Recent statements from the European Commission reminded the shocked crypto community of some dystopian fiction where Big Brother is always watching. The proposed regulation on banning anonymous crypto wallets means the industry is doomed. Or is it? Let’s take a closer look.
On July 20, the European Commission announced a package of new legislative proposals aimed at money laundering prevention. New reforms apply existing anti-money laundering (AML) and countering terrorism financing (CTF) laws to the crypto sphere. Namely, crypto transactions would not be anonymous under the new law.
EU Commissioner Mairead McGuinness tweeted about the plans:
“Our rules will now apply to the whole of the crypto sector. We will ban anonymous crypto wallets and make sure that crypto-asset transfers are traceable.”
This tweet caused a lot of uncertainty and misunderstandings since nearly every cryptocurrency wallet is anonymous by default. Cryptocurrencies as such are a great way to send and receive money without using a centralised third party. The blockchain system allows users to remain anonymous since wallet addresses don’t reveal any identifiable details. At the same time, crypto transactions are already not 100% untraceable as it may seem. Recently, the US federal officials recovered most of the Bitcoin ransom paid in the Colonial Pipeline ransomware attack which proved crypto is not as hard to track as cybercriminals think.
Therefore, we need to clarify that the new proposals do not ban the existence of anonymous crypto-wallets used for self-custody. Thus, nobody will force you to identify your independent cold or hot storage wallets. The new rules, however, prohibit anonymous crypto transactions performed by third-party providers such as crypto exchanges or custodians. Those providers will need to ask for your personal details while registering, which most of them already do.
Currently, selected crypto-asset service providers are already covered by the EU’s AML and CTF rules. Back in 2020, the EU’s Fifth Anti-Money Laundering Directive (“5AMLD”) subjected certain participants in the crypto-asset sector to AML/CTF regulation compliance.
Under the directive, digital wallet providers and crypto-asset exchanges are supposed to be regulated and supervised to ensure they have verification checks in place to make sure their clients are operating legally. The crypto-asset providers are supposed to report suspicious activity.
This includes the need to have:
- Proper KYC onboarding
- Adequate checks on company ownership
- Sufficient checks that they are not dealing with sanctioned countries
- Transaction and money flow checks
- Regular periodic client outreach
However, the directive needs to be separately applied to existing national laws in every EU country. This often leads to delays in implementation and divergence in national rules, resulting in fragmented approaches across the EU. Some countries have already taken action, though they needed about a year for that. For instance, Ireland introduced Regulation of Virtual Asset Service Providers (‘VASPs’). This law obliges all VASPs established in the country to register with the Central Bank for AML/CFT purposes and comply with the AML/CFT obligations. Other countries have not yet implemented the directive, so the question of unified legislation arose.
These unified rules will no longer need transposition into national law. The rules at EU level will be more detailed and granular than at present, and will include a number of Regulatory Technical Standards. A new proposed revision of the 2015 Regulation on Transfers of Funds to trace transfers of crypto-assets (Regulation 2015/847/EU) will make it possible to trace transfers of crypto-assets and limit large cash payments. The EU basically wants to create a single rulebook so that money-laundering that happens with the help of crypto-assets cannot take place in any country within the Union.
These rules will remain proposals until the European Parliament votes to support the amendments. This may take months or even years. The full rulebook, including technical standards, is expected to be in place and apply by the end of 2025. It is a part of the EU’s Security Union Strategy for 2020-2025, which aims to protect EU citizens and the EU’s financial system from money laundering and terrorist financing.
A plan to boost European Union powers to curb the flow of dirty money through banks and financial institutions was inspired by major money-laundering and financial fraud scandals in Estonia, Malta, Latvia, Cyprus and the Netherlands. Those exposed how national watchdogs are slow at acting against banks or fintechs who abetted or did not prevent money laundering. The proposed measures greatly enhance the existing EU framework by taking into account new and emerging challenges linked to technological innovation. They will also ease compliance for operators subject to AML/CFT rules, especially for those active cross-border.