The much-awaited European Commission's anti-money laundering legislation covering virtual currency may need to tighten its definition of "wallet providers" – as it stands, the wording means multisig key holders could be caught by the provisions.

According to the proposals, only those wallet providers offering custodial services "of credentials necessary to access virtual currencies" are to be included in the legislation. However, there is no primary purpose limitation, meaning anyone who has responsibility for taking care of virtual currency keys for someone else will likely need to carry out due diligence, monitor transactions and report suspicious activity.

Siân Jones, founder, EDCAB, who spoke at the European parliament's public hearing on virtual currencies earlier in the year, said the scope of the definition of wallet providers should be addressed.

Jones told IBTimes: "There are some issues around definitions and scope, about which we are making representations, and have already started that today actually.

"There are issues about what might end up being included as a custodial wallet provider. There is a definition and we believe that potentially it's much wider than the term 'wallet provider'; it could even include multisig key holders and so on, which could be problematic. So we need to tighten up perhaps on some of those things."

The European Commission adopted proposals for legislation to amend the 4th Anti-Money Laundering Directive (4AMLD) earlier this week (5 July).

The proposals will see exchanges and custodial wallet providers added to the list of "obliged entities" required to carry out customer due diligence (also known as KYC), monitor transactions and report suspicious transactions. Only those engaged in exchanging between virtual and fiat currencies are included. Virtual currency to virtual currency exchanges are not covered. So, for example, Bitcoin-to-Ether exchanges will not be regulated.

The amendments demonstrate Europe catching up with the UK, which proposed AML legislation for crypto exchanges in the 2015 Budget.

Taking a more general view, Jones added: "I think it's probably fair to say that virtual currencies are an important but relatively small part of the package of measures which are proposed. Others covering pre-paid cards, and a lot of other measures in there including proposals for national registers of bank accounts and host of other measures.

"The virtual currency piece sits at the head of the list – rather unfairly in my opinion.

"I'm pleased to say the commission seemed to have listened to comments particularly that we have made, both at public hearing and parliament and in private meetings. And have dropped a number of the more radical measures that they had in mind in relation to virtual currencies. They have not, for example, included anything in the space of a prudential regulation at this time. They have limited it to those two categories."

Other possible points of contention aired by Jones included the timing of the proposals into legislation, which will be "challenging".

The proposals now go to the European Council (comprising member states) and the elected parliament before becoming law. Member states will then have to transpose the directive into national law, a process that normally takes up to two years. However, the Commission is calling for harmonisation to be completed by 1 January 2017, said Jones.

"With the European parliament currently in its last plenary siting before the summer holidays and with many other money laundering and terrorist financing provisions to be considered, that timeline looks very challenging."