Introduction
The Netherlands is at the forefront of regulatory development for the cryptocurrency industry, particularly in the European context. With a strong focus on ensuring compliance while fostering innovation, the Dutch government and regulators have laid out clear frameworks that balance consumer protection, financial stability and the encouragement of new technologies.
The Financial Supervision Act (FSA), the Dutch Anti-Money Laundering (AML) Act, and the EU Prospectus Regulation form the core legal framework for cryptocurrencies and related services. Although these laws don’t specifically target cryptocurrencies, they are applied where relevant. For instance, certain cryptocurrencies may fall under existing definitions like financial instruments or securities, depending on their characteristics.
As part of the European Union, the Netherlands also seeks alignment with EU-wide regulations, such as the Markets in Crypto-Assets (MiCA) and incorporation of the EU directives like MiFID II and AIFMD by FSA, ensuring that crypto-related activities adhere to broader European regulatory principles when applicable.
Ensuring Compliance with AML/CFT Principles
The Netherlands has strict AML and CFT regulations for cryptocurrency service providers, in line with the EU’s Fifth Anti-Money Laundering Directive (AMLD5). Since May 2020, cryptocurrency exchanges and wallet providers have been required to register with the Dutch Central Bank (DNB) and comply with stringent rules regarding the detection and reporting of suspicious transactions.
Key requirements include:
- Know Your Customer (KYC): Businesses must verify customer identities before allowing them to trade cryptocurrencies.
- Transaction Monitoring: Cryptocurrency service providers are required to monitor transactions and flag those that exceed certain thresholds or exhibit suspicious activity.
- Reporting to the Financial Intelligence Unit (FIU): Companies must promptly report suspicious transactions to the FIU, which operates under the Ministry of Justice and Security. This ensures that any illicit financial activity, such as money laundering or terrorism financing, is identified early.
- Appointment of Key Staff: VASPs / CASPs are required to designate senior personnel, including a dedicated compliance officer, to oversee AML/CFT measures and ensure regulatory compliance within the organisation.
- Risk Analysis: Companies must perform in-depth risk assessments tailored to their operations, identifying threats linked to money laundering or terrorism financing and developing strategies to mitigate them.
- Customer Verification: Strict customer due diligence (CDD) processes are essential, ensuring the verification and continuous monitoring of client identities and activities.
- Internal Controls: Need to create and enforce robust internal policies to prevent financial crimes and ensure compliance with legal standards.
This robust framework highlights the Netherlands' proactive stance in tackling financial crime within the digital asset space. By enforcing rigorous AML measures, the country strives to create a secure, transparent financial system that encourages both innovation and long-term growth in the digital economy. Failure to comply with these AML/CFT requirements can lead to fines, reputational damage, and, in severe cases, criminal prosecution.
Registration Process in Brief
The Dutch Central Bank (DNB) requires cryptocurrency service providers to undergo a detailed registration process, which shares similarities with licensing requirements. The process includes submitting extensive documentation, such as:
- Company Information: Recent extracts from the Trade Register, articles of association, and shareholder registers.
- Business Plan: Outlining the company’s activities, strategies, and governance.
- Operational Management: Compliance policies, incident reporting under AML laws, and outsourcing agreements.
- Ethical Management: Customer due diligence procedures, integrity policies, sanctions screening, and transaction monitoring.
The registration process for crypto service providers in the Netherlands also includes a fit and proper assessment. This screening is conducted by the DNB and evaluates the integrity and competence of senior executives and major shareholders (those holding more than 10% of shares). The aim is to ensure that key personnel have the appropriate qualifications, ethical standards, and background to manage a crypto business, minimising the risks of financial crime and ensuring sound governance within the sector.
This registration requirement, implemented on May 21, 2020, aims to address the increased risks of money laundering and terrorist financing associated with crypto transactions. Despite legal challenges, the procedure remains in place to mitigate the anonymity in crypto services that could enable criminal financial activities. As mentioned before, the Dutch AML Act plays a central role in combating money laundering by requiring service providers to conduct thorough checks on customers and transactions to ensure they aren't linked to illicit activities. This scrutiny extends to executives and shareholders, who undergo screening to ensure they meet integrity standards.
Legal debates have arisen over whether DNB’s registration process is effectively a licensing regime in disguise, with the courts acknowledging the similarities and leaving the door open for further examination. Nonetheless, the registration mandate underscores the necessity of safeguarding the financial system from criminal exploitation.
Money Transmission Laws
Currently, the Netherlands does not have regulations that explicitly ban the use or trading of cryptocurrencies. However, depending on how cryptocurrencies are used, especially if they are utilised as a means of payment to third parties, certain regulatory requirements under the Financial Supervision Act (FSA) may be triggered. Specifically, the use of cryptocurrencies for payments could fall under the scope of the Payment Services Directive (PSD2), which sets out rules for payment services and electronic money institutions in the EU, potentially requiring providers to obtain a licence.
While there is no outright prohibition, crypto businesses operating in payment services may face additional scrutiny and regulatory obligations, such as licensing, compliance with payment systems regulations, and adherence to, already mentioned, anti-money laundering laws. The Payment Services Directive aims to ensure consumer protection, enhance transparency, and improve the security of payments in the digital financial landscape, potentially impacting how cryptocurrencies are handled in certain scenarios within the Netherlands.
