At first glance, a proposal by the European Commission to end anonymity in cryptocurrency transactions is confusing. How can you enforce a requirement to identify senders and recipients in a peer-to-peer system with built-in pseudonymity? And doesn’t such a proposal take the “crypto” out of the “crypto currency”?
Cryptocurrencies are designed as an alternative to state currencies that are overseen by a central bank. Instead, they work as a network. Anyone familiar with peer-to-peer file sharing like BitTorrent will be familiar with the concept.
In short, every user has a “wallet” of coins that can be stored on software or hardware and that has a unique public identity number or “key”. Users can send coins to other wallets. The recording of the transactions is kept and verified by the entire network: the so-called blockchain. Wallet’s public identity numbers are not tied to the private identity – although investigating transactions can provide clues – that offer the “crypto” portion of the currency.
This is how Bitcoin works – other, newer cryptocurrencies have improved the concept. So how could the Commission prevent anonymity from something people do on their computers in their private homes?
This is because most, or certainly many, users of cryptocurrencies rely on intermediary services in order to use the coins, such as wallet providers, apps and trading platforms.
The Commission’s proposal is to extend the anti-money laundering laws currently in force in the financial industry to all of these crypto services. In order to be a regulated crypto business in the European Union, companies would have to log the identities of users and recipients in order to ensure the traceability of transactions. They would also not be allowed to provide users with anonymous wallets, which the Commission says is prohibited even though they have not defined what a wallet is, so the meaning is not exactly clear.
Would anything prevent users from continuing to send transactions to each other directly from private wallets?
“We would not go so far as to monitor exchanges between citizens ourselves,” said an EU official; these would not fall within the remit of the regulatory authority. “Peer-to-Peer Transactions. . . would be in the private sector. ”For example, the decision of a private person to sell a car to another person for direct payment in cryptocurrency would not be covered.
It seems that people who are motivated to use cryptocurrencies because of the privacy issue could still do so. But it would likely become more difficult for them to issue or exchange coins within the EU.
It is possible that there is a stratification between regulated and unregulated cryptocurrency networks. Dedicated users could continue to be off-grid and potentially rely on offshore exchanges. More casual users in retail would continue to use the more accessible regulated, non-anonymous apps. However, it is not clear what, at this point in time, would distinguish de-anonymized cryptocurrencies from any digital currency, be it fiat or Facebook, aside from potentially perceived gambling / investment opportunities.
On the positive side, it would be more difficult for fraudsters to target more naive users with crypto as a tool. The combination of platforms that provide a simple user interface for casual users, along with anonymity and irreversibility of transactions, has been ideal for fraudsters and is the reason why ransomware hackers demand payments in Bitcoin. It’s hard to force a scam victim to send a Bitcoin payment if they don’t know how.
But the bigger picture raises serious privacy concerns. In addition, private corporations and central banks are preparing to compete to create their own dominant, non-anonymous digital currencies. At the same time, many countries are moving towards phasing out cash. (It’s expensive to manufacture and has the same lack of traceability that authorities dislike because of its attraction to bad actors, which is reflected in the Commission’s proposed ban on cash payments of more than € 10,000 in the same package.)
For many in the crypto space, the prospect of centralized units having oversight of all transactions in a dominant currency is exactly the kind of privacy issue that makes crypto attractive.
As banking and digital payments expert Simon Lelieveldt points out, a data breach is always imminent, and such a large collection of intimate data – all payments made by everyone in the currency – would be a powerful draw for individuals who choose to do so dismantle to further their own interests.
Lelieveldt describes the Commission’s proposal as a victim of “99.8 percent irrelevant data for the pursuit of 0.02 percent”.
“It is conceptually flawed,” he says, “and a violation of international treaties and agreements such as the UN treaty on the right to privacy in the digital age.”