On Thursday, members of two European Parliament committees voted to approve draft legislation that could require exchanges to verify the identities of the owners of unhosted wallets―wallets that aren’t controlled by exchanges or other custodial services, and which the owner has sole control of the private keys.
According to a press release, politicians on the Committee on Economic and Monetary Affairs (ECON0 as well as the Committee on Civil Liberties (LIBE) voted 93 to 14 with 14 abstentions to approve the proposed rules for crypto. The rules not only task firms with identifying the owners of unhosted wallets, but also asks them to report any transactions to anti-money laundering authorities with no minimum amount, meaning that the rules would apply no matter how small the amount being transferred is. The rules would not apply to “person-to-person transfers conducted without a provider,” the release states, “or among providers acting on their own behalf.”
Videos by VICE
Prior to Thursday’s vote, crypto advocates mounted a loud campaign to convince lawmakers that such regulations are dangerous threats to privacy, and to the industry.
U.S.-based exchange Coinbase published a blog post by chief legal officer Paul Grewal insisting that “this revision would unleash an entire surveillance regime on exchanges like Coinbase, stifle innovation, and undermine the self-hosted wallets that individuals use to securely protect their digital assets.” Grewal argued that the rules would give cash an advantage over crypto, and invade the privacy of non-customers, since the exchange would be obligated to identify the recipient of funds from a Coinbase customer if the destination wallet is unhosted.
Coinbase chief policy officer Faryar Shirzad took to Twitter on March 27 to argue that the then-latest draft “could significantly violate individual financial freedom, irreparably harm the cryptoeconomy, & stifle the future of innovation across the EU.”
Paul Tang, a member of the European Parliament helping push for these measures, has criticized the crypto industry before but particularly its response to this legislation. “The #crypto sector demands to be taken seriously yet they refuse to take seriously their role in the fight against criminal money,” Tang said on Twitter this Wednesday. “Their aggressive campaigning only shows that strong regulation is urgently needed.”
On Monday, Tang penned a short thread explaining some of the rationale behind the regulation. The politician asserted that because crypto allows for cross-border payments without any intermediary, funds from unhosted wallets can come and go to unknown sources at levels just below a legal threshold that might raise red flags in traditional financial systems.
“These are important tools to fight money laundering/terrorist financing. Some crypto-lobbyists won’t like the extra work,” Tang added. “But being a part of our society comes with obligations. Banks already fight criminal money. Crypto-bro’s should set up[sic] to the plate and do so too.”
Similar regulation has also been considered in the United States, specifically by the Financial Crimes Enforcement Network (FinCEN)—a bureau of the Treasury Department charged with fighting money laundering. At the end of 2020, FinCEN proposed that crypto exchanges be required to verify the identities of the owners of unhosted wallets by collecting their names, addresses, and other personally identifiable information. Treasury Secretary Janet Yellen echoed a similar desire this year as part of a series of reports that also called on crypto exchanges to register with FinCEN.
Next up, these measures are off to enter a formal set of talks and negotiations with the European Commission and European Council’s versions (known as a “trilogue”) that will likely feature debates over the verification rules as the Commission and Council versions require crypto service providers ask for the identity of the owners, but do not require they independently verify the information given like the Parliament version does.
