Bitpanda Requires Users to Provide Proof of Source of Funds

Austrian crypto exchange Bitpanda now requires proof of source (more precisely: proof of source of funds) for fiat money and cryptocurrencies like Bitcoin of its users. By doing so, the exchange is implementing the latest tightening of the Financial Market Money Laundering Act (“Finanzmarkt-Geldwäschegesetz“, FM-GwG) in force in Austria. The purpose of the proof of source of funds is to provide evidence of the legitimate origin of financial funds. Money or cryptocurrencies may only be used on crypto exchanges if they can be proven not to originate from criminal acts.

For users, this new practice currently has far-reaching consequences. We are receiving reports of blocked customer accounts. Cryptocurrencies and/or fait money are thereby frozen until proof of source of wealth is provided in accordance with the requirements. It is true that the anger of users is initially often directed against Bitpanda itself. However, the crypto exchange is merely implementing what the legislator has meanwhile demanded of it.

Bitpanda Requires Proof of Source of Funds Due to EU Regulation

In order to combat money laundering and terrorist financing, the EU legislator has been issuing the so-called money laundering directives since 1991. These are also referred to as the so-called AML (Anti Money Laundering) Directives. Through revisions, it adapts the legal framework in the EU member states to the actual circumstances and situations in the field of money laundering.

We have provided an overview of the AML directives in our FAQ.

The directives issued by the EU legislator must be transposed by the EU member states into their respective national laws. This means that a national legislative process is required, which must be completed by an implementation deadline specified in the directive.

It is true that the 6th Anti-Money Laundering Directive (“AML6”) has already been enacted in the meantime and had to be implemented by financial institutions by the beginning of June 2021. However, it was the AML5 Directive that – and thus also for Bitpanda – brought about far-reaching innovations with regard to the area of cryptocurrencies as well as their exchanges and trading venues.

Due to increasingly strict requirements of the EU directives, the Austrian FM-GwG was further tightened. For further background information on the FM-GwG, please read our page on the general legal situation in Austria.

Attention: Proof of Source of Wealth Obligation for Fiat Money and Cryptocurrencies

As media coverage has focused in particular on the obligation to provide proof of the origin of cash in the case of cash deposits and the purchase and sale of precious metals, the actual scope of the proof of source of funds is often underestimated.

Under both German and Austrian law, the obligation to provide proof of source of funds goes much further. Numerous other assets are affected. In certain situations, the legitimate origin of these assets must also be proven. And these also include assets in the form of cryptocurrencies.

How Does Bitpanda Do It?

Bitpanda therefore requires proof of source of wealth not only for fiat money, but also for any cryptocurrencies you hold in your Bitpanda account. This is because the FM-GwG requires those obligated by the law to apply certain due diligence requirements to their customers for a number of constellations. For example, § 5 stipulates, among other things, that the due diligence obligations must be applied

“(…) each time savings deposits are paid in and each time savings deposits are paid out, if the amount to be paid in or out amounts to at least 15,000 euros or the equivalent in euros;”

must be observed and implemented vis-à-vis customers. The wording makes it clear that the Austrian legislator did not want the law to cover only cash. Instead, explicit reference is made to the euro equivalent. The fact that the legislator may also have had cryptocurrencies in particular in mind becomes clear from the fact that it explicitly defines crypto exchanges as being obligated by the FM-GwG right at the beginning of the law:

“This federal law shall apply to credit and financial institutions as well as to service providers in relation to virtual currencies (obligated parties).”

Based on another passage, it is also clear that cryptocurrencies are also included in the scope of the law. The due diligence obligations just mentioned are precisely defined there in terms of their scope. They also include the requirement of proof of the source of funds. This is because, according to the FM-GwG, customer due diligence obligations also include.

“Obtaining and verifying information on the source of the funds used; such information may include, but is not limited to, the professional or business activities, income or business results, or the general financial circumstances of the client and its beneficial owners;”.

Due to the general wording “source of the funds used“, this mentioned obligation can in principle be applied to all possible assets. If the legislator had meant only money here, he would have written this exactly the same way.

Information on Why Bitpanda Requires Proof of Origin of Funds

Bitpanda itself proactively informs that proof of source of wealth is required not only for fiat money, but also for cryptocurrencies in certain situations. After all, the source of cryptocurrencies on your Bitpanda account is not always Bitpanda itself.

