Source: Adobe / kravik93

While the European Commission (EC) says it is not targeting unsecured crypto wallets, its new legislative proposals would still affect such users and the entire emerging sector.

Niklas Schmidt, lawyer and partner at the Austrian law firm Wolf Theiss, told that “as part of a revision of the EU money laundering regulations, the European Commission – in a desperate power struggle – is putting the thumbscrews on crypto assets such as Bitcoin (BTC).”

“Do not fool yourself and do not let yourself be lulled”, warned the compliance advisor of the Dutch Bitcoin exchange Bitonic, Simon Lelieveldt.

According to these proposed rules, every company that transfers crypto assets must collect and store details about the senders and recipients, similar to what already applies to transfers – and this so-called “travel rule” was introduced by the Financial Action Task Force in June 2019 ( FATF).

Now the European Commission wants the EU member states to implement it in order to have full traceability of crypto transfers, argued Schmidt.

He describes the use of the term CASPs (Cryptoasset Service Provider) in contrast to the VASPs (Virtual Asset Service Provider) of the FATF as “typical of the EU’s bureaucratic approach”.

According to Schmidt,

“In the long run, this rule – if adopted – would likely result in a dichotomy between fully compliant (and therefore very expensive) centralized crypto-actors such as centralized exchanges (CEXes) and a parallel universe of non-compliance made up of alternatives such as decentralized exchanges (DEXes).”

The lawyer emphasized whether the proposal would survive the legislative process remains to be seen.

The limited scope with far-reaching effects

The proposal itself does not apply to peer-to-peer (P2P) transfers of crypto assets or to transactions involving a crypto asset service provider (CASP) and an “unhosted wallet” (only a normal crypto wallet, with that a user has control over the private) involved key).

Its scope is limited to crypto asset transfers that involve CASPs and other companies, such as B. different payment service providers.

However, should the proposal be implemented, crypto exchanges would still be required to report if a customer sends crypto assets to an “unhosted wallet” if they find it suspicious. At the same time, a transfer from this type of wallet cannot be accepted without the customer’s duty of care.

Since CASPs – which include crypto-to-fiat and crypto-to-crypto exchanges – would be among the companies covered by the new Anti-Money Laundering Regulation (AML), they would be subject to customer due diligence and would have to report suspicious transactions, be it when entering into a business relationship or during occasional transactions. This also includes receiving crypto from “unhosted wallets”.

The proposal itself speaks of a “preventive approach” with full compliance with the free movement of capital. It considers it “appropriate” to create a system that requires payment service providers and CASPs to include information about the sender and beneficiary of each crypto transfer.

They say this is to “ensure the transfer of information throughout the chain of payments or transfers of crypto assets”.

However, Member States should be able to exempt certain domestic low-value transfers, such as the transfer of low-value crypto assets used to purchase goods or services, from this Regulation, provided that the transfer can be tracked at all times to the payer / beneficiary.

If the verification has not yet been carried out, the obligation to verify the accuracy of the information about the payer and the beneficiary should only apply to individual transfers over EUR 1,000 (USD 1,188), unless:

  • the transfer appears to be linked to other transfers which together would exceed EUR 1,000;
  • Crypto assets were received or paid out in cash or “anonymous electronic money”;
  • there is a well-founded suspicion of money laundering or terrorist financing.

This is done so as not to compromise the efficiency of payment systems and crypto-asset transfer services, the proposal argues, and to “offset” the risk of driving transactions underground as a result of “excessively strict identification requirements against the potential terrorist threat” . caused by small transfers of crypto assets. “

“Major encroachment on human rights”

“The EU accepts all FATF principles in full. While they may not technically prohibit self-hosted wallets, the trick lies in the Article 58 review and KYC obligation [know-your-customer] the beneficiary of wallets, ”Simon Lelieveldt told

He added that this is the same “trick” that the Dutch Central Bank (DNB) introduced in the Netherlands to achieve almost the same goal.

As reported in May, a court order obtained by Bitonic managed to force the DNB to abolish its controversial wallet verification requirement.

This is a great gallery game.

– Simon Lelieveldt (@finhstamsterdam)

The European Banking Authority (EBA) has called on the DNB because of the primacy of the FATF rules, said Lelieveldt, emphasizing paragraph 54 of the FATF interim report for 2020, which reads:

“However, the introduction of new virtual assets could significantly change ML / TF risks, especially if a virtual asset is rolled out on a massive scale that enables anonymous peer-to-peer transactions. A number of instruments are available at national level to mitigate to a certain extent the risks posed by anonymous peer-to-peer transactions when the national authorities consider the GW / TF risk to be unacceptably high. This includes banning or refusing to license platforms if they allow non-hosted wallet transfers, impose transaction or volume limits on peer-to-peer transactions, or require transactions to be made using a VASP or financial institutions. ” [Emphasis added.]

The report update also notes that “VASPs will be denied licensing if they allow transactions to / from non-committed entities (i.e. private / non-hosted wallets) (z).”

Therefore, according to Lelieveldt, the EU is forcing the beneficiary KYC for P2P wallets as well as for lockers, “for which it makes no sense”.

Lelieveldt provided further insight on his Twitter threads, arguing that the reason we landed on the travel rule for banking, and now crypto, is because it is “a tool to ensure the proper applicability of legal obligations by government agencies avoid and bypass the great free riders wanted ”. Data without worrying about privacy, ”describes it as the government imposing ransomware on its citizens and financial institutions.

He described the EU package as “a serious interference with human rights” and argued that last May the European Data Protection Board (EDPB) sent the EC a letter on the protection of personal data in the proposed legislation to combat money laundering and terrorist financing.

The EDPB told that

The EC “has duly taken note of our letter and the concerns expressed in it and we are confident that it will endeavor to address them in the next steps of the legislative process.”

The legislative package is now being discussed by the European Parliament and the Council. The EU also hopes that the new money laundering authority at EU level will start its work in 2024. However, it would start its work of direct supervision “a little later” as soon as the directive has been implemented and the new legal framework begins to apply. Applies regulations correctly and consistently “.

See Bitcoin spokesman, author and educator Andreas M. Antonopoulos argue that privacy is a human right.

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