- The European Parliament’s recent passage of stringent anti-money laundering regulations signifies a significant crackdown on financial crime within the cryptocurrency industry.
- The legislation introduces tighter oversight on non-custodial wallets, aiming to bolster transparency and combat illicit activities. However, concerns linger regarding the impact on user autonomy and the broader adoption of blockchain technologies.
On Wednesday, April 24, the European Parliament passed a new rule in order to combat the violation of anti-money laundering (AML) rules while addressing incidents of terror financing. However, as the European Union steps up its monitoring measures, crypto is at risk of losing its promise of privacy and self-banking.
The newly passed bill by the European Parliament will mandate crypto firms to collect more data regarding users and their transactions thereby enforcing stronger monitoring of the non-custodial wallets. Besides, the bill also proposes a ban on tools used for increasing crypto anonymity such as privacy tokens and crypto mixers.
The cryptocurrency sector has been closely monitoring nearly three years of negotiations preceding the vote. This occurred within a broader crackdown targeting privacy features, which are a major attraction for decentralized finance proponents. Speaking on Wednesday, EU Financial Commissioner Mairead McGuinness said:
From cash to crypto, from real estate to luxury goods and football clubs, we are targeting all areas where there is a real risk of illegal activity.
The bill, in its final stages before enactment, arrives amidst mounting concerns about money laundering within the crypto industry. Software developers associated with the crypto mixer Tornado Cash are facing scrutiny both in Europe and the US, per the Crypto News Flash report. Prosecutors allege that these developers enabled criminals to launder $1.2 billion in illicit funds.
Focusing on Self-Hosted Wallets
Crypto firms will face stricter regulations regarding non-custodial wallets, also known as “self-hosted wallets,” as defined by European lawmakers. These wallets empower individuals with complete ownership and control over their funds, eliminating the need for intermediaries. This financial autonomy is a fundamental principle of the crypto sector.
Under the new regulations, service providers must conduct user identification and verification, monitor transactions, and obtain additional information about both senders and recipients.
These requirements run counter to industry best practices, which encourage storing crypto assets in secure non-custodial wallets instead of custodial wallets. This approach aims to protect users from vulnerabilities associated with centralized exchanges and crypto custodians. The legislation will not impact service providers focused on developing software for non-custodial wallets that are purely technological, such as MetaMask.
However, countering EU’s controversial digital identity wallets, IOTA has proposed its own solution IOTA Identity providing users with a neutral and reliable identification protocol, devoid of centralized control, per the Crypto News Flash report.
The EU bill also prohibits tools that facilitate anonymity, including cryptocurrencies like Monero or Zcash. Additionally, services offering crypto mixing, which obscure transaction histories, will no longer be permitted.
Under the new regulations, crypto firms are required to verify the identities of users, monitor transactions, and collect additional information about both senders and recipients.
However, some concerns have been raised that these Know Your Customer (KYC) processes may place burdens on users and discourage the adoption of blockchain technologies. For crypto transfers below €1,000, basic KYC is required to identify users. Transactions exceeding €1,000 require customer due diligence measures, which involve longer-term monitoring of user behavior and identity in addition to KYC.
