The European Union’s Parliament has taken it upon itself to address the ongoing lack of regulation harboring Bitcoin and other cryptocurrencies with the potential adoption of groundbreaking anti-money laundering legislation. Back in March, European lawmakers proposed legislation that would hold cryptocurrency exchanges more accountable for activity taking place within their respective platforms via the implementation of traceability/transaction surveillance safeguards. Despite a significant amount of backlash received from various parties involved in this debate, the EU is apparently pressing forward with their proposal as they begin talks to finalize the passing of new regulations.
Around the world today there are approximately $2.1 trillion worth of crypto assets being exchanged across numerous marketplaces that are to this point mostly unregulated. Despite much speculation that measures to bolster financial security in the crypto-realm could be on the horizon over the last several years (specifically as the popularity of these assets has grown at an exponential rate), to date there has been no standardized method of reporting or tracking suspicious transactions as seen in traditional financial markets. Under the new proposal put forth by the European Commission however, cryptocurrency exchanges will have to obtain and verify, maintain, and submit to regulators any and all pertinent information about those involved in covered crypto transfers. The legislation would essentially make “anonymous” crypto transactions illegal and would reportedly cover both exchanges and self-hosted/private wallets. Clearly the goal of the draft legislation is to make it much easier to track criminals that are unethically using crypto exchanges as a tool to launder ill-gotten money and promote other destabilizing activities both domestically and abroad. The new legislation will hopefully allow for paper trails to be followed to find the source of mass market exploitation and improve transparency in the global market overall.
Improving oversight and reporting in this regard would undoubtedly provide an additional boost to global anti-money laundering (AML) and counter-terrorism financing (CFT) efforts, but at what cost? Many have argued that new regulation might reign in the industry altogether, stifling innovation and further progress towards legitimizing decentralized digital currencies as true stores of value. Others have viewed increased supervision in this regard as an invasion of personal privacy, with many arguing that if implemented, the proposed regulations would not only make crypto transfers significantly more cumbersome for exchanges and consumers alike, but that they might also make the entire process less secure. “You are putting [on] more obligations if it’s crypto-related than if it’s not,” Schrepel, an associate professor of law at the Free University of Amsterdam, said in an interview. “That would be the worst outcome.”2 He also expressed concern that the government would be overreaching and invading the finances of individuals and how the “know your customer” (KYC) method of compliance used in traditional banking would now apply to all crypto users that use their own wallet—as opposed to an exchange. “We should protect [the] privacy of people, not destroy it.”2
In March, prominent American cryptocurrency exchange platform Coinbase led a campaign of several companies who opposed the new legislation. Their reasoning was that these regulations would erode individual rights of crypto traders and limit the growth of the market, while also noting that they are already helping from an AML perspective by working directly with the U.S. Treasury Department to help block or freeze the wallet addresses associated with sanctioned individuals and entities. Other individual wallet providers such as MetaMask have noted that rules to track self-hosted wallets would have to extend beyond the platforms themselves and target individual users, further complicating matters and adding an extensive degree of uncertainty to the efficacy of the process. In speaking on the subject, Bill Hughes, senior counsel and director of global regulatory matters at blockchain technology solutions firm ConsenSys, noted his belief that “the regulation will almost certainly not have any measurable impact on financial crime while being most assuredly burdensome on people and businesses conducting lawful activity.”1 With EU parliament ultimately choosing to continue the push towards improving industry oversight however, some firms have chosen to take the high road. “I do not think that this is some tragedy,” said Oldrich Peslar, the legal head at Rockaway Blockchain Fund. “[This is] all information any compliant service provider could already have,” and obtaining it “is not an administrative burden nor any invasion of privacy.”2
Once finalized, the law will require transaction-reporting protocols similar to standard AML banking requirements. This will include the reporting of transactions exceeding €1,000, in addition to any suspicious transactions that are less than that amount. Many believe that if successful, the move could set the standard for similar measures to be taken by other prominent jurisdictions such as that of the United States. Time will tell how such a monumental decision will shape the crypto market in the years to come.
- Denton, Jack. “Coinbase and MetaMask Warn over Privacy as Global Crypto Rules Take Shape.” Barron’s, Barrons, 1 Apr. 2022.
- Schickler, Jack. “Europe’s Lawmakers Set to Advance Discussion of Controversial Crypto AML Rules.” CoinDesk Latest Headlines RSS, CoinDesk, 27 Apr. 2022.