Promotion and Testing
The Dutch government actively encourages innovation in the financial sector through initiatives like regulatory sandboxes and the InnovationHub, both of which play crucial roles in allowing businesses to develop and test innovative financial products in a controlled environment. The regulatory sandbox provides businesses with temporary regulatory flexibility, where they can test their products without facing the full spectrum of legal restrictions, ensuring that compliance does not stifle innovation.
The letter from the Dutch Minister of Finance, dated July 3, 2020, discusses the Dutch government's FinTech Action Plan, which aims to foster innovation in the financial sector. The letter highlights the development of regulatory sandboxes as a key initiative to support FinTech companies. It notes the government's intent to explore the possibility of creating a sandbox both nationally and at the EU level.
The InnovationHub, jointly managed by the Dutch Central Bank (DNB), the Netherlands Authority for the Financial Markets (AFM) and the Authority for Consumers & Markets (ACM), serves as a more advisory platform for businesses to receive informal guidance about the regulatory landscape. The Hub allows both startups and established companies to engage directly with regulators, ensuring they understand the relevant supervision rules and can work collaboratively to ensure compliance from the early stages of product development. Unlike the sandbox, the InnovationHub does not offer exemptions from regulations but helps businesses navigate the complex regulatory requirements they must meet.
Key aspects of both initiatives include:
- Regulatory Flexibility: Companies can test new products under lighter regulatory conditions, while the InnovationHub offers expert guidance on applicable rules and compliance strategies.
- Collaboration: Both platforms foster a close relationship between businesses and regulators like the DNB and AFM, ensuring innovative projects remain compliant and mitigating risks early in development.
- Consumer Protection: Despite the flexibility provided, both initiatives maintain strict consumer protection standards. Companies must still ensure their services do not harm consumers or pose risks to the financial system.
In addition to these initiatives, the AFM monitors how digital assets businesses promote their services to the public, ensuring that marketing is clear, accurate, and not misleading. Companies that fail to meet these standards may face penalties or restrictions on their promotional activities.
Taxation
In the Netherlands, Virtual Asset Service Providers (VASPs) are subject to several taxation requirements depending on the nature of their operations. These include:
- Corporation Tax: VASPs must pay Corporation Tax on profits generated from their activities. In the Netherlands, the corporate tax rate is 19% for profits up to €200,000 and 25.8% for profits exceeding that threshold.
- Capital Gains Tax: While the Netherlands does not have a specific capital gains tax, gains from selling business assets are treated as regular income and taxed under the applicable corporate income tax rates.
- Dividend Withholding Tax: Dividends paid out by VASPs are subject to a 15% withholding tax. However, exemptions and reductions may apply under certain conditions, including tax treaties or participation exemptions.
- Social Security Contributions: Employers, including VASPs, are obligated to contribute to social security schemes on behalf of their employees. In the Netherlands, the employer's contribution can vary depending on the sector and the specific social insurance scheme but generally falls between 18% and 25% of the employee's salary.
- Stamp Duty: While the Netherlands does not impose a general stamp duty on the transfer of shares or property, some property transactions may be subject to transfer tax at a rate of 8%.
- Value Added Tax (VAT): The provision of goods and services by VASPs may be subject to VAT at a standard rate of 21%. However, activities such as the exchange of cryptocurrencies are exempt from VAT, according to EU rulings.
This robust tax framework ensures that VASPs operating in the Netherlands adhere to the broader European standards while supporting the growth and regulation of the cryptocurrency sector.
Next Steps: MiCAR - Important Step in Regulating Crypto Markets
The Dutch Central Bank (DNB) has actively embraced the EU’s Markets in Crypto-Assets Regulation (MiCAR), which has begun taking effect from June 2024. The DNB views MiCAR as a crucial step towards creating a harmonised regulatory framework for crypto-assets across Europe, enhancing both market integrity and consumer protection.
As of July 1, 2024, the DNB made the application form available for issuers of Asset-Referenced Tokens (ARTs) under the MiCAR. From June 30, 2024, ART issuers need to be licensed under MiCAR to operate legally within the EU. To apply, issuers must complete the form fully, attach the required PDF questionnaire, and submit all necessary documentation. The licensing ensures compliance with MiCAR's requirements, fostering market integrity and consumer protection.
The DNB, alongside the Dutch Financial Markets Authority (AFM), oversees compliance and licensing under MiCAR for CASPs and issuers of crypto-assets. They emphasise that these new regulations are important for investor protection and the stability of the financial system. Moreover, the DNB has urged market participants to prepare for MiCAR and participate in the ongoing consultation processes to shape the technical standards that will apply.
Conclusion
Netherland's progressive approach to cryptocurrency regulation, positions the country as one of the desired destinations for digital assets investment. With an advancing legal framework and government support for fintech development, Netherlands offers a compelling proposition for businesses seeking to capitalise on the opportunities presented by the digital economy.
If you would be interested in learning more about Malta, and how you can play a bigger role in defining the upcoming rules and regulations, we invite you to connect with us and schedule a complimentary consultation.
