The founder of the theory of natural selection Charles Darwin said: “It is not the strongest or the smartest who survive, but those who adapt best to change.”

Although the above thought applies to evolution, the same principle can be applied to almost all areas of development, with cryptocurrencies being no exception.

The world of blockchain and Web 3 is changing at lightning speed and regulators at local and European Union level are currently failing to catch up with the constant progress. Even the planned Markets in Crypto-assets (MiCA) regulation will not fully regulate the processes and market participants. However, its entry into force will at least unify and synchronize the legislation of at least the countries in the European Union, which will also affect the applicable legislation in Bulgaria.

Until this happens, local legislation relating to anti-money laundering and anti-terrorist financing measures will apply in each Member State. In recent years, these provisions have become mainstream in almost all business sectors. Failure to comply with them leads to significant penalties and reputational risks. Crypto currencies have come to the attention of law enforcement because of the possibility of anonymity of the transactions and the unhindered movement of funds that can be used for relatively quick and easy money laundering and/or terrorist financing.

It is for this reason that the first official definitions of virtual currencies and a custodian wallet service providers are in Directive (EU) 2018/843, the so-called Fifth Anti-Money Laundering (AML) Directive.

Pursuant to the provisions of the Fifth Directive:

‘Virtual currencies’ means a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically;

‘Custodian wallet provider’ means an entity that provides services to safeguard private cryptographic keys on behalf of its customers, to hold, store and transfer virtual currencies.

The AML Directive also introduces the requirement for each Member State to establish either a registration or licensing regime for all entities that provide services as (i) custodian wallet providers or (ii) providers engaged in exchange services between virtual currencies and fiat currencies.

The Bulgarian jurisdiction offers one of the fastest, straightforward and simplest procedures in this respect. Under Bulgarian law custodian wallet providers and persons offering virtual currency exchange services are subject to registration. These persons are supervised entities by the State Agency for National Security in relation to the rules for the prevention of money laundering and terrorist financing. They should apply the regulations on customer identification (so-called KYC), identification of beneficial owners of legal entities and the origin of funds when establishing business relationships. They should also apply suspicious transaction monitoring, known as “know-your-transaction” (KYT) and numerous other obligations under the law.

If you have an idea for an innovative Web 3 business, we would be happy to brainstorm together. Progressive Lawyers is a pioneering and leading law firm in Bulgaria with extensive background and experience in the area of Web 3 legal consultancy. The law firm can provide you with a full package of services, such as company set-up, obtaining of proper registration (both custodian and exchange), a full package of anti-money laundering and anti-terrorist financing documents, including assistance with opening of accounts with payment service providers and/or centralized exchanges. Progressive Lawyers partners with a wide range of law firms across the world and can provide global Web 3 consulting in multiple jurisdictions should an international focus is required.