Licenses for cryptocurrency exchanges (e.g., Binance) is a hot topic for Europe for several months now. Even though the number of cryptocurrency exchanges is steadily increasing, applications for new licenses are taking months.
We would be lying to you if we told you that acquiring a cryptocurrency exchange license in Europe is an easy process. But it’s not impossible. There are many hurdles that need to be cleared, and many hoops that need to be jumped through.
Whether you’re taking your trying to broaden your current exchange or open up a brand new crypto exchange business in the EU, here’s what you need to know.
Crypto Is Still a VERY New Industry
Think about how difficult it is for most people to understand what NFTs are, how crypto works, what blockchain technology or distributed ledger technology are, and fintech.
It’s no wonder the EU is struggling to regulate the industry and get a grasp on security and consumer protection.
With the crypto ecosystem still in its infancy, it might come as a surprise that there are well over 100 exchanges operating in Europe today. The speed with which this industry is developing is impressive. However, it also means that many of the rules and regulations are being written on the fly and it’s increasingly difficult for startups and virtual asset service providers to comply.
- Cryptocurrency exchanges rely on government regulation to establish trust in their services and must meet stringent criteria to gain approval.
- Although there are no specific rules governing crypto exchange licenses in Europe, there are regulatory bodies which oversee this industry.
- In order to obtain a crypto exchange license, businesses should seek advice from a legal expert who specializes in blockchain and cryptocurrency law.
- Getting a license in the EU is NOT the same as getting on in the UK through the Financial Conduct Authority (FCA).
What Is 5AMLD?
The Fifth Anti-Money Laundering Directive, known as 5AMLD, is a set of rules that were implemented by the European Commission on 10 January 2020. It aims to provide greater transparency and prevent money laundering activities in Europe. The 5AMLD is an amendment to 4AMLD and the third EU anti-money laundering directive (3AMLD).
5AMLD requires crypto exchanges to be licensed in order to operate legally.
So add that to your compliance to-do list, along with KYC (Know Your Customer) and whatever other regulations exist in the country you’re applying in.
Here’s What 5AMLD Does
- Increase transparency about the ownership of legal entities to prevent money laundering and terrorist activity
- Provide European finance regulators easier access to information through centralized banking
- Prevent terrorist financing (CFT) through anonymous prepaid and crypto pathways
- Increase information exchange between AML supervisors and the European Central Bank
- Ensuring higher level safety when working with and transferring money to/from high-risk 3rd-world countries.
How You Can Comply with 5AMLD
It’s simple: demonstrate that you have anti-money laundering procedures in place and comply with KYC (as you would need anyway).
That doesn’t mean it’s easy to get a crypto exchange license. As the EU is still figuring out this new industry, there will be hurdles to leap over.
Many European exchanges struggled with obtaining licenses from their home nation regulators because they couldn’t demonstrate that they were compliant with 5AMLD.
Moreover, even those who did obtain licenses faced ongoing scrutiny from financial crime investigators — not just because of any real suspicion of money laundering, but because they were understandably keen to ensure that new crypto exchange entrants were playing by the rules.
So, as you can see, the waters are still a bit mucky. But that doesn’t mean obtaining a license is impossible! It’s just difficult.
First Step: Choose a Country
The first step to becoming licensed is making sure that the country you choose to set up your exchange in has governmental financial regulations that allow for exchanges to operate there.
While the license is valid across the EU, you will need to apply in one particular country and gain approval from that nation’s competent authorisation issuance body for market participants.
Different Country, Different Rules
Each country has its own requirements and due diligence for what information needs to be provided and who should provide it. Some countries allow applicants to fulfill these requirements themselves, while others require a third party such as an attorney or auditor to do so.
Do some research about where it’s easier, safer, or faster to get the licensing done. We hear good things about Estonia and Malta, but it’s tough to say which country EU is objectively better. France and Germany are primed to stand as strong competitors, and more are popping up with new initiatives.
Step Two: Open a Bank Account
It is simply impossible for any cryptocurrency exchange to operate without banking services. This means that banks play an important role as gatekeepers for crypto exchanges around the world.
Here’s the tricky part: even if you choose a bank in the same country you’ve registered your exchange and you’ve complied with every rule and crypto regulation, they can still deny you.
Banks don’t understand crypto (e.g., Bitcoin, stablecoin, security tokens, utility tokens) and have little trust in the industry due to the number of scams taking place, large volatility, and other factors. Banks are also afraid of losing their reputation by offering services to crypto companies with weak AML policies.
There are banks that do it and truly understand crypto asset-based trading, but be prepared to present your case in the most attractive way possible. You need to win them over.
Things to Cover Moving Forward with Your Digital Currency Exchange
When making your application for both company registration and licensing, you need to cover a few things.
- How are you organizing operations?
- Are you opening a branch in a Member State?
- Is your crypto exchange considered a cross-border financial service provider in the country you registered?
- What’s the marketing and advertising front look like?
These are questions you should be ready to answer. But not only when applying for your crypto exchange license. You should use them as a means of planning for your business.
Focus on One Market at a Time
It’s great to be ambitious. When it comes to crypto and e-money, potential feels limitless. But there are several roadblocks along the path to success and they all come out of fear for financial stability for virtual currency from financial institutions that already exist in the financial sector and from the European Parliament. You should focus on one crypto market/country at a time and gradually expand as the industry becomes better understood.
The European Union has 28 member states. They all have their own regulatory bodies, and each one of them has its own rules. Moreover, these rules are constantly changing, and so does the implementation of each country’s regulatory framework. Even if passporting is allowed, it only makes it slightly easier since you’re a digital money institution. The next country needs the appropriate financial instruments to ensure your compliance and safety for their market.
For example, one country might change its AML/KYC requirements for electronic money businesses or introduce a new license for the exchange trading platform of digital assets.
As you can imagine, getting a crypto license in European financial markets is a really difficult task — even if you pick one jurisdiction and focus on that territory only.
Your Merchant Account Provider Can Help
Crypto exchanges in Europe are facing tough times at the moment. The regulatory environment is uncertain and has become highly burdensome for a variety of exchange operators over the past year alone.
This is true for both crypto-to-crypto exchanges, as well as fiat-to-crypto exchanges.
Regardless, it is clear that these regulatory hurdles will not be going away anytime soon and complying with licensing requirements won’t become any easier.
Therefore, having a solid compliance team on hand to ensure adherence to the evolving legal framework is vital for all serious crypto exchange operators in Europe.
Your merchant services provider can help you along the way. Here at DirectPayNet, our team is well-versed in compliance measures in the EU and payment services (to provide a means of payment for your users). Contact us for assistance getting your crypto business live.