Less than a week after a potential Proof-of-Work (PoW) digital asset ban was dropped from the intended EU MiCA framework, a new threat to the cryptocurrency industry could emerge in the European Union. This time around, non-custodial or non-hosted wallets are on the radar of regulators.
On Thursday, March 31, the European Parliament’s Committee on Economic and Monetary Affairs will vote on an Anti-Money Laundering (AML) package of regulations that aims to revise the current Funds Transfer Regulation (TFR) in a way that expands the requirements for financial institutions to attach information about the parties to the transaction to cryptocurrency assets. The rapporteurs of the resolution are Ernest Urtasun of the Green Party and Asita Kano of the conservative and reformist group.
As cryptocurrency advocate Patrick Hansen of blockchain firm Unstoppable DeFi has warned, the latest draft regulation will require cryptocurrency service providers not only to collect personal data related to transfers made to and from non-hosted wallets (which they are already required to do), but also to “verify accuracy of information about the sender or beneficiary of an unplaced wallet.”
The obvious problem with this language is that in many cases it can be difficult, if not impossible, for cryptocurrency service providers to verify an “unlisted” counterpart. Thus, Hansen fears, in order to comply with the requirements and protect their place in the EU market, these companies will be forced to stop transactions with unlisted wallets.
Even if lawmakers introduce some guidelines for screening procedures, the potential transaction costs of compliance are likely to deter small players and lead to further market concentration.
The draft also includes an obligation to inform the “competent authorities against money laundering” of any transfer of €1,000 or more to/from a non-hosted wallet. Moreover, a year after the passage of the bill, the EU Commission will have to assess whether any “additional specific risk mitigation measures” are needed from such transactions.
It’s not entirely clear what additional measures might be implied, but as Hansen warned, it could mean anything, up to an outright ban on non-custodial wallets.