The proposed regulation would compel exchanges to validate any transaction involving personal data.
Less than a week after the European Union’s planned MiCA framework abandoned a potential ban on Proof-of-Work (PoW) digital assets, a new threat to the crypto business may emerge in the European Union. This time, regulators are targeting non-custodial, or unhosted, wallets.
On March 31, the European Parliament’s Economic and Monetary Affairs Committee will vote on an anti-money laundering (AML) regulatory package that seeks to amend the current Transfer of Funds Regulation (TFR) to require financial institutions to attach information about transacting parties to crypto assets. Ernest Urtasun of the Greens and Assita Kano of the Conservatives and Reformists are the regulation’s rapporteurs.
As crypto advocate Patrick Hansen of blockchain firm Unstoppable DeFi warned, the latest draught of the regulation would require crypto service providers to collect not only personal data about transfers to and from unhosted wallets (as they already are required to do), but also to “verify the accuracy of information regarding the originator or beneficiary of the unhosted wallet.”
The obvious disadvantage of this terminology is that it can be difficult, if not impossible, for crypto service providers to authenticate a “unhosted” counterparty in many circumstances. Thus, Hansen thinks, these companies would be obliged to discontinue transactions using unhosted wallets in order to remain compliant and maintain their market position in the EU.
Even if legislators establish some rules for verification methods, the associated operational expenses are likely to frighten away smaller firms, resulting in increasing market concentration.
Additionally, the draught contains a requirement to notify “competent anti-money laundering authorities” of every transfer of 1,000 EUR or more to/from an unhosted wallet. Additionally, the EU Commission would be obligated to review whether any “extra specific measures to reduce the risks” associated with such transactions are necessary one year following the bill’s implementation.
It is unclear what other measures may be indicated, but as Hansen cautioned, this may entail anything from a blanket prohibition on non-custodial wallets to an outright ban.
Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.