Will terror attacks end bitcoin free-for-all in Europe?

A crackdown on terrorism financing in the wake of the attacks on Paris and Brussels will see European regulators tighten up the rules governing digital-only currencies like bitcoin and prepaid payment cards.

In June, the European Commission (the legislative arm of the European Union) is set to update its anti-money laundering rules to force virtual currency exchange platforms to check their clients are who they claim.

Cryptocurrencies like bitcoin are characterized by their anonymity, with neither payers nor payees required to identify themselves and the system open for anybody to use. Regulators believe this makes them attractive to criminals.

"The Commission proposes to bring virtual currency exchange platforms under the scope of the anti-money laundering directive, so that these platforms have to apply customer due-diligence controls when exchanging virtual for real currencies, ending the anonymity associated with such exchanges," the European Commission said in a news release in February.

Identification could take the form of a passport, official photographic ID or proof of residence such as a utility bill.
ISIS and the Dark Web

This follows reports the so-called Islamic State — which claimed responsibility for the attacks on March in Brussels and November in Paris — was receiving funding via the so-called Dark Web. This is the encrypted, hard-to-reach part of the internet where bitcoin or other digital-only currencies are the preferred payment methods.

"There is a shadow banking system that now exists around the world that is capable of moving unlimited amounts of money… They (terrorists or criminals) know the banking system is well-monitored," Scott Dueweke, the founder of Zebryx, a digital identity consultancy, told CNBC via phone.

In October, a report from the U.K. Treasury and Home Office concluded digital-only currencies were already the preferred method of online payment for illicit goods like firearms and drugs. The report added that the money-laundering risk associated with digital-only currencies was low, but could rise if their use became more prevalent.

A few months later, in January, Dutch authorities arrested 10 people accused of running a bitcoin-laundering ring.

Any impact?

For many leading bitcoin exchanges, the change will have negligible impact, as they already comply with best practice on anti-money laundering and "know your customer" rules, Garrick Hileman, an academic at the University of Cambridge in England's Judge Business School, told CNBC via phone.

Those exchanges already in compliance include San Francisco-based Kraken, which claims to be the largest euro-bitcoin exchange, and Circle, a peer-to-peer digital currency player that has secured Barclays as a U.K. banking partner, Hileman said.

Other players in the space will need to come up to standard or consider relocating their operations away from the European Union or not serving EU customers. Some jurisdictions such as the U.S. and the U.K. have already launched similar crackdowns to that planned by the EU, which hopes to persuade others to do the same.

Yuriko Nakao | Bloomberg | Getty Images
Pre-paid, no name

The EU also plans to toughen up on the identification requirements for using prepaid instruments, of which consumer prepaid cards make up the vast majority. These are not linked to a bank account, are topped up with cash and can include cards linked to a particular store.

It is believed prepaid cards were another means used by terrorists to anonymously finance purchases for last year's Paris attacks.

Under the current rules, no identification is needed for non-reloadable cards worth up to 250 euros ($283), or 500 euros for those than can only be used in one country.

These thresholds are likely to be lowered under the news rules and cardholders may need to identify themselves with an ID card or passport.