The AMLD5 Paradox: A Monetary Definition Applied to Essentially Financial Crypto-Assets
How the EU’s first AML-focused intervention on crypto adopted a monetary framing for “virtual currencies” just as token markets were evolving into predominantly financial and utility-oriented ecosystems.
AMLD5 pulled crypto-intermediaries into the EU AML perimeter using a definition of “virtual currency” built around monetary functionality. Yet the tokens it targeted were largely speculative, financial, or utility-based. This article unpacks that paradox and shows how it paved the way for MiCA as a corrective regime.
When the European Union adopted the Fifth Anti-Money Laundering Directive (AMLD5) in 2018, it sought to respond to the rapid rise of crypto-assets and the perceived risks they posed to financial integrity. AMLD5 represented the EU’s first legislative attempt to regulate crypto-asset intermediaries—but it did so through an AML-centric lens rather than a comprehensive financial regulatory framework. As a result, AMLD5 introduced a definition of “virtual currencies” that was conceptually anchored in monetary functionality while being applied to a universe of tokens whose economic nature was predominantly financial, investment-oriented, or utility-based.
This conceptual mismatch reveals a fundamental paradox: AMLD5 regulates crypto-assets based on a definition that treats them as alternative money, while the tokens covered by this definition often exhibit characteristics of securities, financial products, or access rights rather than monetary instruments. The Directive therefore embodies a regulatory compromise—an attempt to extend AML obligations using a category that is both under-inclusive and over-inclusive, anchored in outdated assumptions about the nature of the crypto-ecosystem.
This article offers a doctrinal and conceptual analysis of this paradox. It argues that the monetary framing of AMLD5 inadvertently imposed an inappropriate lens on crypto-assets at precisely the moment when their diversity was expanding beyond any narrow conception of alternative currencies. It further shows how the Directive’s residual definition failed to capture the economic reality of token markets, thereby necessitating the subsequent development of MiCA (Markets in Crypto-Assets Regulation) as a corrective framework.
Ultimately, AMLD5 stands as an instructive example of regulatory path dependency: an effort to fit emerging technologies into pre-existing categories whose conceptual boundaries were poorly aligned with the underlying economic phenomena.
I. The Monetary Foundations of AMLD5’s “Virtual Currency” Definition
AMLD5 defines “virtual currency” as:
“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 the legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and can be transferred, stored and traded electronically.”
This definition is explicitly monetary. Its core criterion is acceptance “as a means of exchange,” supplemented by transferability, storage, and electronic tradability. The Directive thus conceptualises crypto-assets through the prism of money substitutes—non-sovereign payment instruments that mimic monetary functions without state backing.
Such a conception is consistent with the historical context. Early public policy debates around Bitcoin framed it as “virtual money,” a payment instrument used for illicit transactions on darknet marketplaces. Regulators were primarily concerned with preventing Bitcoin from becoming a channel for money laundering. AMLD5 thus imported a monetary analogy that, while understandable in 2014–2016, was conceptually outdated by the time of the Directive’s adoption in 2018.
Yet the Directive applied this definition not merely to Bitcoin-like payment tokens but also to a rapidly growing universe of tokens created through initial coin offerings (ICOs). These tokens were often marketed as investment products, utility tokens, or governance tokens. Their economic functions bore little resemblance to currency. By relying on a monetary definition, AMLD5 forced conceptually diverse tokens into a narrow regulatory category.
This mismatch is the essence of the AMLD5 paradox.
II. A Monetary Definition Applied to Non-Monetary Assets: The Conceptual Mismatch
By 2017–2018, the crypto-asset ecosystem had fundamentally transformed. The ICO boom expanded the universe of tokens far beyond currency-like instruments. Many tokens represented:
- speculative investment vehicles;
- digital claims against issuers;
- access rights to networks or platforms;
- governance rights within decentralised protocols.
These attributes are financial or utility-based, not monetary. Yet AMLD5 applied its monetary definition to all virtual currency service providers, regardless of the nature of the underlying token.
1. Financial tokens as “means of exchange”
Many ICO tokens had no payment function. Their value derived from expected appreciation, rights to participate in a network, or governance power. Treating them as means of exchange for AML purposes created conceptual distortions.
2. Utility tokens assimilated to monetary instruments
Tokens granting future access to a platform—such as those issued for decentralised applications—rarely served as payment instruments in a monetary sense. Yet they fit AMLD5’s definition if they could be transferred or traded.
3. Token fungibility as a proxy for monetary functionality
In practice, AMLD5 captured tokens not because they behaved like money, but because they were fungible and transferable. These criteria align more naturally with securities than with currencies.
Thus, AMLD5’s monetary definition captured assets that were financial in substance, not monetary—illustrating the Directive’s conceptual inadequacy.
III. The Residual Nature of AMLD5’s Definition and Its Legal Consequences
AMLD5’s definition of virtual currencies functioned as a residual category, applying to all digital assets not already regulated under financial law. This residuality had significant legal and conceptual consequences.
1. Under-inclusive: failure to capture certain financial tokens
Tokens qualifying as transferable securities under MiFID remained outside AMLD5’s “virtual currency” category, even though they posed similar or greater AML risks. AMLD5 thus focused on tokens not because they were especially risky, but because they fell outside pre-existing financial categories.
