For Managing Risks in the Crypto-Asset Sector and Increasing Transparency — Amendments to the Law

The Ministry of Finance (MoF) together with the Bank of Lithuania (BoL), Financial Crime Investigation Service (FCIS) and the Centre of Excellence in Anti-Money Laundering have prepared the amendments to the Law on the Prevention of Money Laundering and Terrorist Financing aimed at strengthening the management of money laundering risks in the cryptocurrency sector, increasing its transparency and more stringent regulation of the operating conditions of service providers.

According to the project promoters, the law is intended to lay down more requirements for virtual currency service providers (virtual currency exchange offices, deposit wallets of virtual currencies), their managers, activities, the amount of capital and other requirements, where the supervision of the requirements will be ensured by the Financial Crime Investigation Service monitoring this sector.

“Recently, we see a rapidly changing situation in the virtual currency sector and a significant increase in the number of entities engaged in these activities in Lithuania. Given the risks that the sector faces in terms of money laundering, fraud or circumvention of international sanctions, we need to take immediate decisions on strengthening the national regulatory regime by increasing the transparency of this market segment," says Deputy Minister of Finance Mindaugas Liutvinskas. — “This is the initial and important step without waiting for the adoption of the EU regulation providing for the establishment of an EU-wide licensing regime for virtual currency service providers”.

“The Bank of Lithuania has already announced its official position on crypto-assets in 2017 and even then clearly declared that financial services must be separated from services related to virtual currencies. Since then, the activities of the crypto sector have repeatedly proven to be risky, as recognised by authoritative international organisations. The identified risks are related to money laundering and terrorist financing, fraud, etc. In recent times, the risk of non-compliance with international sanctions is also increasing — when making crypto-payments it could be susceptible to avoid imposed sanctions, so it is necessary to ensure that operators of crypto exchange offices properly comply with the requirements for prevention of money laundering and terrorist financing and ensure compliance with sanctions", says Simonas Krėpšta, member of the Board of the Bank of Lithuania.

Lithuania is currently witnessing a very rapid increase in the number of start-up companies and companies engaged in cryptocurrencies. In 2020, 8 new companies of virtual currency service providers were established in the country, while in 2021 – 188 companies, and over 40 more companies in the first few months of this year. According to the data of the Centre of Registers, on 16 March this year, in total, 252 companies of virtual currency service providers were operating in Lithuania.

The rapid growth of the crypto-asset market segment and the continued emergence of new products require additional attention from responsible authorities to manage risks related to money laundering. In this context, the amendments to the law have been initiated to ensure more efficient regulation of the sector without waiting for the entry into force of the Markets in Crypto Assets regulation, MiCA, currently finalised in the EU institutions. The European regulation is expected to be adopted later this year, with an expected date of application – the year 2025.

“As the number of virtual currency exchange operators and deposit virtual currency monetary operators is increasing due to the favourable conditions for starting operations in Lithuania, the FCIS observes the risks associated with the activities of this sector — the number of reports on suspicious monetary transactions and cash transactions is growing every year. The FCIS is currently carrying out a sectoral strategic analysis of virtual currency operators in order to identify and assess the risks posed by this sector in the field of prevention of money laundering and terrorist financing. Inspections will also be carried out, but more stringent regulation of the sector is also needed", says Deputy Director of the FCIS Mindaugas Petrauskas.

“The drafting of a new law is of great importance. In line with the policy of prevention of money laundering and terrorist financing, we must maintain high regulatory standards in Lithuania for timely prevention of possible risks related to money laundering", stressed Eimantas Vytuvis, Head of the Centre of Excellence in Anti-Money Laundering. — “Changes are inevitable, the dynamic development of the crypto sector encourages institutions to respond and seek to manage the rapidly increasing risks of MLTF at the State level. In this case, only permanent regulatory changes, based on the EU regulatory experience, can help protect consumers, and the crypto sector activities must, therefore, be more regulated and controlled”.

The amendments to the Law on the Prevention of Money Laundering and Terrorist Financing are foreseen to be submitted in the near future for consultation to market participants, interested institutions and for consideration  to the Government. The prepared draft law is planned to be presented during this Spring session in the Seimas. The amendments to the law would enter into force later this year.