How will new regulation affect the crypto market? | Blockchain Technology | Deloitte Netherlands

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How will new regulation affect the crypto market?

New Dutch crypto rules shouldn’t defeat their purpose

The Netherlands wants to start regulating cryptocurrency companies to prevent the virtual currency being used for criminal purposes. What impact will this regulation have? How will it affect crypto exchanges and innovation in the market?

March 04, 2019 | By Tommie van der Bosch & Jacob Boersma

In recent years, an increasing number of authorities have been thinking about ways to regulate the growing market for cryptocurrencies. It makes sense, as the ease of anonymity in the market proves appealing to fraudsters. Last fall, research from the Wall Street Journal showed that an estimated 88 million dollars was laundered through 46 crypto exchanges over the past two years.

The Dutch crypto law

Countries including Japan, Germany and Switzerland already have crypto regulation, and others are now considering them. Last December, the Dutch government announced a legislative proposal for regulating the national cryptocurrency exchange market. Buying or selling cryptocurrencies on Dutch crypto platforms will become subject to the Dutch Money Laundering and Terrorist Financing (Prevention) Act (Wwft).

The law still has to be passed by both parliamentary chambers, but when it comes into effect, companies that offer exchange services for cryptocurrencies will be obliged to get a license to operate from the Dutch central bank (DNB). Under this license, companies will have to report unusual transactions to the authorities and will need to have a Know Your Customer policy.

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The law can push innovation on the crypto market

For a long time it was unclear how authorities would respond to this quickly developing young market. Clarity at a national level is a positive development: it provides companies certainty about what is and isn’t allowed, giving them more guidance as they further develop their crypto services.

Many companies already largely comply with the proposed regulations. For those, DNB's approval primarily strengthens their market position, with the license serving as a kind of quality mark, one which stands out in a mostly murky and unregulated market. This may prove to be a reason for non-Dutch crypto companies to settle here.

… but it can also defeat its purpose

There are, however, some reservations about the proposed law. The rules for companies dealing with cryptocurrencies have now become as strict as those applying to banks. Even if someone wants to buy only 10 euro worth of Bitcoin, an exchange must ask for identification. This seems excessive, especially if the person is already identified through the Dutch bank account they are using to pay.

If the law is strictly interpreted — which is often the case shortly after a law’s introduction — then it could possibly overshoot its goal. It makes sense that companies dealing with large amounts of cryptocurrency must be thoroughly investigated. But if every individual with a small crypto wallet has to be identified as a high-risk customer, this will lead to the creation of large databases of personal data that bring about other, disproportional risks. In addition, a strict interpretation of the law might potentially slow down further innovation in the Dutch crypto market. 

Fortunately, Dutch regulators are willing to start conversations with cryptocurrency companies, as demonstrated by the sandbox environment provided for blockchain companies by the DNB and AFM. This demonstrates a willingness to start a dialogue with cryptocurrency companies in the hopes of achieving a risk-based approach to the new regulations.

More information

Want to know more about how the new regulations will affect your organisation? Please contact Jacob Boersma & Tommie van der Bosch via their contact details below.

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