2. Over-inclusive: capturing tokens with no monetary function
Conversely, AMLD5 captured tokens with no monetary or financial significance simply because they could be transferred electronically and used as a medium of exchange in limited contexts.
3. Arbitrary boundaries caused by reliance on financial law categories
The Directive’s reliance on MiFID classifications created inconsistencies. Tokens deemed financial instruments were excluded from AMLD5’s scope, even though their AML risks were often greater than those of non-financial tokens. The result was a fragmented and incoherent regulatory perimeter.
In effect, AMLD5 imposed a structure that reflected regulatory silos rather than the technological and economic realities of the crypto-asset ecosystem.
IV. Frictions Between AMLD5’s Monetary Paradigm and the Market Reality of Tokens
Several structural frictions arose from AMLD5’s attempt to regulate crypto-assets through a monetary lens.
1. Payment-centric regulation in a non-payment-centric market
By 2018, the majority of token activity was speculative or investment-driven. Payment usage represented a small fraction of transaction volume. AMLD5’s payment-centric framing therefore misaligned with market behaviour.
2. Lack of alignment with the decentralised nature of crypto-assets
AMLD5 presupposed the existence of identifiable service providers. But decentralised exchanges, DAOs, and non-custodial wallets challenge the assumption that intermediaries exist to enforce AML obligations.
3. Conceptual tension between “virtual currency” and “virtual asset”
The FATF’s shift from “virtual currency” to “virtual asset” in 2019 highlighted the inadequacy of AMLD5’s terminology. While FATF embraced a broad, technologically neutral definition, AMLD5 remained anchored in a narrower monetary paradigm.
4. Difficulty in distinguishing use-value from exchange-value
AMLD5 struggles to classify tokens whose value derives from use or access rights rather than exchange functionality. The Directive’s monetary definition obscures these distinctions.
These frictions underscored the need for a more adaptive, technologically neutral framework.
V. AMLD5 as a Regulatory Bridge: A Necessary but Conceptually Limited Framework
Despite its conceptual flaws, AMLD5 played an important transitional role in the EU regulatory landscape.
1. Bridging a regulatory vacuum
Before AMLD5, crypto-exchanges and wallet providers operated largely outside the AML perimeter. The Directive imposed customer due diligence obligations and offered a first layer of oversight.
2. Constraining illicit activity in the early crypto ecosystem
By requiring registration and supervision of VASPs, AMLD5 reduced the ease with which illicit actors could exploit centralised platforms for laundering purposes.
3. Preparing the groundwork for MiCA
AMLD5’s limitations clarified the need for a comprehensive regulatory framework addressing the economic nature of tokens, rather than merely their AML implications. MiCA emerged as a response to these conceptual deficiencies.
Thus, AMLD5’s paradoxical nature ultimately contributed to the evolution of EU crypto regulation.
VI. MiCA as a Correction to AMLD5’s Monetary Paradigm
MiCA (2023) represents a significant shift. It abandons AMLD5’s monetary definition in favour of a broader concept of crypto-asset, defined as a digitally transferable representation of value or rights.
This shift corrects several AMLD5 deficiencies:
- It no longer relies on monetary functionality;
- It acknowledges diverse token categories (ART, EMT, utility tokens);
- It aligns legal definitions with market realities;
- It avoids arbitrary exclusions based on financial instrument classification.
MiCA thus resolves the paradox of applying a monetary definition to non-monetary assets. It reconceptualises crypto-assets as a distinct class requiring dedicated regulation.
However, MiCA does not replace AMLD5 for AML purposes. Instead, the two frameworks coexist: MiCA provides the financial regulatory perimeter, while AMLD5 (and future AMLR) supplies the AML layer. This dual structure reduces conceptual contradictions but does not eliminate them entirely.
Conclusion
AMLD5 represents a pivotal moment in the evolution of EU crypto-asset regulation—but also a striking conceptual paradox. The Directive sought to regulate crypto-assets through a monetary definition at precisely the moment when the market had shifted toward financial, speculative, and utility-based tokens. Consequently, AMLD5 applied a narrow monetary category to a broad, heterogeneous, and rapidly evolving ecosystem. This mismatch created conceptual distortions, regulatory inconsistencies, and enforcement challenges.
The paradox of AMLD5 is thus emblematic of the difficulties regulators face when emerging technologies disrupt established taxonomies. Its monetary framing failed to capture the economic reality of crypto-assets, demonstrating the limits of adapting old categories to new phenomena. The subsequent development of MiCA illustrates the need for purpose-built regulatory frameworks that reflect the inherent diversity and complexity of the crypto-asset ecosystem.
In retrospect, AMLD5 should be understood as a transitional instrument—one that succeeded in bringing crypto-service providers within the AML perimeter but failed to articulate a coherent conceptual foundation for crypto-asset regulation. Its limitations paved the way for MiCA, which in turn reveals the necessity of evolving beyond legacy monetary concepts toward a more nuanced understanding of digital assets.
Key takeaway. AMLD5 used a “virtual currency” lens to solve an AML problem in a market already dominated by financial and utility tokens. Its paradoxes helped trigger MiCA, highlighting why future frameworks must start from the economic reality of crypto-assets, not from inherited monetary analogies.