Custodial wallet / SaaS in Denmark

Lov om forebyggende foranstaltninger mod hvidvask og finansiering af terrorisme (hvidvaskloven) – The Money Laundering Act.

This is the core Danish law that transposes the EU's 4th, 5th, and 6th Anti-Money Laundering Directives (AMLDs).

The 5th AMLD (Directive (EU) 2018/843) was particularly significant for bringing virtual asset service providers under the scope of AML/CFT regulations, requiring them to register and comply with the same obligations as traditional financial institutions.

The 6th AMLD (Directive (EU) 2018/1673) primarily harmonises the definition of money laundering offences and associated penalties across member states, indirectly strengthening the overall framework.

Exchange between virtual currencies and fiat currencies.

Exchange between one or more virtual currencies.

Are custodian wallet providers.

Provide other services related to virtual assets.

Identification and Verification of the Customer:

Natural Persons: Obtain and verify the customer's identity (full name, address, date of birth, national identification number if applicable). Verification must be based on reliable, independent sources (e.g., valid passport, national ID card, driving license combined with proof of address).

Legal Entities: Obtain and verify the entity's name, legal form, address, registration number, and Articles of Association. Identify and verify the identity of the persons who are authorised to act on behalf of the legal entity.

Purpose and Intended Nature of the Business Relationship: Understand the purpose and intended nature of the business relationship or the occasional transaction.

Identification of Beneficial Owners:

VASPs must identify the ultimate beneficial owner (UBO) of all legal entities and trusts. A UBO is typically any natural person who directly or indirectly owns or controls more than 25% of the shares or voting rights, or otherwise exercises control.

Verification of the UBO's identity is also required, using reliable, independent sources.

VASPs must conduct an enterprise-wide risk assessment (§ 7 of Hvidvaskloven) to identify, assess, and understand the money laundering and terrorist financing risks associated with their customers, products, services, transactions, and geographic areas.

Enhanced Due Diligence (EDD): Required in situations presenting a higher risk of money laundering or terrorist financing. This includes:

Customers who are Politically Exposed Persons (PEPs) or their family members/close associates.

Customers from high-risk third countries (as identified by the EU or FATF).

Unusual or complex transactions.

Situations where the customer is not physically present for identification.

Measures include obtaining senior management approval, taking reasonable measures to establish the source of funds and wealth, and conducting enhanced ongoing monitoring.

Simplified Due Diligence (SDD): Permitted in clearly defined low-risk situations, but these are rare for the virtual asset sector, which is generally considered higher risk.

VASPs must continuously monitor the business relationship, including scrutiny of transactions undertaken throughout the course of that relationship, to ensure that the transactions are consistent with the VASP’s knowledge of the customer, their business, and risk profile (§ 13 of Hvidvaskloven).

Customer information and risk profiles must be kept up-to-date.

Titles III (ARTs) and IV (EMTs) of MiCA apply from June 30, 2024.

The remaining provisions of MiCA apply from December 30, 2024.

Only credit institutions (banks) authorized under the Capital Requirements Directive (CRD IV) or e-money institutions authorized under EMD2 can issue EMTs.

The reserve assets must be held in segregated accounts with credit institutions.

They must be invested only in highly liquid, low-risk assets and in a manner that ensures stability and sufficient liquidity.

Issuers must be authorized by their competent authority (Finanstilsynet in Denmark) as a "crypto-asset service provider" (CASP) specifically for the issuance of ARTs.

The authorization process requires a detailed application outlining business plans, governance arrangements, operational resilience, and the reserve asset management.

Holders of EMTs have the right to redeem them at par value (1:1) for the underlying official currency at any time, free of charge (with exceptions for fees for non-active users, similar to e-money).

Algorithmic Stablecoins (without robust reserves): MiCA effectively prohibits purely algorithmic stablecoins that do not maintain a stable value through reserves (see section 5 below).