan contributes to the review of the European analysis

The European Commission is currently working on a revision of its report on the analysis of BC/FT risks affecting the internal market and related to cross-border activities (“SNRA”) published in 2019, as well as the accompanying working document. This update of the NARS is part of the ongoing work to overhaul the European regime in this area. The Commission wished to involve Adan on the parts of these documents dedicated to the crypto-asset markets. The Association thanks the Commission once again, and underlines the necessity and importance of such cooperation.

In summary, Adan makes the following findings and recommendations for the revision of the document accompanying the NARS 2019:

The description of the sector (products and activities in crypto-assets)) should be updated in the light of its substantial evolution in recent years, particularly as a result of market consolidation, the structuring of the ecosystem, the institutionalisation of the sector and regulatory developments in France and Europe. The description of the risk scenarios needs to be reviewed, especially as it is based on the erroneous idea that crypto asset transactions are anonymous and difficult to trace. Adan provides a detailed explanation and counter-examples to correct this assertion, and encourages the Commission to base its analysis on “pseudonymity” (and not anonymity) and transparency of crypto-asset exchanges. The Association also recommends that the future report distinguishes between crypto-assets and anonymity-enhanced crypto-assets (AEC): the latter represent a marginal subset and their risks are becoming better managed.

The description of the sector (products and activities in crypto-assets) should be updated in the light of its substantial evolution in recent years, particularly as a result of market consolidation, the structuring of the ecosystem, the institutionalisation of the sector and regulatory developments in France and Europe. The description of the risk scenarios needs to be reviewed, especially as it is based on the erroneous idea that crypto asset transactions are anonymous and difficult to trace. Adan provides a detailed explanation and counter-examples to correct this assertion, and encourages the Commission to base its analysis on “pseudonymity” (and not anonymity) and transparency of crypto-asset exchanges. The Association also recommends that the future report distinguishes between crypto-assets and anonymity-enhanced crypto-assets (AEC): the latter represent a marginal subset and their risks are becoming better managed.

A fair and representative description of the actual threat level of crypto-asset activities under AML/CFT is absolutely fundamental.

  • To compensate for the lack of data in the Commission’s current analysis, and to correct the stated conclusions, Adan offers concrete elements from various studies of private players (Chainalysis, Ciphertrace, Scorechain) but also from the Treasury’s General Directorate. Among this useful information: only 0.34% of crypto-asset transactions are characterised as illicit (which is broader than the BC/FT), 3% of players do not perform KYC due diligence, almost 0% if we consider European and North American companies.
  • Adan also recommends refining the analysis with regard to the different activities on crypto-assets: for example, crypto-crypto exchanges carry lower levels of risk and are more traceable than crypto-fiat transactions.
  • Adan notes some logical leaps in the current report, which states the importance and continued growth of BC/FT risks of crypto-asset activities in the absence of tangible information corroborating these conclusions.

In view of the revision of the directive in this area, Adan insists on the need for maximum harmonisation between Member States in the implementation of AML/CFT regimes within the European Union.

Finally, Adan reiterates its general position on the need to regulate the crypto-asset markets from an AML/CFT perspective, and to adjust the existing rules (initially intended for the banking and financial industry, and therefore partly unsuitable for the crypto sector) in order to build a suitable and proportionate regime. Only such an approach can ensure an effective fight against BC-FT threats while preserving the innovation and competition potential of the European crypto-asset ecosystem.

Adan remains at the disposal of any interested party to discuss this document.