The appealing user interface is a reason why many Bitpanda customers choose this crypto exchange. For many, it is obvious to transfer their complete holdings of cryptocurrencies to their wallet at Bitpanda in order to have all cryptocurrencies “in one place” and to be able to continue trading with the coins there.

This is exactly where Bitpanda now increasingly wants to know where the cryptocurrencies you transfer to the Bitpanda Wallet actually come from. The goal is to prove that the Coins have a legitimate origin, i.e. that they were not obtained from committing crimes.

Bitpanda provides this and much more information in its info article and help section on the topic of proof of source of funds.

There you will find very detailed instructions for various situations, which documents have to be presented and when. Just in case Bitpanda requires proof of source of funds for cryptocurrencies on your account, it distinguishes between the following case constellations:

• Your cryptocurrencies originate from other crypto exchanges or trading venues
• You made trading profits elsewhere with your cryptocurrencies
• You obtained your cryptocurrencies through income from services (e.g. affiliate programs)
• Your cryptocurrencies came from initial coin offerings (ICO), token sales, mining, staking, air drops, coin or token swaps, lending, and liquidity pools
• You acquired all of your cryptocurrencies from Bitpanda itself

Based on these case constellations alone (for cryptocurrencies!), it can be seen that it can be quite complicated to comply with the obligation to provide proof.

Effects of Bitpanda Demanding Proof of Source of Funds?

We are receiving more and more reports from our readers about letters from Bitpanda in connection with Bitpanda demanding proof of source of funds. All cases we know of so far have in common that Bitpanda has temporarily frozen the assets in the customers’ accounts. This state is supposed to remain until users have submitted the required proof of source of funds.

This proves that Bitpanda does not only implement the proof requirement towards new customers. This is because the reports we are aware of are exclusively from existing customers. They concern both fiat money and cryptocurrencies that Bitpanda temporarily freezes.

The consequences of not providing proof of source of funds, or not providing sufficient proof of origin of funds, can therefore be severe. You may lose full access to your assets held in the Bitpanda account as long as you do not fulfill the proof requirement. This gives Bitpanda, but also any other crypto exchange or other exchange, enormous leverage to get customers to provide the proof.

In such a case, you should neither panic nor fall into actionism. On a separate page, we will give you some very basic tips on what to do if proof of of source of funds are demanded from you. It is true that many bodies that demand proofs of source of wealth provide corresponding options for uploads. Nevertheless, it may be necessary and even advisable to correspond with the authorities, especially in case of queries. We will be happy to support you with advice and sample cover letters.

Limit Above Which Bitpanda Asks for Proof of Source of Funds?

Interestingly, Bitpanda is very vague on its website about the limits for transactions of any kind for which the exchange does not require proof of source of funds. It only makes a general reference there to applicable EU directives. On the one hand, this is understandable, as the entities obliged by the FM-GwG do not want to show any pattern in the fight against money laundering. Furthermore, each entity has a certain amount of leeway in its risk management and risk analyses. For customers, however, this means uncertainty and many a surprise.

A clue – but nothing more – for thresholds for when Bitpanda requires proof of source of funds could be provided by the FM-GwG itself (see above). According to this, those obliged by the FM-GwG must in fact apply the so-called due diligence requirements outlined above in any case when deposits or withdrawals are made in the amount of EUR 15,000 or crypto equivalent.

However, you should always bear in mind the following: every service provider, regardless of whether it is a crypto exchange, bank, or broker, can of its own accord determine and implement stricter regulations than those prescribed by law. Service providers are unlikely to have much interest in this from an entrepreneurial point of view. After all, more controls lead to more dissatisfaction on the part of customers. However, it makes it clear that what is prescribed by law and what companies actually do do not necessarily have to be on the same page.

It remains exciting to observe how differently crypto exchanges deal with the internationally increasing regulation of cryptocurrencies. Even Binance, as one of the largest crypto exchanges in the world, recently initiated the first steps towards requiring proof of source of wealth from users. The no less well-known US exchange Kraken even implemented the proof requirement in a remarkable way by linking it to the annual income of its customers.